INSTITUTIONAL FINANCE TO SMALL

SCALE INDUSTRIES IN INDIA

 35

Stnall scale iildustries play a key role it1 our plan~ledcconomy with Lhcir

ildvantagcs of low i~ivestinent, I~igll potcntinl li)r employment genclation.

diversification of tllc iildustrial basc and dispersal of industries to rural anti

semiurbn~,areas. ' h i s scctor Iias, thcreforc, bccn appropriately given a strategic

positioil in our plail~lcdcco~lomy.It has a vital t.olc to play in the I'ullilmenl orthe

socio-econoinic objcctivcs, particularly, in aci~icvingequitable growth. Dhar Sc

Lydall(1961) have observed that "the psotnotion of stiiall scale industries has been

widely reco~litllendedas one orthe most appropriate means of developing i n d ~ s t ~ y

ill over-populated, bncltward countriesN.l

'I'he devcloptiicill ofsmall scz~lcititi~istsicsdepends upoti various facttow likc

availability of raw-materials, skilled labour, advanced tcch~iicalknow- how

adequate, easy and cheap linance and right type of maoageme~lt.Among these,

finance is crucial in the develop~nci~t

of small scale industries. Non availability

of finance at tllc right time aiitl in right q~~nnlitics

with low rate of illtercst poscs

:1 serious tllrcat (0(Iic d c v c l o p ~ ~ofstili~ll

i ~ ~ ~ t scale itldustrics. With ihc availnbility

of adequate finallee, it is casy to ~ L I (lie

I ~ ~iiiits~lccesbk~lly
witllout ally Ilindratlcc.

Tli.: small scale itldustries main sources of finance are promoters,

insiitutional agcncics, and non- il~stitutio~lal

agencies. Because of their poor

Dhar, P.N & Lydall. 1I.F (1961) 'The Role of Stilall Enterprises in Indian,
Economic Dcvelopmc~lt,Doinbay, Asin I'ublishers.
 36

financial background, the capacity of the promoters to invest in their respective

units is limitcd. I,ikcwisc, tlle no~~-i~lstitutio~ial

agencies ilrc always reluctan1 to

invest in tllcsc slnall scale industries, duc to tllcir limitcd carning capacity as well

as poor reputation of the entrepreneurs. Ilence, the institutional financial

agencies have to play a greater role in fi~~ancillg

the development of the small

scale enterprises.

There are different financial institutions to cater to the financial needs ofthe

small-scalc industt.ies. Mostly worlti~igcapital rinnncial needs are met by the

com~nercialbanks, regional rural banlts ;uld co-opcli~tivcbanks. Sometimes, thcy

!nay also participate irt the lollg-ter.111financial ltccds nlong with State Financial

Corporatit~ns(SFCS) but on a limited scale. Financial assista~cein kind is also

available to the small scale sector f?om tile Stnte Small Industries Uevelopnient

Corporations (SSIDCS) at the state level and National Small Industries

Corporation @'SIC) at the natiooal level. The Industries Developtnent Bank ol'

India(lDBI), the Sniall Industries Develop~nentBank of lndia (SIDBL), National

Bank for Agriculture i~tldIlural Devcloptucnt (NADARD) and other national lcvcl

development balks provide refinance facilities to banks and other grassroots level

agencies for financing s~nallscale industries. The Deposit Insurance and Credit

Guarantee Corporation (DICGC) assists tl~csmall scale industries by guaranteeing

advance to these industries. Moreover, Llie Export-Import Bank of lndia (EXIM)

facilitates external trade by rediscounting the bills of these industries. Likewise,

 37

the Industrial l~cco~istruction

Dank of India (IRHI) assists ill rehabilitating tlie sicli

units of these indnstries.

Ilaving discussed (lie basic i~irormationabout financing schemes being

operated hy various financial institutio~lsor agencies, the details regarding these

scllemcs are given bclow.

Cuaimercial Banks

14 major conunercial ba~iltshad been mostly

Prior to their natio~~alization,

engaged in financing orga~iizedtrade, com~iicrccand industry. The commercial

banks, being tlrbati-based and profit oriented, were not respo~lsiveto the financial

needs of the s111allscale i~ldustries.In other wolds, the whole banking system was

built in such a way as to cater to the needs of a particular class, viz, traders and

big industrialist.;. Moreover, tlie commercial balk branch network had an urban-

bias with consequent inadequate coverage in the rural areas. The commercial

bank deposits had increased, but the bull(, oftllc increase was accounted ror by tlle

organized sector and Ilie prospc~ousregions.

As the comniercial bank lendings were concerned with the orga~~isecl

industry av~dtrade, the other sectors of the economy had to depend upon tlie non

institutional agencies for their financial needs. The banking facilities were beyond

the reach of the vast masses of economically weaker sections of the society.
 38

In 1967, tlle idea of socializalion of Bank lending was introduced, under

Social control over Uz~sk.The main aim was to assist the hitherto neglected

scclors of economy such as s~liallscale industl.ics. retail trade, small transporl and

agriculture. But tlie mere issue of guidelines did not make llie desired inipact on

the dcploy~iientofbnnk credit. Consequently, thc government orIndia took a bold

step of nationalisation of 14 major banks on 19th July , 1969. Again on 15th

April, 1980, six more private sector banks were further ~lationalisedto extend the

area of control over the banking system in tlie c o u n t ~ y . ~

The main aim of nationalisation of these banks was to ensure that no viablc

productive endeavour should falter for lack of credit support, irrespective of the

size of the borrower. Therefore. tlie concept of'priority sector' was evolved to

ensure that the assistance from tlie banking systcnl flowed on ail increasing scale

to the hitherto neglected sectors of tlie economy a i d according to national

pri~rities.~
Thus, the concept of priority seclor lending is mainly intended to

ensure assistance to those sectors of the economy wliicll have been hitherto

neglected by the banking syslenls. 'l'llis systelii l ~ a stwo advanlages, viz., (1)

priority in allocating credit; mid (2) corlcessiotis in ternis and conditions, including

rate of interest.

V.S.Yarshy1eya,(l986)"BailkNationalisation and Afier", Yojana,(July 16-31),

p.4.
' P.D. Ojha, (1987): 'Banking and Econon~icDevelop~nentin India: Problems and
Prospects", Rc.re~veBnrtk of ltln'io Bliile/it~,(Jan. 1987),p. 14.
 l'llc priority sector inclt~desthe following:

i. Agriculture;

ii. Small scale industry

iii. Intlustrial Estates;

iv. Road and Water 'l'ra~lsportOperators;

v. Rctail Trade and Small Busil~css;

vi. Professionals & Self-employed persons;

vii. Education;

viii. Iiousing loans to weaker sections; and

ix. Pure consumption.

The Reserve Dank or India, basing on the recommendations of A. Ghosh,

has prescribed tlie rollowing main tatgets ill regard to lending to the priority sector:

i. Banks sl~ouldaim at enllancing the proportion of their advances to

priority sector to 40 per ccrlt by 1985;

ii. Among tlie total adva~lccslo priority sector, minimum 40 per cent

sliould be extended to agricultural sector;

iii. In the small scale industrial sector advances the weaker sections

sliould constitnte 12.5 pcr ccl~tortlle total adva~icesto small scalc

intlnstries by 1985.

iv. All small scale i~ldustrialunits with limits upto Rs.25,000 are to be

treated as weaker sections. This was expected to cover almost all

the artisans as well as the village and cottage ilidustries and also

the tiny sector.

 40

For tlie s111allscale industries tllesc co~nmcrcialbanks grant both long-ter111

and short-tern1 loans. But much of the assista~icerendered by them is in the form

of short-term credit. 'l'hey also extend credit both on easy and concessional terms

with regard to rate oiinlerest, margin, and security.

Term Loans:

a) Long and Mediun~

Traditionally, the commercial banks have been engaged in financing

working capital requirenlents of the industry. Moreover, in recent years, the

commercial banks have entered inlo tllc licltl of long ternl industrial Iinancc, l'llc

tenn loa~isare for acqc.liring iixcd nssctg, construction of factory buildiogs, and the

purchase and installation of macllinery and equipment. Sometin~es,these loans we

also granted for the purpose of expansion, nod ern is at ion and renovation. These

loans can be secured against mortgage of fixed assets. l'lle loans are repayable

over a period of seven to ten yenrs in suitable installlients. Eventhough term

lending fina~icialinstitutio~~s
like state li~la~~cinl
corporations llavc bcen sct up for

banks in term financing has

granting tern1 loans, tile participation oi'co~nmc~.cial

beconie necessary because the network of their branches and their intimate

cotlnections with the borrowing collcerrls facilitate effective supervisioli of credit

and effective follow up work.

 41

'I'echnically qualified artinnns, who arc tlcsirous of starling small scale

units, are provided necessary finance by these con~mcreialbanks under the scheme

for financing qualified entreprenenrs. The assistance nlay be on an instalment

basis for tlie purcllasc of the necessary ~nacllincryand equipment, a nlediuni tern1

loan for financing pern~anentworki~~g

capital, i~ndcash credit for the short-le1.111

working capital. Equity ktrld schen~eprovides interest free assistance for meeting

the equity gap in the project and is rcpayablc on a long-term basis. The actual

aolount ofassistance is the variance belwccn 25 per ccnt of the pro,ject cost and tlle

capital available with the entrepreneur. l'lic co~nmcrcialbanks also provide tllc

financial nssista~lceto intlividunls or lit.111~

providi~lgsc~.vioeslike watch repairing.

catering, elc and, proScssionals such ;IS lawycrs, rloctors, engineers, architects.

and transport operators.

Nortually tllese commercial banks get refinance Srorn tlie Industrial

Development Dank or India (IDBI) in respect of term loans, provided the loans arc

sanctioned 8s pcr the tcrnls and co~ltlitionslaid down by the IDBl Dom time to

time.

SHORT TERM:

Commercial banks grant short-term loans to sniall scale industries for

maintaining necessary inventory of raw materials, fil~ishedand semi-finished

goods and ~naintainingday-to-day expenses. These short-tenn l o a ~ sare a d v a a

 42

against pledge of ~natcrialsarid proccssctl gootls. 'rllcse loarls or working capital

lows are provided by commercial bwks in tlic (i>riilofcasll credit, bill financitig,

loans against book debts and advance against fixed deposit receipts, letter of

cretlil. and pre-sliip~~lent

and post-sl~ip~ne~it
credit. Ilere an alte~lipl is made to

discuss (Ile different types of conln~ercialbanli credit to s~nallscale industries of

the entrepreneurs.

Cash Credit

Onc of the rilost popular modes ofco~nmcscialbanlt crcdit to small scalc

industries is cash credit. It is a running account operated by tlie borrower through

cheques and other instru~iie~its

of credit. Daily lrn~isactionsofthe borrower are put

tllrough this account. I-lere, the account is permitted to be overdrawn upto tlie

limit sanctioned or tlie drawing power, whichever is lower. Before an advance is

allowed, drawing power is calculated on tlie basis of value of the goods pledged

andior hypothecated, subject to stipulated margins. This determines the

maximum a~iioulltof advance admissible withi11the overall sa~lctionedcredit limit.

