SMALL AND MEDIUM EN TERPRISE-AN OVERVIEW-

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

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

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

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

Inherent advantage of S.S.I

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

Why S.S.I fails

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

Inherent weakness of S.S.I.

Lacking basic infrastructure Old/outdated technology Poorly placed in market situation Promoters lack specialisation Weak capital base &lesser access to capital market Lacking managerial&professional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

Inherent weakness of SSI contd.

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

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

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

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

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

Bankers approach to SSI financing

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

Activities not covered under SSI

SSI units set up by state/central govts. Hotels,Tourism,Cinema house Tea processing blending ,Diagonistic center Pharmaceutical companies working on loan licencing policy

Structured approach in SSI financig

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

Dehejia committee recommendation

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

Puri Committee recommendation

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

Tandon committee recomendations

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

Chore committee recommendation

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

NAYAK COMMITTEE RECOMMENDATION

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

Nayak committee (contd)

Banks have been advised to give preferences to village industries,tiny industries,& other SSI while extending finance to SSIs.

IMPORTANT BANKING OPERATIONAL CLARIFICATION ON NAYAK COMMITTEE RECOMMENDATIONS

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

Operational clearification on Nayak commt. Contd.

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

Operational clearification on Nayak commt. Recomm.

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

Kapur committee recommendation

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

Kapur committ. Recm. contd

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

Kapur committ.recm. Contd.

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

Kapur committ. Rcom. Contd.

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

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

Working capital requirement of SSI units

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

W/C requirement--new units

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

W/C assessment ---new units

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

Factors determine W/C

Policies for production Manufacturing process seasonality pace of turn over

Fixing the quantum of W/C

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

Fixing quantum of W/C contd.

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

Fixed assets financing through Term Loan

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

PRESENTING A CREDIT PROPOSAL

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

Presenting a credit proposal

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

Post sanction monitoring of SSI advances

A.Getting the sanction accepted B.Documentation C.Flow of information Dperiodical inspection E.Insurance F.Periodical review/renewal of credit limits