Trade Bills

Commercial Banks provide crcdit facilities by purchasirig document any

demand bills or by discounting usance bills to the small scale illdustrialists

CliEOlT ACAINS'I':

Government Supply Bills

Coni~nercialbanks also extend credit against adlioc or regular supply

orders of central and state goverlinlenls, to those sliiall scale industrial units which

supply goods to public sector undertakings. In such cases balks obtain an

irrevocable power of attorney in their favour autliorising them to obtain paylnent

from tlie departnie~ltconcerned on bellalf of the unit. T l ~ ebank's advance to tlie

unit is lirn~!edto 85 to 90 per cent of ll~callloilnt of the invoice, leaving a ~~iargiri

of l O to 1 5 per cent.

Book 1)ebts

Since small scale units sell tlieir goods to a large number of buyers in small

quantities on credit ternis, usually it 111ilynot be possible to draw bills for s~iiall

amounts. 'fherefore, a large alnoulit oi'cretlit given by the s ~ ~ i ascale

l l units is in

the form of book-debts. Commercial banks provide credit facilities to s~ilallunits

against the book-debts. 'l'he ol~itsarc ~.cquircdto subrllit pcriodic staternelits

relating to book-debts with names anti addresses of the debtors, the iunounts due

and tlie period for which the debts are outstanding. The rate of margin normally

varies between 30 and 50 per cent depending upon tlie credit quality of book debts.

The margin lliay also vary according to the amount of discounts, returns, and

rejeclions.
 44

Letter of Credit

The imporler's bank issues a letter ofcredit to the exporter authorising him

to draw bills, upro a particular a ~ i i o u at

~ ~the
t co~~tracted
price. The differnit types

of letter of credit arc: clean and docu~~lc~~lary

crcdit, revolvi~iglcttcr or crcdit,

revocable and irrevocable letter ofc~.cdit,confirmed atid u~iconfir~ned

letter of

credit, transferable letter of credit, back to back crcdit and red clause letter of

credit. The banks usually require a margin or 10 per cent on the amount mentioned

in the letter of credit. If the small scale industrial 111iitswant to import machinery

& equipment or raw materials and other co~i~ponents

fro111abroad, they are

providcd through tlie lettcr of credit racilitics.

Pre-shipment and Post-shipment Credit:-

To encouragr exports, commercial banlts provide pre-shipment and post-

shipment credit to the small scale i~~dustrial

units. The pre-shipment credit is of

two types, viz., packing credit and red clause credit. Similarly post-shipment

credit conslsls oradva~icesagainst roreig~lbills, duty drawback adva~lceand cash

i~ice~itive
sche~ueadvance. 'l'lle packing crcdit is made available to the exporter

for purchasing, processing and packaging exportable goods for shipment. 'nle

credit is given against the security of goods to he exported at concessional rate

of interest. Such loa~isshould be liquidated, within the specified time, o~ilyfrom

the proceeds of exports made by the borrower. In a red clause letter of cred~t,

the advances are made against a simple receipt and are unsecured. The receipt
 45

indicates that the f~111ds

will be used to porchasc tllc materials stipulated in tile

letter of credit and tlle beneficiary will deliver tlle necessary shipping documents

prior to the expiry of tlie date oftlle Ictter of credit.

Adva~rtccsagainst f u r c i g ~bills
~

Under this scheme the bank cxtcnds credit against foreign bills tendcrcd

by the borrower. The bank generally beco~llesa pledge of the goods and is

deenied to be the lioldcr for value of the bill to the extent ofthe anlount of advance

made agaiust it. In order to avoid the cost of swapping funds lo the banks arising

due to bills re~iiai~iing

outstanditlg for all u~ldulylo~igperiod, the exporters arc

required to bear the exchange risk.

Duty drawback

Under this scheme the customs duty paid 011imporls used inmanufacturing

the goods exported, is refunded. 'l'hc customs authorities issue a certificate lo

exporters stating thc aniou~l(of duly drawback piyi~blcthrough tllc Rescrve Hank

of India to the concerned bank. 011receipt oftlie clnim fionl the lina~icingbank,

the customs authorities sanction the drawback amount and infor111 the Reserve

Bank of lndia wllicll in turn informs the linanciny bank. All commercial banks,

which are authorised dealers in foreign exchange, may grant credit against those

duty drawbacks. On eligible loans the Reserve Bank of India provides refinance

upto 100 per cent

 46

The credit ngninst c s s l ~incentives

Under tliis scheme, subsitly is given t c ~exporters on the FOB value of their

exports of certain comniodities to enable thelii to face the competition in the

international market. As it generally takes so~lieti~ne

for tlie exporter to receive

cash incentive, tlie bank may grant credit ageillst casli assistance entitleotenl.

Cornn~ercinlBanks-Special SC~ICIIIC~:

Apart from conventional le~~ding

to sniall scale industrialists, tlie

coni~nercialbanks have drawn up special scliemes for financing target groups

under the small scale sector. l'liough tliffct.cnt banks have drawn up different

schemes, only the scliemcs of State I3a1ik or India are highlighted in tlie

following lines, The schemes of other hanks could not be discussed here for want

of adequate information. Moreover, tlie State Bank of India is a pioneer in the

area of financing of small scalc industries. It was tlie State Balk of India which

instituted a 'pilot scheme' way back in 1956 to meet all types of credit

requirements of small scale industries. l'lie State Bank of India, for the first time

in the country, introduced the concept or ~ieed-basedapproach to financing small

scalc industries, which was a radical departure Go~iitlie security-orientcd

approach.

Entrepreneur Schcn~e

To provide financial assistance to technically qualilicd entrepreneurs, the

State Bank of India drew up a scheme called entrepreneur scheme. The scheme,
 47

which came into effect in 1967, covers all teclinically qualified persons, as also

persons who have technical experience and skill but may not liave received any

forninl technical education. Under the schenie, 100 per cent li~ianeeis provided

to the entrepreneurs, without insisting 011any ~iiinirnu~n

equity contribution. The

financial assista~~ce
is given upto Rs. 5 laklls, which is repayable in easy

instalments.

Specirk1 Scllen~efor Financing C r a f t s ~ ~ ~nnd

c n Artisans

Tlie traditional i~~dustries

are also eligible to receive financial assistance

under this scheme. 'Hie Slate Bank of l~ltliai~ilroduceda special schenie of

financing artisagis and clansmen. In fact, the Dank introduced tlie sclienie in

coordination with the Government of India to cover the target group under Rural

Industrial Projects. Under this scheme, tlie Bank gives liberal credit assistance

upto Rs. 7,500 to the eligible borrowers, identified by tlie Bank in coordination

with tlie Government agencies.

Equity F l ~ n dScllerne

111 1978, Tlie State Dank of lntlia i~~sliluted

a fund called Equily Fund

with tlie rnait~ail11 of providing equity assistance to new e11treprene~u.seligible for

financial assistance. Under this scheme assista~~ce

is provided by way of intercst-

free loans, ranging liom Rs. 5,000 to Ils. 50,000, to meet the shortfall in equity.

Tlie loans are repayable afier an initial moratorium period of 5-7 years. Under
 48

this sche~iiepreference will be give11to tlie units in the backward areas, tiny

sector units in tlie rural areas and export oriented u~iitsin tlie s~ilallscale sector.

For tlie benefit of tlie small scale cntrcpre~ieurs,the State Balk ofledia also

takes- up promotio~lalrole. 'l'lie Un~llccstablislicd in 1973 its own teclil~ical

consulta~lcycells to provide Lecll~iicaland managerial guidance to small scale

entrepreneurs in each of its local Head ofices. In order to upgrade the managerial

skills of s~nallscale industrialists, tlie bank also conducts 'Management

Appreciation Programmes' witli particular emphasis on backward and remotc

areas. Moreover, witli the objective ofrapid growth of industrial develop~i~e~it

in

tlie backward areas, tlie Bank lau~iclleda prograliiliie of etltrcpreoeurial

development in 1978. The trailling under tlle programme aims at development of

entrepreneurial nlotivation, creating co~lliile~icc

through direct experience, supply

of information about the region, industry potential, and eco~iornicinsights and

managemelit skills. ?'he prograeime also includes practical trai~iitigin small scale

industrial sectors to inlpnrt intluslrial cxpcrieticc. Ancr tlic training, the ba~llc

provides to tlie entrepreneurs colltiri~~ous

counsclli~~g
aid co~lsultwcyserviccs free

of charge in areas like project selectio~i,project report, market surveys and project

validation.
 49

Rcgulatioo of Bank Credit

In a developing country likc India. Dank credit is n scarce resource.

Therefore the bank credit should be utiliscd optimally, and tlicre should not be any

abuse and misuse of bank credit. In order to ensure sufficient and timely flow of

credit and effective utilization of crcdit lo the needy sectors ofthe economy, the

Government appointed Several Co~nn~itteesfrom time to time to study and

recommend ways for better utilisation of the bank credit. The background, and

major recommendations of such com~~iittees

arc also discussed in the present

study.

Dellajin Som~eittee

In October 1968, tlie National Credit Counsel set up a Study Group under

the chainnaiship of V.'I'. Dehajia to examine the extent to which the credit needs

of the industry and trade were likely to be inflated and how such trends could be

checked. In Septeniber 1969, the SLudy Ciroup sub~nittedits report to tlle National

Credit Counsel.

The group, while reviewing the existing situation, found that the banlc

credit during the period 1960-1961 to 1966-67 expanded at a higher rate than the

rate of industrial output. 'I'he group, therel'ore, came to the conclusion that in the

absence of specific restraints, there was a tcndcncy on the put of industry to avail

itself of short-term credit from bank in excess of the amount based on the growth

in production and lor inventories in value ternis.

 50

The Conlnlittec found that the conl~ncrcinlbanks were not able to prevent

the enlergence of excess demand for credit fiom certain borrowers. The

con~mercialbanks were inclined to relate their crcdit limits to the security offered

by tlie custoniers and, as such, they did not alternpt to make any assessnient of the

overall financial position oftlle borrowers tl~rouglla cash flow analysis. Further,

the banks did not follow any unirorm mctl~odof valuation of stocks. In practice,

there was also considerable divergence as regards the prescription of margins by

banks.

The Committee also found that 20 per cent of the gross fixed assets of many

companie~were financed with short term sourccs of funds which included bank

loans. The banks extendcd these loans by way ofcnsh credit limits which were

only technicnlly repayable on demand. 'I'lie system was found to be convenient as

the banks insisted on the security aspect oftheir lendings. The security orie~lted

approach to lending had led to over linancing of industry in relation to production

and inventory needs. Thc C o ~ i ~ ~ n ialso

t ~ eohservcd
c that this systelu of lending

made tlie borrowers depend upon short-tcrm debts.

Basing on tlie above nlentio~ied findings, the Committee made the

following recommendations:

(i) 'l'he lba:llts while granting loan Lo a borrower sllould study the overall

financial position of the enterprise by cash flow analysis and forecasts

submitted by the borrower.

 51

(ii) Tlie biuiks sliould also insist on certain basic docu~iic~itswhich contain

i~ifo~mation
about the end use of credit, repayment capacity etc., while

sa~icliotiingloa~is.

(iii) With a view to chccking extra bank crctlit, commitme~it charge on utilised

litnits should be Icvicd. If ~icccssary.so~licn~itiirnu~~i

ititcrest could also be

charged.

(iv) Proper care and attention sliould also be paid to !lie qucstion of adequacy

or othemtise of inventories held by various industries.

(v) The working capital limits arc to bc considered only ill a need based

manlier. Double credit should bc avc~itlcclby dctluctitig tlic crctlit p~~rcliascs

~iiadeby the borrower.

(vi) A large sum as working capital advance, is pemiatietitly needed by tlie

borrower to carry on tlie operotiolis. So, in tlie financial plaaning of the

borrower, it is necessary to lind out pcrmancnt working capital a i d

te~nporaryworking capital, l'lic banks sliould finance the temporary

working capital through short-tcmi crcdit and for the pennulent working

capital, tile borrowcrs slioultl Iry for long term sol~rccsof linancc.

Tandon Cotnniittec

In July 1974. 'Ilie Reserve Rank of I~ttliaco~islit~rlctl

a Study Group,

namely, the Tandon Coni~nittee,to linme tlic guidelines for rational allocatiotl

and efrective utilisation of batik credit . In 1975. The Committee sub~liittedits

report with wide ranging reconi~iientlations. 'flit rccommendalions are applicable

to all industrial sectors liavilig working capital liriiits o f Rs. I0 lakhs and above

froill tlie banking systeiii.

'The Committee recom~iicndalio~is

call hc classified under the Ibllowing

licads:"

(i) Nomis for inventory and receivables;

(ii) Approach of lending;

(iii) Style of credit';

(iv) Infor~iiationsyslcm; slitl

(v) Bill finance.

The Colnmittee opined that tlie tilaill fulictioli of a banker as a lender is to

supplement tlie borrower's resources to carry on acceptable level of current assets.

That is, the level of current assets must bc renso~lableand based on nonns.

Further, a p a t of tlie fund requirements for carrying current assets must be found

fro111long tern1 sources of funds.

Rep011 of tlie Study Group to Frame Guidelines for Follow-up of Bank

Credit,(1975) Bombay: Reserve Baiik of liidia.
 53

The Committee suggcstcd norms for 15 industries. 'Shc nortils represented

the maxin~umlevels for holdi~~g

inventory and rcceivables in each industry. The

tiorms were applicable to all industrial borrowers including small scale industries

with aggregate credit limits from tlic banking systcm in excess of Rs. 10 lakhs. The

working capital gap viz., the bo~.rower'sr c i ~ u i r e ~ ~of~ cri11n11ce

~ i t to carry current

assets (based on tlonns) other than those fi~iatlccdout of his other current

liabilities, could be bridged partly fro111his owned funds nttd long tenn

borrowings; and partly by bank borrowi~lgs: l'he maxilnum penllissible level of

bank credit could bc worked out in tllrcc ways. 111tlie first method, the borrower

will have to contribute a ~liinimurnof 25 pcr cent of tllc working capital gap fro111

current ratio 01' 1: I. Utidcr tllc

long tcrm fu~ltls. 'l'liis would givc a 1ni11inlu111

second method, tlie borrower will have to provide a minimuun of 25 per cent of

total curreid assets fsom long term firnds, This would give a current ratio of at

least 1.3:l. In the third method, tile borrower's contribution from long term funds

will be to tile extent of tile entire core current assets, and a minimum of25 pcr

cent of the balance current assets, tll~tsstrcngtlieni~lgtllc currcut ratio furtherS.

as a stop-gap mcthod till

The Com~nittcerecommended tlic lirsl ~ilcll~od

borrowers got used to the new approacll of lending and moved towards tllc idea of

the third method.

 54

The other recom~nendationsof tlie Co~nriiitteeare summarised as follows:

(i) 'Clie annual credit liniit liiay be bili~rcaledillto a loan which would comprise

the minimu~nlevel of borrowing tliroughout [lie year and a denialid cash

credit, which would take carc of tlic fluctuating requirements, both to be

reviewed annually.

(ii) Re;:ivablcs sliould be fi~ia~icctl

by way OF bills rather than cash credit

against book debts.

(iii) It sliould be tho responsibility oftlic borrower to supply all necessary and

relevant i~irormationto the le~~tli~ig

bank, such infonilation sliould include

an opcratirlg as will as funtls Ilow sl:~lc~iic~ll

for the whole of next ycnr.

It sliould also supply projected bala~iceslieet as it stood at the end of next

year. This would help tlie bankcrs in finding out annual drawing with in

the sanctioned lin~its;and

(iv) Each hank, should actively follow-up and supervise the use of credit

advanced by it to the parties. The banks should ensure that tlie end use or

the credit is according to tl~cpurpose for which it was advanced. 'rlic

Tandon Committee reconitiic~idalio~is

wcrc acccpted by the Reserve Bank

oClndia in 1975, and the Banks wcrc askcd to act upon tliem in their future

lending operations.
 55

C l ~ o r Co~l~mittee
e

Inspite of lieserve Bank of India's advise lo tlie banks in implenlenting the

rccommendatio~isof thc'fnndon Com~nittcc,psrticularly with regard to cash credit

syslcnl, thc progress acliievcd had bccn vcry slow. It was in that context that the

Reserve Bank of India appointed a working Group under the cltairnianship of

K.B. Chore in the ycar 1979. l'lic tcr~iisofrcfcrcncc wcrc as follows:"

(i) to review the operation of ihe cash credit system in recent years,

particulmly with reference to the gap between sanctioned credit limits a i d

the extent of their utilisatio~i;

(ii) to suggest ~nodilicationsin tiic systeln with a view to ~nakingthe systcni

more amenable to ratiotlal ~iianagementof funds by con~mercialbanks; and

(iii) to suggest alternative types of credit facilities, which would ensure greater

crctlit discipline and also enable banks lo relate credit li~liitsto increases

in u~ltputor otlier productive activities.

The Committee observed that tlie gap bctween tlle sanctioned limits and

its utilisation was large and hence thc sanctioned limits did not give a correct

of bank C~cilities. It was observed tllat without a periodic

picture of tlie ~~tilisatioli

review based on a quarterly information system, cash credit system, loses much of

its anenability to discipline and planning. It was also observed that the utilisatio~i

of credit limits was higher in tlie case of private sector borrowers (around 70 per

Report of tlie Working Group to Review tlie System of Cash Credit, (1979):
Bombay : Reserve Bank of India, p. I.
 56

cent), aid lower in tlie case of public sector borrowers (50-55per cent). Further,

tlie utilisation was liiglicr (around 70 per ccnt) in tile case ofvcry largo a i d vcry

sninll borrowers.

The Comniittee felt that tlie bifi~rcationof cash credit limit into a demand

loan portion and a fluctuating cash credit component has not found acceptance

either on t;,e past of the banks or the borrowers. Tlie Cotnmittee also felt that the

advantages of the existing system of extending credit by a combination of three

types of lending, viz.. cash credit, loan, and bill system of finance should be

retained.

'nie Committee mndc tlic followi~igrccoiiimendatio~is in tlie light of the

above, findings:

(i) In order lo ensure that the borrowers do enhance their contributions to

wor!iing capital and to improve their current ratio, it is necessary to place

them under the second mctliod of lending as recotiiniendcd by the Tandon

Cornn~ittee.

(ii) While assessing the credit require~iients,the banks should appraise and fix

separate li~iiits for the 'normal non-peak level as also for tlie peak level

credit requireiiients i~~dicating

also tlie periods during which tlie separate

litilits would be utilised by the bonawers. This procedure would be

extended to all borrowers having working capital limits of Rs: 10 lakhs and
 57

(iii) Banks slioold review the system of linancing book debts tlwough cash

credit and insist on thc conversiol~of sucl~cash credit limits into bill limits.

(iv) Banks sl~ouldsanction to ~ n n ~ ~ u f n c t tunits

~ r i ~ at
~ glcast 50 per cent of tlic

cash credit limit against raw materials as drawee bill limit particularly when

such purcllases are made from s~llallscale industries.

On the basis of the Chore Committee recommendations, the Reserve Bank

of lndia has prescribed that while assessing the credit requirements of the

borrowers having working capital credit limit of Its. 50 laklls and above, separate

liniits should be fixed Ibr Lhe nor~~lal

non-peak lcvcl as also Tor the peak level

credit rcrlt~ircme~lts,
i~idicnti~lg
the pcliods tluri~igwhich the separate limits would

be utilised by the borrowers.

Nayak Committee

111llecember 1991. the Reserve Bank of lndia appointed a coln~nitteeunder

the chairma~lsllipof P.R. Nayak Lo look inlo lllc various aspecls of the credit

requirelncnts of the stiiall scale i~idusrl.ial sector. 'l'llc tcrnls ofrcfcrcncc oTthc

Committee included examination of' (a) the adequacy of institutional credit (both

for working capital mid for tenu loans) to the s~uallscale industrial sector; (b) the

need for modifications1 rclatiolis in tile norms prescribed by the Tandon m ~ d

' Recerve Bank of lndia Bulletin, (1992).Bombay:Reserve Bank of India bulletin

Nov 1992, Pp 1881-85
 58

Chore Committees in so far as s~nallscale inciuslrics are concerned; (c) rcvision,

if any, requireci in the existing RBI guidelines for tl~crehabilitation ofthe sick

s ~ ~ i ascale
l l industrial units, and (d) any otlier aspects relnted to the above.

Alter a thorou~;llinvestigation of the problem, the Cornmiltee observed

tliat the credit support cxte~ldcdby tl~ehallking systems to the small scalc

industrial unit is inadequate. This sector as wllole got only 8.1 per cent of their

output as working capital from the banking systeln. While the larger segments

within the small scale industrial unit secured wound 18.8 per cent of their output

which was niaryinall), less tllnn what llle Co~n~niltce

considered reasonable, the

village and smaller tiny industries got only 2.7 per cent oftheir output as working

capital. The Comnlittee suggested that small unregistered units with credit limits

of less than Rs. 1 lakh should have the first claim on the priority sector credit to

small scale industries. Besides the ballking system should meet all the working

capital requirements ofall the units of the tiny sector with credit limits upto Rs. 10

lakhs.

The Comniittee fi~rtherrcconunencled that the working capital needs of

other small scale units at 20 per cent of the output should be pre-emptied by

co~n~llercial
banks through a11annual budgetary exercise and, if necessary, a part

of the resources flowing to the 11lediu111

and large industries sector at present,

should be diverted to fully meet the demands of s~ilallscale industries.

 59

As per the Tandon Coni~nittcereport, the nomls for inventory and

receivables has little relcvancc to tlie vast 111;1iorityof s~nallscale industries.

The Commitlec felt that tliese norms slloultl not come in tlie way of small scale

units getting at least 2 per cent of their turtlover as working capital from the

banks. Special nonns in thc norlll-eastcr~~and liilly regions lnay also he

considered Sor s~ilallscale sectors.

'I'he Committee modified the definition of a sick suiall scale industry. A

wit may be classified as sick when any of its borrowed accounts remains overdue

for a period exceeding 30 nio~itl~s

and there is erosion in the net worth due to

accumulated cash losscs to Ilic extent of 50 pcl. ccnl or Illore or its peak net worth

during the preceding two accounting years. To tackle tlie problem of sickness in

a small scale unit, the Co~umiltcercco~n~ne~~tlcd

creatio~iof cells in tlie banks

at regional levels. Constitution of state level tribunals on the lines of BIIiR,

changes in tlie State Level Inter-l~lstitutio~ial

Committees (SLIIC) and a role for

a district cuunterpart of SI,IIC in ~nionitol.i~ig

and overseeing tile bank's progress

in tlie quick deterriiinationof' viability ofsick units arc thc olller ~.ecommendations

of the Cotunlitlee in regard to sickness in smilll scale sectors.

The other important recommendation of the coninlittee, include (i)

indexation of the value of investment in pla11tand machinery of units to ensure a

uniform applicalion of the definition or small scale unit; (ii) rationalisalion in (he
 60

interest rates charged to tiny units: (iii) reduction in tllc sc~-vicc/collectioncharges

and overdue interest charged by banks in tlie hills of their s~nallscale industry

clientele; (iv) abolition of tlic system of lcvying lllc DlCGC credit gunrantee fee

separately for snlall scale industrial borrowers; (v) creation of a separate

modernisation f ~ n db r sniall scale sectors; and (vi) setting up of factoring

organisations in all parts ofthe ~latio~lislatc

and nllowi~lgIhc private sector to

enter this field.

Tli!: Co~nrnitteestressed (lie role of t l snlall

~ scale industry associations

in mitigating the cneniToltl hardships and dilXculties and recomnicndcd that tlie

associations should dcvclop separate tecllnieal wings consisting of qualified

personnel which would be ablc to look into the ploble~nsof units and pursue them

with various authorities.

Co~nnlercialBanks I'erfuraionce

For a long time, thc comnierci;~lbnnlis wcrc not inclined to finance lliesc

small scale industries as tllry consitlcretl tllat li~iancingsmall industry was a risky

proposition. Consequently, at tlie ti~lleof nalionalisation of major comniercii~l

banks, the small scale sectors accounted for Rs.347 crores or 9.6 per cent of tlie

total bank credit. I lowcver, the involven~cntor banks in lending to small scale

industrial units lias bren increasing tremendously ever since the nationalisation of

major co~nmercialbanks in 1969. 'The Resewe Bank of India has instructed the
 61

banking sector that credit to tlie slliall scalc scctor sliould be given on a priority

basis. As o result of the direction of I<cserve I%alikof India, credit to the small

sector has bccn trcmcndously increasing year nncr year.

A glarlce at tl~cdata providcd ill 'Ihblc-11. I., mnkes it clear that there has

been a significant increase in the priority scctor advances since 1969. At tlie end

of December 1969, tlie total bank credit was Rs.3,616 crores. But it increased to

Rs.1,14,502 crores by June 1992, that is about 32 fold increase in the total

outstatlding bank crcdil ovcr a pcriod of 23 years. 111the case of priority sector

credit, it was Rs.659 crorcs in 1969. but it i~icrcascdto Rs.44.995 crores, that is

about 68 roltl i~~crcasc

in priority scclor Icnili~igovcr tlic same pcriod. With rcgard

to s~nallscale industrial sector adva~iccs, it was Rs.347 crores in 1969 but

increased to 17,189 crores, tliat is about 5 1 rold i~icrcasein SSI sector advances for

tlie period.
 Table-11.1
Sclieduled Coni~nercialBanks' Atlva~iccsto SSI Sector in lndin

(An~oantin Rs. Crores)

* D e t ~ i l srelnte to Public Sector Banks o~lly.

Source : Reserve Bank of India Monlliiy Bulletill (Relevant Issnes).
 In 1969, tlie priority sector crcdit accot~titedfor 18 per cent of the total

credit. Bul as a result oftlle deliberate policy ofthe Government and the Reserve

Bank of India, this percentage increased to 26 pcr cent by 1975, 35 per cent by

1981,42 pcrcenl by 1901 and, 41 pcr cc~itby 1092. But it declined fro1ii45.1 per

cent by June 1989 to 27.62 percc~itill 1999. 'fllus, tlie co~nnicrcialbanks liave

well reached tlie target of extending 40 per cent of tlie total bank credit as

advances to the prior~iysector. Siniilarly, tlie stnall scale sectors share in the total

bank credit was 10 per cent in 1969, but incrcascd to 12 pcr cent in 1975, 13 per

cent in 198 1, 16 per cent in 1991 and, 16 per cent in 1992. But it decli~iedto 15

per cent in 1993, 13.74 pcr cent ill 1999 Besides, the sliare of stiiall scale sector

in tlie total priority sector lending (in ternis of percentage) was 53 per cent in 1969,

44 per cent in 1975,38 per cent in 198 1,37 per cent in 1991.39 per cent in 1992

and 38 per cent in 1993, 44 per cent it1 1994, 5 1.92 per cent in 1996,49.74 per

cent in 1999. An analysis of the prcsent data revcaled that wliile there lias bcen a

significant increasc in absolute terms both in llic nu~nberof accounts and tlic

amount of credit to small scale industries, tliere lias actually been a decline in the

percentagi sliare of credit to small scale industries in the total priority sector

advances. This might be because of iticreasc in tlie of credit to otlier constituents

of tlie priorily sector.

 64

Co-operative Banks

The co-operative banks also have it1 consonance wit11 the Government

Policy taken on the task of financing intlustrial projects in a big way. Even before

independence, the industrial co-operatives l~avc been financed by the co-

operative banks. In urban areas co-operative banks financed people engaged in a

variety of professions, trades and other avocations.' In other words, co-operalives

have played an itnportant role in the development of small scale and cottage

industries.

Co-opcrative banks provide boll1 term as wcll as working capital finance

to the smai! scale industries. In evcry slt~tc,tl~crcis a state lcvcl co-operative bank

and district level central banks. The co-operative central bank may finance an

entrepreneur who is a 'B' class member of village society or a co-operative central

bank. Where a borrower is situated nearer to tlie state co-operative bank or

prefers to obtain his finances rroun that biuik or in case tho co-operative ccnlral

bank is unable to finance an cntrcprcneur, tlic state co-operative bank will bc

agreeable to consider financing the entrepreneur. Procedure for appraisal, norms

of discipline prescribed for the borrower and otller related matters are the s a n e as

in the case of comn~ercialbanks. Sinlilarly, norms of security ~llarginsare also

more or less similar to those prescribed by the conunercial banks.

C. Sitharamaqya and P. Udnya Shanker, (1989) Srnall Indusly

Financing,Hyderabad: National Institute to Slnall Industry Extension Training,
p. 166.
 65

Fixed capital financing ter~nsare dcpcndenl on the type of industry and

nature of the fixcd capital required. Working capital is provided either on pledge

or on hypotliecation of stocks. Facilities for discounting orbills are also provided

especially hy the state co-operative banks. Interest on term loatls will range from

9.50 per cent to 15 per cent depe~idingon thc source orrelinance, type of unit and

location of tlie unit. Undcr the existing tcrms of financc, units sct up in a backward

area are entitled to term finance at 12.50 per cent while units covered under credit

guarantee scheme or tecIi~iician/entrel~reileurs

scheme can obtain finance at 11 per

cent. In casc any unit is set up in a rc~~iotc

rural arca whose application is routed

through primary co-operative society, tllc intcrcsl ratc on its working capital cot~ld

be as low as I I per cent. Siniilarly, i n rcspccl ~ I ' E I I I induslrial co-opcrntivc sct

up in (lie district, the niininium rate will be 9.50 per cent.

State Financial Corporations (SPCs)

Tl~eState Financial Corporation's main aim is to provide the ii~ediun~

and long-term loans for sctting u p ~ncw intlustrial units and for expansion,

diversification, renovation modcrnisation and rcliabilitation of existing units and

thus speed up the industrial develop~l~e~it

ill tile count~y?

M.N.A.Ansari, (1980) "Stale Financisl Corporations -A Review of 'Thci~

Perforiiiance", TIie Uir~rker(Nove~nber,1980), p. 39.
 66

While the Industrial Finance Corporatio~lof India (IFCI) provides the

financial requirements of mcdiunl and Inrge scalc industries, tlie small scale

industries have been lell high and dry. Furtlicr, a single corporation cannot be

expected to shoulder the additional responsibility of meeting the varied financial

req~tirenlenrsof diversified, s~uallscalc industries. Accordingly, the Governnient

thought of creating another layer of i~istitutio~is

cxclusively for finnticing tlia small

and medium scale industries. Accordingly in Septeniber 1951 the State Financial

Corporations Bill was passed. 'l'he first State finmmial Corporation was set up by

the Government of Pulljab in 1953, and tlierc aficr. other stales followed suit. To

day, there are as Inany as 18 state Financial Corporations in the country including

l'amilnadu Industrial lnvestntcnt Corporatioti ('I'IIC).

Source of Puncls

'l'lie Stale Financial Corporatioti's cllicl'sources of lirnds consist of bonds

aid debentures, deposits, sbxe capital and reserves, borrowings from tlie Reserve

Balk of India aid tlie state government concerned. These corporations may also

obtain funds from Industrial Developnlent Bank of India under the refinance

scheme.

Main functions

The main fi~nctionsof the stale financial corporations x e as given below:

(i) Extending long lcrn~credit lo induslrinl concellis, primarily for thc

purpose of acquiring fixed assets in tllc shape of land, buildings, and

machinery;
 67

(ii) Guaraiiteeiiig loans raised by induslrial co~icernsin the capital market or

from scl~cdulcdbanks or slate coopcrntivc bnnks;

(iii) Guaranteeing deferred paylncllts duc @on1 any i~idustrialconcerns in

con~lectionwith their purcl~nscof capital goods within India;

(iv) Subscribi~igto the stocks, bo~ids,or ilche~lturcsof ail indt~strialcoocern out

of the fu;~dsrepresenting tile special class of share capital subscrihed by the

State Government or the ID131 ill nccortlance with the provision of section

4 A of the SFCS Act 195 I.

(vi) Underwriting of the issues of stocks, shares, bonds, or debentures by

industrial collcerns.

(vii) Acting as an agent of the slalc or t l ~ ccentral Government or any other

finarlcial institution ~notificdin this connection by the Government of India;

and

(viii) Providir~g foreign excliange loans under IDA line of credit.

Eligibility for financial Assistance:

Itldustrial conccrns undcr ally Sor~n of owncrsliip, wl~ctllcr il bc a

proprietary or partnership conccrn, rcgistcrcil coopcrntivc socicty, private or p ~ ~ b l i c

limited company engaged in or proposed to engage in one or more of the

following activities are eligible for financial assistance."'

(i) Manufacture, preservation or processing of goods;

Andhra Pradesli State Financial Col.poration, (1984) Schcmes for Financial

Assistance, Hyderabad: Aiidlira I'raciesh State Financial Corporation
(ii) Mining, and development of nlincs:

(iii) Hotel i~ldust~y;

(iv) Transport of passengers or goods by road or by water or by air or by rope

way or by lin;

(v) Cie~ie~.atio~l
or distril>utionof clcctricity or iiny othcr form of power;

(vi) Maintenance, repair, testing or scrvicitig of ~iiachine~y

of ally descriptio~i

or vehicles or vessels or nlotor boats or trailers or tractors

(vii) Assembling, repairing or packing any article with t l ~ eaid of machinery or

power;

(viii) Developrr~entof any conli~iuousarea of land as an industrial estate or

industrial area:

(ix) Fislling or providing shore Sacililics li,r iishing or maintenance tliereot

(x) Research and development or any process or product in respect of

industrial activities eligible for assistance by SFC;

(xi) Providing of weigh bridge facilities

(xii) Providing special or technical lu~owledgeor other services for the

pro~notionof industrial growtli.

(xiii) Setting up nursing Iio~ncs/hospitalsant1 111ctlicalequipment to doctors:

(xiv) Borewell I rigsiroad layi~igequipmetitiearth excavators;

(xv) Bu!iness enterprises set up by qualified professionals in tnanagement,

accountancy. architucture, cnyinccring. and ~iledicinc

 69

The state financial corporations do not extc~ldfinancial assistance towards

working capital except under composite loan scheme, single window schenie, and

self- etiiployment sche~nefor young e~~treprencurs.

Quantulli of Assistance

Generally, between Rs.10,000 and Rs.30.00,000 are given by the state

finance co~poratio~i
as loans. In lllc casc ofli~iiitcdco~npanicsand co- opei.atives,

the niaxi~nuni limit is extended upto Rs. 60 lakhs including deferred payment

guarantees and underwriting of shares. Any industrial sector with a project cost

not exceeding Rs.3.00 crores is eligible for linancial assistance. Wherever

necessity tlic corporations u~~dcrhkcjoinllinanci~lg wit11 other financial

institutio~lssucll as II:CI, ICICI, and Con~~nercial

banks. Recently tile State

Finance "rporations have also bee11 sanctioning mini Loans of Rs. 5000 to

50000 to small scale industrial units.

Special Schemes Operated by tlie State Financial Corporations

In addition to extending tern1 loan assistance for establishing the new

industrial undertakings or for exp:ulsio~l/divcrsilicalio~~

of the existing industrial

sectors, the state financial corporations also operate the following special schemes

for the benefit of a wide range ofentrcpreneurs,

Composilc. Loan S c l ~ e ~ n e

Under this scheme village nnd cottage e~~tcrprises

located in places with a

population oi' less than 5.00 laklls are eligible for 100 per cent financial assistance

for both fixed capital and working capital subject to a n~aximumof Rs.50,000.
 70

Under this sclleme, the nloratorium period shall be 12-18 rtlontlls. Repayment

period can range from 3 to 10 yean. So~ncsort of concessions are also givcn in

the rate of interest for tile loans snnctioncd undcr this sche~ne,the margin at an

interest rate of 0.25 per ccnt in backward nrcas and 1 1.5 pcr cent in non-back-

ward area:; I-lowever,the entcrpriscs promoted by artisans are eligible for loans

througllout the state.

Scheme for physically Handicapped Entrepreneurs

A person who on account of injury, disease or congenital deformity is

substcantiallyhandicapped and thc dcgrcc of tlisability has exceeded 40 per cent

as delilied in Workmen Compensation Act, 1923, as a~nendcdupto 1976 can avail

of financial assistance Lo the t ~ ~ of

n c Rs.50,000 and get 100 per cent assistance

for project, for equipment or working capital or both. For projects with the cost

exceeding Rs.50.000, financial assistance sllall be extended on Liberal terms

including soft loan assistance. Concessional rate of interest is allowed irrespective

of location of the industry.

Single Window Sclie~ne

The corporation has reccnlly i~ltroduccdthis schcme. This scheme is

meant for new tiny and small scale industries -- whose project cost, does not

exceed Rs.20 lakhs, and the total working capital rcquiremcnt does not exceed 10

laklis. But the overall debt equity ratio [nust be 3:l. Repayment period is a

maxi~nu~il
of 10 years with an initial morntorium period of 2 years for term loans

and 3 years for working capital loans.

 71

Assistance to Scl~cduledCastes 1 Scbed~~lcd

'Sribcs Enterprises

Under tlie sclienie, enterprises belonging to Sclieduled CastesiTribes are

provided financial assista~iceat concessionnl tcrms to set up viable units. Only

sole proprietorship atid partnersliip firnls are eligible under the scheme. The loan

assistance can mugc li.o~nRs.50,000 to 15.00 I:~kl~s.'She rate of interest as well

as margin are retained on security according to the slab of tlie assistance

Women Entrcprenenr Schen~e

Under this sclienie the wornen entrepreneurs are provided training and

extension service support througll a co~iipreliensive package suited to their skills

and socio-economic status and extended financial assistance on concessional tern~s

for setting up industrial units in small scale sector.

The state financial corporations linve specially designed some schemes for

assistance to wonien entrepreneurs. Tlie enterprises started by wonien

entrepreneur (s) liaving a project cost of mininiuni 51 per cent sliare in equity are

eligible for assistance l~ndertlie scl~e~iic.Assistance shall be given at a

niaxi~nunidebt equity ratio of 3:1 will1 a niininl~~ni

pro~iiotcr'scontribution at 15

per cent of project cost. Term loans with an initial nioratorium period upto 2

years, are repayable over a period of 10 years.

 72

Mahila Udyn~aNidlli SC~ICIIIC

'l'llcre is also a~lotllcr S C ~ I C I I I CcaIIci1 Mal~ili~

Udyanl Nidl~i Schcmc

exclusively Tor wonlcn entrepreneurs. All nc\v industrial projects with pro.jcct

cost not exceeding Its. 10.00 laklls pro~~~otctl

by wornell entrepreneurs with a

rnil~ilnun~
or51 per cent share ill cq~~ity
nre cligiblc for equity type ~Tassistnoce

under the ~ c h e ~ along

n c with regular term loan. I:urther, seed capital assistance by

or 15 per cent of the project cost

way ol' son loan is considered upto a ~nnxi~nu~n

to nlect the gap in equity. 'I'i~esoft Ion11wit11 a ~noratoriumperiod upto 5 years is

repayable over a period of I0 years

Self-ea~pluya~ent
scl~emefor Y O I I I Entrcprc~lcl~rs
I~

'1.0 encourage selT-enlploymc~ltand tl~crcby rcducc pressure on work

employ~nent,the SI:Cs in tllc coul~ttyIlavc tlesigncd some special schemes. One

sucll schcli~eis selT-employment scl~elnefor young entrepreneurs. The scheme

is specifically designed to provide gainful self-employment opportunities to the

unemployed in the age group or 20-40 years, with a minimum educational

qualilication of 10tl1standard. Uut tllosc wllo llavc acquired skills of a~lisansand

craflsnlen witllout tllc ~nini~n~lnl

ctlucation:il qi~alilicationsare also eligible for

assistance under this sclleme. In case ol'schedulctl casteltribe entrepreneurs the

rnaximunl age li~nitis uptu 45 YC:ISS. Untlcr Illis sclle~llcto get assistance tllc

industrial unit must be a new venture. 'l'lle total cost of the project i~lcludingcost

of the fixt:l assets and working capital, shall not exceed Rs.5.00 lakhs. The

maximum loan repayment period with an initial moratorium of2 years, is 8 years.
 73

Self-e~ttployr~~errt
Scheme for Ex-servicc~i~e~t

'I'lie ~nainobjcctivc or the sclictiic is to encourage alltl extend financial

assistance to ex-servicemc~i,dis:~blctl scrvicc pcrso~~nel,

and widows of ex-

serviceme11 to he sc!f-e~iiployetl by scttiny up industrial ventures. ' n ~ ecx-

servicclilcrl are idso eligible Ibr li~l;t~lcial

ilssi'tt:~~icefor acquiring lieavy or ligl~t

eom~iicrcialvellicles witli 50 pcr cell1 collotctal security. 'I'llc ex-servicemen

undertaking llotel projectsitourisni relatcd activities are also eligible for assistance

under tlie scheme. 'l'he ex-servicetnen f o r ~ n i ~partnership

~g witli one or more non-

ex-servicemen would also be eligible Ibr assista~iceu~idcrtlic scheme provided

the co~ltribulionfro111non-ex-serviccmc~~
tlocs not cxcced 25 per cent of the total

promoter's contributio~land effective management of the project rests with the ex-

sesvicc~nen.

Equipment Refi~lnnccS c l ~ e ~ ~ t e

Under this scheme financial assistance is extended for the procurement of

new macl~iney!equip~iie~it
for the purpose oS~liodernisatio~iiexpaasiolllbalanci~~g/

replacemc~it.'1'0 be cligihlc Ibr assisk~nccuntlcr the schc~nc,tlic unit sliould Iiave

been ill operation for atleast Ibur years allti sl~ouldnot ]lave defaulted in

payments due to tlie i~istitutions.

The assistance should not exceed Rs. 3.00 crores and tlie paid up capital

and reserves also should not excecd I(s. 3.00 crores, The ~ninimumcontribution

of promoters should be 22.5 per cent and repayment period shall not exceed 5
 74

years with a moratorium pcriod upto 12 ~llonths. Ilowevcr, tlie rate of interest

applicable under the scl~enleis 14 per cc~ltper annum.

Schcatc for Motlersisatio~~

'1.0 encourage adoption ofin~provctlor uptlnlcd tecllnology and neth hods of

production and to prevent tecllnological oh.ro/(~sceraethe corpora ti or^ provides

financial ilssistance on co~lcessionalterlns under its modernization scheme.

Under this sclicae to get assistance, the sectors sliould be it1 existence at

least for a period of atleast 5 ycars. 111 cnsc of replacement / renovation, the

tnachinery sllould havc bcen in wage for a period of ;it least 5 years. l'roposals for

assista~lceshould establish the need for n~odcr~~isation

and sl~ouldprimarily aim

at: (a) Upgradatiorl of process tech~lologyand products; (b) Export orientation; (c)

Import substitutio~l; (d) Energy saving; (c) Anti-pollution measures; (f)

Conserva,ion i substitution of scarce raw-lnaterials and other inputs i~icludillg

recycling i recovery of waste and byproducts; (g) ilnprovement in capacity

utilisation \i'itlii~lthe existitlg capacity tl~rougllincrease in productivity and (h)

improvement in material handling. Ilowcver, lllc proposals for Illore replacelnent

of machinery or solely Tor expansion ofcapacity arc not covcrcd under the schcmc.

The period of repaylrlent of loan will be lixed on the basis of repaying capacily.

The nssistancc is provided at I 1 per cent rate of interest per annum, irrespective

of the location ofthe unit and minimu~npro~noter'sco~ltributioliof 10 per cent.

Special Cn1)it;ll Assistal~cc

Tile corporatioti provides special capital assistance by way of sol1 loan.

.Ihis
. is sanctio~lcdto bridge the gap in cquity capital of s~ilallscale industrial units
pro~liotctlhy (lie lirst genernticlrl tcclit~oc~.:~t
ctlllrpreneurs. IJ~itlertllc spccial

cnpit:rl i~ssista~icc
sclictric, 20 per cct~toi'llic ~)rc!jcctcost or l(s.4 laklis, wliicllcvcr

is lowcr, is co~isitlcretlto bridge the gap ill n i i ~ ~ i ~ n~xo~i~oler's

u~ii co~itributionto the

project. Repay~lle~it
period will be a tnaxi~iiu~ii
of 10 years with a moraloriu~n

period upto 5 years.

Nntio~ialcquity Ft~ntlS c l ~ e n ~ e

Untlcr tI~cNotio~ialliqr~ilyI:utitl Sclic~~ic,

tl~cslate li~~al~cial
corpolatio~is

could providc nssislallce ~ ~ p 15

t o per ccllt of tllc prqject cost or Rs. 1.5!) lakl~s,

whicllever is lower. 13ul the ~projcct sliould have beeti floated by new

entrepreneurs in Ihe tiny or small scale seclor wit11 llle pro,jecl cost 1101exceeding

Rs. lO.00 Iakhs. 'l'llc cxisting slliall scnlc it~dustrinlsectors call also avail of this

facility for rcliabililatio~ipurposes, ~provitlctltllc total outlay or1 rcllabilitalio~ltlocs

service charge of one

not exceed Rs.10.00 lalths. Under this sche~nc,a ~no~ni~ial

per cell1 per anriuln is cliargctl o ~ Ilic

i :tssist:ltlcc. 'l'llc rcpay~llcntperiod, with all

initial ~iloralorit~~ii uplo 7 ycars.

pcriotl o f 3 ycars, is gc~~clally

Finnncinl i'erfor~nance

111 our cou~itry.Llic slalc li~latlcialcorpor;~tionslinvc bccn assisti~igtile

illdustrial sector since the early 1950s. Cu~nttlatively,from their inception till
 76

1995-96. all tllc SPCs in thc country sn~lctioncd1ts.l 1.635.30 crores, of which the

disbursements were to the tutle of Rs.R.756. I0 crores. Will1 regard to SSls, SFCs

had assisted 3,26.487 units with cu~i~ulativc

s : ~ ~ l c t i ool'~ ~lls.8,121,30
s crores, o r

which the disburscmellts were to tlic extent of lls.O.260.20 crores. 'l'hus, the share

of small scale i~~ilustrics

ill the totnl sa~lctio~ls
works out to about 70 per cent.

In 'fable -11.2, the year wise sn~ictionsand disbursements of SFCs are

shown. It :an be observed from the table that tllere is a substantial increase in the

number of units assisted as well as amount of loans sanctioned over the period. In

tlie year 1986-87, all the SPCs ill the cou~~try

sn~lctioncdRs.200.73 crores to all

the industries. of wliicll the sharc of s~liallscale i~iduslricswas to tlic extent of

Rs. l 18.31 crores. In other words, sn~aIIscale i~ldustricsaccou~ltedfor 59 per cent

oTtlie total sa~ictions.In tlie year 1992-93, the total sanctious were to the tone of

Rs.743.12 cmrcs, ofwliicll Rs.553.15 were to tl~cs~nallscale industries. Thus, the

share of slnall scale industries in the total sanctions works out to 74 per cent. But

in 1998-9;' the s~nallscale industries accounted for 70.4 per cent of the total

sanctions of Rs.1,848 crorcs. It can bc li~l.tl~cr

obscrvcd rro~ntlic tablc that actual

disburseniertts were far below tlic satlctiolis. 111tlic yczv 1986-87111 disburse~ilc~its

to the small scale industries accoullted for 70 per cent of the satictioned amount;

in 1992-93 it was 67 per cell1 nlid ill 1998-99 it was 77 per cent. Thus, it can be

stated that ilbot~t O I I ~third of tl~csn~~ctio~ls

:~lwnys rcrnaitl undisburscd.

Furthermore, the ~llilllber of s~llallscale uuits assisted by the stale fiiia~lcial

corporations also increased from 7,248 ill 1986-87 to 33,582 in 1998-99. In other
words, tllere is about Tour fold i~lcl.caseill tlic nmnbcr ol' units sssisted over a

period of twelve years, 1986-87 to 1998-00.

of Crrdit by St:~lcI'io;~~~c.ial
I)eploy~~tet~t Corl~ol;ltionsin India

(A~nountRs. Crotes)

Year 1 Sn~nllScalc 111dust1.ies

No. of unils
(SSls) Totnl
(SSIs and Others)
Sanctio~~v I)i~but.scn~csI Sllnctioss l)isburscs~entu
Assistccl s

Source : : R q ~ o r oil
Itldustrial Development Unl~kof l~~tlia t Deveiopir~e,it Bnnkirlg iil
Iitciio (Relevant Issues).
National Sn~nllIntlustries Corport~tiot~
(NSIC)

111 Fehroary 1955, the Nntio~i:il Sni:ill Industries Corporati011 was

established to aid, counsel, assist. li~la~lcc

ant1 proriiok tlic interests of' sniall

industries ill tl~ccountry.

Amo~igotlicr tlliligs, tllc Col.por;~lioll supplics both indigenous and

imported machines on hire purchnsc tcr~ils. Spccial concessional terms liavc been

introduced for units in backward areas a~idalso for units promoted by

entrepreneurs from weaker sectio~lsor thc society.

In March 1956 the Iiire purclinsc sclicmc was laulicllcd. Its main purpose

is to facilitate establishmellt of new s~llalland ancillary units and modernisation

of existing ones. U~lderthis sche~iic,the NSlC ctlables the SSIs to obtain

machinery aid equipment by paying at1 initial deposit of I0 per cent of the cost

of thc equip~nc~lt ovcr a pcriod olseven ycars.

a~idpaying tlic rcst in i~istalnic~lts

Thus, und:r this schctne, small industries gel ~nacliineryand other equipme~~t
on

easy terms of pay~nent.'I'lle NSIC' also opcrales prolotype production and training

centres mainly to dcvrlop proto(ypc ~ ~ L I ~ ~ I I ;i11(l

I C I tilaclli~le
II tools for production

on com~nercialbasis and distribution lo s~iiallscale industries. The NSlC also

assists s~ilall itidustry by c~lsuri~ig

greater slinre in government purchase

progranune, and distribution of IXW materials, scarce components, and parts.

 79

Till 1988-89 the Corporatio~~

nssistetl 749 small scale industrial units

under thc hire pul.chasc schc~nca~ltlthc vnluc of cnachi~lcgsupplied was

Rs.83 1.32 Inlths. But ovcr a pcrioil ol'ti~~lc,

tllc Cot.poratio11itlcrcased its qualltuni

of assista~icc.As it can he ohscl.vctl li.on1 'l'able-11.3. the nucnbcr of units assisted

incrcaseil to 1195 in 1091-92 and to 1,530 in 1005-96. 1 lowcvcr, in 1997-98. the

number ol'u~li(snssistcd dccli~lctlto 085. 'l'l~ev:~lueof machincry supplied under

the scheme also increased to Rs.1,754.25 Iakhs in 1990-81 and further to

Rs.2,I 86.60 laklls ill 1995-96. I lowcvcr. ill 1998-99, the value of machicicry

supplied was o111yRs.1.740 Iakhs.

I ~ ~ d u s t r i In~l e v c ~ l o ~ ~l1;111k
c ~ ~ cofa tl~ltlia(II)I1I)

Ilnder lllc Icldustrial I)evclop~nc~ll

I3a11kof India Acl, 1964, this bank was

established in July 1964. 'file lI)I11 is an apcx financial i~istitution for

coordinating, in conformity with national priorities, the activities of the

institutions engaged in lina~lcitlgand pro~notingindustrial dcvelopmenl in the

country".

"
Vasant Desai (1989) Manageulerit of Stl~allScale Inditstries Bombay : Himalaya
P~~blisllers.
VALUE OF lllACIIlNEKY SUI'I'LIISI) BY NSlC ON HIRE PURCHASE

I1ASIS TO SSI IINI'I'S IN INIMA

Source: Report on Devclop~iie~it

Unnki~igill India, (Relcva~itIssues).

The ~iiostdistinguishing featurcs of tlie IDBI are to serve as a11 apex

institutio~lfor tlie term lending i~istitutionsand to coordinate their activities it1

 81

financing, protiiotitig and developi~~gi~id~~strios.

1DBl's assista~iceto small

industries sector is cliannelised through the network of primary lending

institutiotis under its refi~iancesclie~iic.hills rc(liscounti~igsclicme, and seed

capital assista~icesclicme, etc.

Refinance Schenie

S ~ i ~ aand
l l Medium size units can avail of IDDl's refinance assistance

through tlie eligible institutions viz., cotl~~~iercial

banks, cooperative banks,

regional rural banks, state financial corporations (SFCs), state industrial

developn~:nl corporatiotis or state illdustrial itivcst~iic~~t

corporations (SIDC.SIIC).

In other words, the lDBl provides nssistnncc to small scale iridustries tlirougll

grass root lcvel ilistitutio~isas it is ~iolpossible for tlie IDUI to reach directly

a large number of small i~idostrialonits scattered all over the countryt2.

The ~iiaximutliamount of loan for rclina~iccis Rs. 60 lakhs for SFCs. Rs.80

lakhs for commercial banks, and Rs.60 lnkhs for SIDCslSIICs. When projects are

jointly financed by SFCs and SlDClSllC atid co~nnicrcialbanks, the total allloullt

of refinance from the IDDI may bc Rs.200 laklis. No mini~numlimit lias been

laid down for eligibility under thc sclic~nc.'l'lie minimum period of loans for

refinance is 3 years. Tlie ~iiaxini~~tii

pcriotl of loa~isgive11by conuiiercial balks

" Srivastava,S.P(1981).A practical gi~idel a Industrial Entrepreueurs,New Dellii,

Buttan Cliand & Sans.
 82

and state coopcrativc banks may be upto 7 yfiirs; but for other tern1 lending

institutio~lstlle period is upto 10 ycars. 'l'he II>IlI ~ior~nally

relinances ~ ~ p90
t opcr

cent of t l ~r eligible loans. IIowever, refina~icei s provided upto 100 per cent for

lows to sniall scalc units covcrctl 1111rler

iltc cretlit gunrnnlcc schc~ncand to slnall

road transport c~l.rcrators,i~icludi~lg

tllc single truck operators.

The lDUl has constituted n l'eclitiical Assistance Fund for financing a

wide rangc of developnienl activitics. 'fhc li111i1C O L I I ~be utilized for financing

refinance scheme for industrial loans for sniall and mcdium industries, refinat~ce

composite loall scllenle for artisans, villagc and cottnge industries, relinancc

scheme for industrial loans for working c:~pitalrcquiren~cnlsfor very sniall

industrial units, refinance scheme for wonien entrepreneurs. refinance scheme for

small road transport operators, rcfina~lccscheme for quality control facilities by

industrial units in the sniall scale scctor. refinance sche~nefor ~ilodernisationof

small and medium scnle i~idustrics.rcli~lancesclicn~cfor rcllabilitation of small

and mediunl scalc i~idustries:uld rclinn~~cc

sclic~ilcliir sclicilulcd castes/sclieduled

tribes entrepreneurs and pllysically lla~~tlical>pcd

cntrcprencurs. l'liis h ~ n dis also

utilized for any activities which in the opinion oflDBl are essential for promoting

industrial developnic~lt.
 83

Bills lledisco~lntingAssistn~~ce

lDB1 rediscounts bills or protnissol-y notcs arising out of the sale of

indigenous ~nachineryoil deferred payl~~cnt

basis. Bills or promissory notes drawn

in favour ot'or by machinery ~l~at~ulhct~ircrs

arc tliscountcd by the latter in the first

instance with their banks wllich in turn, retliscount them with the 1DBI. The

facililies ondcr the sclleme arc also available for approved design engineering

concerns, wllicl~ get tile machillcry labrica(cd according to their own

specifications and design under tllcir own supervision and sell then1 under their

own brand names. The sales ~nladcby selling agcntsldistributors of the machinery

n~anufacturersto purchaser users on tlcfcrrcd payrllcnt basis, arc also eligiblc for

assistanct, provided that the agents1tlistributol.s llavc paid in fill1 to the

~nanufactu~~crs
for tllc ~naclli~lery
1111dcrS ~ bc(hrc
C the execlition of the Sills or

pron~issoryiiotes.

Assistance is givcn at collccssional ratcs to seller-rnan~~ract~~rerslp~~rchaser-

users for tlie purchase ofcllassis or nlacl~incryby State Dlcctricity Boards1 State

Road Transport Corporatio~~s and I linlalnyan hill regions, and

in thc ~lot.tll-castc~.~l

to the West Bengal State Electricity Uoarci for usc in the Iiill district of Darjeeling.

The IDBI has give11special per~nissio~~

to banks for the exclusive use of seller-

manufacturers and purchaser-uscr ill tllc snlall scale industry.

 84

Seed Cnpitul Assistance S c l l e ~ ~ ~ e

To assist entrepreneurs who have skill? but lack fi11a11ceto put in tlie

requisite promoters contribution, 11)13I operates tI1rce Seed Capital Schemes (I)

spccial capital sclie~neoperated I1y SITS auil SIDCs; (ii) seed capital scheme

operated by SlUCs a~itlSFCs as agent or Il)l3I R I I ill

~ cxccj~tio~lal
cases, directly

by IDBI itself; (iii) ~lation:llequity k111tltl~rougli~~ationnlisctl

banks as agents of

IDBI. The main aim of seed capital assistauce scheme is to assist those

entrepreneurs who have wortl~whileprojects and also possess the ~iecessary

technical and managerial skills but lack lhc ~.cquil.cdfina~lceto put in the requisite

promoter's equity. l'lius, the II)Lll assicls c~ltrcprcncurswho have technically

feasible aut! eco~io~nicnlly

viablc prc!jccls, hut do not havc e~ioughcapital for tlic

promoter's contribulio~~.

Assistance under both the schemes is interest-free and service charge of

one per cent per annllln. 'l'he assista~lceis also available to the promoters who

undertalte cxpansio~~,
divcrsilicnlion ;urd ~iiodcr~iisalion
of their productive

processes. 'Tlie promoters scttil~gup a project in the s111all scale sector for tlle

first time, ?re eligible for assistarice untler the sclleme, eve11 if tlieir requiretnents

of seed capital assistallcc exceed lls.2 laklis. 'I'hc ~noratoriumis available npto 5

year for repayment of loan.

 85

The Industrial Devclop~nelltllalik oflntli:~also providcs resourcc support

toNational Small ltldustries Corporalion for lcnditig to s~iiallsector. The lDBl

operates scllernes wl~icliextc~ldlinallcial assistel~ceai corlcessiorial rate of itltcrcst

to the ~111ii;in tlic s~iiallscnlc sector covcrcd untlcr the crcdit guarantee sclicme.

'The other sclie~ncsoperated by IDBI arc composite loan scheme, scheme for relief

refinance, scheme for assista~iceto industrial estatcs, scheme for assisting

modemisation ofsmall scale units and rcliabilitaliori of sick s~i~all

scale industries.

Performnnce

The assista~lceof lDBl to slnall scale ilitlustrics ~ltlderthe refinance, bills

rediscounting and olher scllemes i~laeascdli.orli Its. 309.95 crores in 1989-90 to

Rs.1,699.40 crores in 1998-99. i\s it can be observed from Table-11.4, the

disbursemetits illcreased to Rs. 1 158.60 crores in 1998-99.

 Table-11.4
ASSISTANCE TO SMALL SCALE INDUSTRIES BY INDUSTRIAL
DEVELOPMENT BANK OF INDIA

S = Smlclians; U= I)isbnrse~tlelits.
Note: l D B l Opernlions in tesperl ut'Sn~nlisector li;lvc been tln~isltnedlo SlDlll with efTect from 4-2-
1990.

Source: Industrizl Develoipnent Bank of india: Operational Statistics - 1964-89 and Report on
Developaient Ranking i i ~
India (Ilclc>aot issues)
from Rs. 19 1.01 crores in 1980-8 I. l'llc relinance assistance sanctioned during

1989-90 aggregated to Rs. 1,332.50 crorcs as apni~isllZs.269.86 crores in 1980-81.

Disbursements also increased from I<s. 160.94 crores in 1980-81 to Rs. 839.00

crores in IO89-00. I)uring 1989-00. assislallcc sal~ctio~~ed

under bills

rediscouniing scheme aggregated to Rs. 141.90 crores as against Rs.37.69 crores

in 1980-81. 'l'he disbursements under tllc s c l l c ~ were

~ ~ e Rs. 28.27 crores in 1980-

81, but incrensed to Rs.107.20 crores in 1989-90.

The assistance oS IDBI to SSls u~idcrotllcr schemes also increased fro111

Rs.2.4 crores in 1980-81 to Its. 225.00 crorcs in 1989-90. Disburse~nentsalso

increased to Rs. 212.40 crores in 1989-90 from Rs. 1.80 crores in 1980-8 1. The

total sa~lcliollsto small scale industries under all the schemes increased from Rs.

309.95 crores in 1980-81 to 1Zs. 1,699.49 crores in 1989-90. The total

disbursement^ cilso increased from Rs.10 I-01. crorcs in 1980-81 to Rs.1,158.60

crores in 1989-90.

Slnnll llldustries Ueveloprnent Ilallk of l~ltlia(SII)BI)

To ensure larger flow of but11 filloncial and non-financial assistance to the

small scale industries. it was decided to set up Slliall I~idustriesDevelupniel~tBank

of India (,ilIlBI) as a subsidiary of Industrial Development Bank of India. The

basic idea of starting the SIDE31 was to establish a principal financial institution

for financing as~ddfveloping small scale intlustries in the country. The SIDE31
 88

is also expccted to co-ordinatc thc aciivitics of existing institutions engaged ill

promotion and devclop~ncntof s~nallscnlc i~itll~slrics.l'he SlDBl co~iunencedits

operatio~ls011 April 2, 1990 and has taken ovcr fio~nlDUl the responsibility o r

ndministcri~lgtllc s~nallilldi~slrics~lcvclup~i~c~lt
Tiltid arid lllc ~iulionelequity f ~ ~ n t l .

'I'lic main h111ctionsofSIDL)I asc as Sc,llows":

(a) Refiriallcilig of loans and ndvnnccs cxtc~itlcd by tlle pritnary lending

institutions to industrial conccttls ill the sniall scale sector and also providing

resource support to them;

(b) Discounting and rediscounting of hills arising from sale of ~nacllineryto, or

manufactured by, industrial co~lccr~ls
in tllc s~nallscalc sector;

(c) Extension of seed capital soll 10311 assista~lcc~111der

National Equity Frrt~d,

Mahila Udyam Nidhi and Seed Capital Scheme tllrough specified lending

agencies;

(d) Granting direct assistance as wcll as rcli~lmlcingof loans extended by priniruy

lending institutio~is for financing cxport of products manufactured by

industrial concerns in the s~iiallscale sector;

(e) Providing services liltc Sactori~lg.Icasing ctc.. Lo ind~istrialconcerns in tlie

s~liallscalc scctor:

(f) Extending firlancial support to Stnlc S~nall Industries Develop~nenl

Corporations for providing scnrcc t.aw materials to and 111arketillgthe end

products of small-scale industrial units; and

" Repon on Currency and Final~ce(1989-90) Bombay : Reserve Bank of India, pp.
334-35.
 89

(g) Extending financial support to Natio~inl Small Industries Corporation for

providing lcasi~ig,hircpurchasc atid ~iinrkclit~gsupport to small scale

industries.

The fit~a~lcial
assislalice ol'Sll)l3i to tile sll~ellscale units is provided tlirouyli

the existilig credit dclivery IIICC~I:III~SIIIco~ilprisi~~g

SPCS, SIDCs, commercial

banks, cooperative banks and regio~lalI nral banks which have a vast network of

branches all over India.

Perforn~nnce

SIDBI assista~iceto s~ilallscnlc illtlustlies is presented ill Table-11.5. I t call

be observed from the table that the total satictiotis increased from Rs. 2,823.8

crores ill 1997-98 to Rs. 3.458.8 crorcs ill 1998-90, registering an increase of 22.5

per cent over a period of one year. Sinlilarly, the total disbursements increased

fro111Rs.2.253.5 crores in 1997-98 to Rs. 2, 588.1 crores in 1998-99. It can be

further observed from the table that indirect assista~iceforms the li~ajorand

substantial ecgmenl of tolal ossistaricc by tlic S10131. Of the total sat~cliolisill

1997-98, about 96 per cent constitute thc ititlircct assista~icc.111 1998-99, the

indirect assistance formed about 92 pcr cent oftllc total sanctio~is. Under indirect

assistance, assista~iccutider refinance sche~iicis allnost whole of the lot. The

assistance of SIDBI under other schemcs is also creditable.

 Tnble -11.5
ASSISTANCE SANCTIONEI) ANI) 1)ISBUIZSED BY SMALL
INDUSTRIES DEVELOPMENT BANK OF INDIA

Source: Ilenort on Currency and I:innncc.

 Y1

Deposit I~is~lrance
and C~.etlitC;uar.a~~tce
C:arlioratioe (DICGC)

'The Dep,)sit Insnrance and cretlit Gualnlitce Corporation was for~iiedby the

integration of tlic Deposit Insilsa~~cc

Corpol~~tion
and Crcdit Guaralilec

Corporatioli of India 1,imited.

The Deposit Insurance C~~rporation

was established in 1962 followitig

certain bank failures, with a view lo restore the confidence of the depositing

public in the banking syste~nby safiguasding tlicir interests. The Credit Guuaitec

Corporatiori of India Lilliited a public li~liitedconipany promoted by the Reserve

Bank to cater to tlie credit rcrluircments of tlic llitherto neglected sectors,

particularly tlic weaker sections oftllc society. Wliilc there was all increasing

awareness among banks ofthc ~icetlto provide 111orecredit to small borrowers.

certain practical difficulties, largely stelnniing Tram llesitation on tlie part of tlie

credit institutions to venture into new and risky fields of lending, were

encountered. Therefore. tlie idea orsetting up tlie Credit Guarantee Corporation

of India Lid, was conceived to provide n simple but wide ranging system of

guarantees for loans granted by c~cdili~~stitulio~is

to s~nalland needy borrowers.

In 1971 tlie Credit Guararitee C o l p o ~ ~ ~ lofi oIndia

~ i Ltd., (CGCI) was cshblishcd

to administer Small Loan Credit (;unrantcc Scheme for tlie stiiall borrowers.

However, in 1978 tlie Deposit insurance and credit guarantee corporation

(DICGC) took over tlie fil~ictionsoSCGCI. In 1981 tlie DICGC formulated a

scheme, S~nall Loans (Small Scale Industries) Guarantee Scheme,

guaranteeing credit given to sniall scale industries.

 92

Small Lo 111s(Snlall Scale Inclustries) ( ; ~ ~ a r a a l cScc l ~ e o ~1981.

c,

Under tllis sclletne credit r;~ciliticsare granted by commercial banks, State

Financial Corporations and state age~icicsto i~ssistitidustrics in tile small scale

ancl priority sector, for ncq~~isitiotl

ot: or rept~irslo. or replacement of fixed assets

or equipment and for working capital rcquirctnenl for production and marketing

ofproducts.

The guarantee is as mucll as 90 per cent in the case of borrowers having

credit facililies 1101 exceeding Rs. 25, 000, and 75 per cent for borrowers baving

credit facilities over Rs. 25,000 but not cxccedit~gKs. 2 Inkhs. In regard to other

borrowers, the guarantee cover is to tllc cxtc~,tof50 per cent but in the case of

small scale industries located in backward districts, a Iligher guarantee cover of

66 213 per cent is provided, 'rile lligllcsl guarantee cover of 90 per cent is also

provided in respect of advances to tccllnicia~lentrepreneurs subject to certaio

monetary li~nits.The new scl~etne~tipulatesa combined ceiling of Rs. 10 lakhs

in respect C I lerln
~ lootis at~dw o r l , ~ ~callilal
~ g li11o11cc.

The nu~:lber of i~lstitulions partici]>atitlg in the sunall loans guarantee

scheme, increased Don1 285, cornprisi~ig71 con~~nercial

banks, 71 regional rural

batiks, 13 stalc litl;incial corporations, and 4 state

126 cooperative ba~~lts.

develop~nentagencies. at the end of .lunle 1982 to 555 at the end of June, 1990

but declined to 375, comprising 56 cornmel.cia1 banks, 148 regional rural banks,
 93
3 state developnlc~itagencies a1111108 coopcrative banks at the end of June

1991.

Undcr tlic scllc~llcfor snlnll sc:llc intlust~.ics,78.447 claims for Rs. 217.3

crores were receivcd ilnd 80,510 clai~ilsfor Its. 255.7 crorcs were disposed off

duri~lgtlic liscal yc:u. 1001-IOO?. 'l'l~c~otirlrcccipts a~irldisl~osalofclni~ilssi~icc

inception of the scllerne till Marc11 I992 wcrc 4,64,294 claims for Rs. 1,277,crores

and 4,52,839 claims for Rs. 1,239 crores respectively.

'I'he perl'or~llallceof l)lCGC' C;I~I hc asscsscd wit11 the figures prescntcd ill

Table-11.6. As it can be observctl lio111[lie tolilc, tlicrc has been a trc~neildous

increase in the number of atlva~icesguaranteed by the DICGC. A1 the end of

June 1990. the total guaranteed atlvn~~ces

under various credit Guarantee scllemes

were Rs. 8,662 ctarci. but i~lcrcasedto 4 13.05 per cent over the period. 111the

case of assistance for sillall scale i~~tlustries

~ ~ n d eS~linll
r Loans (Sn~allScale

Industries) Guarantee Sclleme, it was Its. 3.822.1 crores in 1990, but increased

to Rs. 16,1!6.2 crores by the end ofMarcl1 1098, recording an increase of 340.23

per cent. III terms of pcrcelltagc to total gunr;iiltccd advances, the guaranteed

advances for SS!s fo~med44.12 per cent ill 1990 and 37.80 per cent in the year

1998. Altllough, the alnouiit of total guaranteed advances and SSls guaranteed

advances increased, the share of gunrai~teedadvances for small scale industries in

the total guaranteeti advailces of DICGC, declined over thc period.

 Tal)lc-ll.6
ASSISTANCE T O SMALL SCALE INDUSTRIES UY DEPOSIT
INSURANCE
AND CIII?I)IT CIJAIZANTEE CORPORATION

19Y7 14,094 0 25.586.3 39,680.3 36.52

1998 16.R26.2 27.6')2.3 44,518.5 37.80

1999 N.A N.A 46.543.0 N.A

Source: Reserve Bank or India Monthly Ilolletin (Relevant Issues).

Industrial Recollstruction Dank of Intlia (11281)

The Industrial Ileconstruction COI-porntionof India (IRCI), which was

established in 1971 with the main ub,jectivc oTassistiny the revival of sick units,

was replaced by tile Industrial I<ccoi~sl~.i~clio~~

I);ulk ol'l~idia(lRB1) io 1985 as the

principal credi: and reco~istructionngcncy for illdustrial revival. The lRBl has

since beer1 vested with more power's to tncklc and contain the growing malaise of

industrial sickness in the country

 95

Liee o f Credit SC~ICIIIC

for Assist;~t~cr
to SJII~III
Scale [Illits

The lRBl has evolvctl a scllc~iicfor cstcl~dingassistance to sick sinall-

scale units. ' n ~ ebroad principles of tl~cscliemc arc stated in the following lines.

(i) Assistance may be estendcti to a stntc level corporation which has

~ I I C ~pcrationsorsick utiits.
requisi!~c o ~ ~ l p c t c ~to~nlo~li[or
cc

(ii) The sclienle of revival ant1 rcl1:lhililntion of units may be prepared by a

state level corporati011 ill prior consultation wit11 tlie lRBl and the

comn~ercialbank concerned. The 1llBl provides such technical or other

advice and assistance as may be necessary and possible.

(iii) In arriving at the share of financial assislnnce which 1110 IRBI niay agrec
tu extend. it sliould bc a prccontlition that any past liabilities or

irregcllarities pcr~aillilig to li~lal~cialinstitotiol~sor banks, and ~ i o t

represented by corresponding assets, should be funded. While the cash

loss as projected in the revival scheme fornu a part of the total

assistance, tlie entrepreneur 111i1stundcrtnke to bear additional cash loss,

if any, incu~redby the unit.

The following facilities are tnatle av:~il:~blcto cover tlie loan assistance:

(a) :~larginfor additional working capital as projected in tlie agreed revival

programmc:

(b) Need hased start up expenses to covcr tile restarting of closed units;

(c) Limited capital expenditure inclusive of the installation cost to finance

balancing Plant and equipmelit without any margin;

(d) cash loss as projected in the scheme of revival.

 96

I'ERPORMANCE

The perforniance of IRBI under the I,i~ie of Credit Scheme is showll in

'hble-11.7. It call bc obsc~-vcdknm thc tahlc 111:1ttlic Rank assistcd 123 units witli

the disbursemc11t of Rs. 2.98 crores till 1985. Ilowever, tile number of units

assisted illcreascd to 229 by Ma~cll1000 i111illlic ~ I ~ I O L disbursed

III~ to Rs. 5.93

crores. 111other wortls, the ~iumberof trnits assistcd and the amount of loan

disbursed have almost doubled ovcr a period of live yews. By any standard, it is

not a small achieve~nc~lt.

Apart from the assistance under line of credit scheme. the IRBl also extends

direct finallcia1 assistatlce to the small scale ~111itswliose i~ldividualrequirements

are ~norctlie~iIls. 10 Inkhs. Untler Illis Ilcad, Lhc IRBI cu~nulativelysa~~ctioncd

uld disbursed an amount of Rs.21.68 cmrcs to 84 units arid Rs. 15.83 crores to 79

units respectively by tlie end ofMarcl1 1999 (Table-11.8). It can be observed from

the table that the number of uuits sanctioned by 1liBI ~111der

ter~llloa11sincreased

to 84 units in 1999 from 69 units in 1906. 1 lowevcr, tile disbursements were medc

by lRDl
to 79 units in 1999 :is against 63 units in 1095. 'I'hc amount sa~lctio~led

to small scale industries under term loans incl.eascd Trom Rs. 11.04 crores in 1995

to Rs. 2 1.68 crores it1 1999, an increasc of 96.38 per cellt over llle period.
 -rnl)1~-11.7
CUMULATIVE SANCTIONS AN11 1)ISBURSEMENTS TO SSIS BY
INDUSTRIAL RECONSTRUCTION DANK OF INDIA UNDER LINE
OF CIIE1)I'l'SCIIISME

(Amount in Rs. Crores)

Note: Operalions ~lnderthis scllcll~eIrallsfert.cd to SIDBI li.om the year 1990-91.

Source: Anr,tual Reports of IRBl (llelcvalit Issues).

 '~;1l~lc-ll.8
CUMULATIVE ASSISTANCE (DIILEC'I') SANCTIONED AND
DISBURSED T O SMALL SCA1,E INDUSTRIES BY INDUSTRIAL
IIECONSTRUC'I'ION IIANI< OF INDIA

Source: Anllual Reports of 111131 (l<clova~~t

Issues).

To sum up, tilere al-c ;I llost ol'ilis(itutions and agencies extending various

forms of assistance to small scale i~ltlustries. Among them, the financial

institutions have a key role to play in h e proniotion and developnient of sniall

scale induslries in the c o u ~ ~ t 'I'o

~ y nlsilrc
. sn~ootli,conti~iuous,and adequate flow

of credit to small scale industries, tl~cfilia~~cial

illstitntio~ishave designed a

variety ofschemes and programmes. 'l'lrc nnlount o r credit extended under various

schemes aid programnles by tile fillancia1 institutions has increased phenomenally

over the period.