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“ROLE OF BANK IN DEVELOPMENT OF SMALL & MEDIUM SCALE ENTERPRISE” –
Catch them young, watch them grow...

SMALL SCALE INDUSTRY

INTRODUCTION:

The definition for small-scale industrial undertakings has changed over
time. Initially they were classified into two categories- those using power with less
than 50 employees and those not using power with the employee strength being more
than 50 but less than 100. However the capital resources invested on plant and
machinery buildings have been the primary criteria to differentiate the small-scale
industries from the large and medium scale industries. An industrial unit can be
categorized as a small- scale unit if it fulfills the capital investment limit fixed by the
Government of India for the small-scale sector.

As per the latest definition which is effective since December 21, 1999,
for any industrial unit to be regarded as Small Scale Industrial unit the following
condition is to be satisfied: -

Investment in fixed assets like plants and equipments either held on
ownership terms on lease or on hire purchase should not be more than Rs 10 million.

However the unit in no way can be owned or controlled or ancillary of
any other industrial unit.

The traditional small-scale industries clearly differ from their modern
counterparts in many respects. The traditional units are highly labor consuming with
their age-old machineries and conventional techniques of production resulting in
poor productivity rate whereas the modern small-scale units are much more
productive with less manpower and more sophisticated equipments.

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Khadi and handloom, sericulture, handicrafts, village industries, coir,
Bell metal are some of the traditional small-scale industries in India. The modern
small industries offer a wide range of products starting from simple items like
hosiery products, garments, leather products, fishing hook etc to more sophisticated
items like television sets, electronics control system, various engineering products
especially as ancillaries to large industrial undertakings.

Nowadays Indian small-scale industries (SSIs) are mostly modern small-
scale industries. Modernization has widened the list of products offered by this
industry. Theitems manufactured in modern Small-scale service & Business
enterprises in India now include rubber products, plastic products, chemical products,
glass and ceramics, mechanical engineering items, hardware, electrical items,
transport equipment, electronic components and equipments, automobile parts,
bicycle parts, instruments, sports goods, stationery items and clocks and watches.

A leading, industrially advanced developing country, India has large,
medium and small industrial units of production in almost all branches of the
industry. Since the time of the independence in 1947, a significant feature of the
Indian economy has been the rapid growth of the small industry sector. The small
industry sector is considered to have a major role in the Indian economy due to its 40
percent share in the national industrial output along with an 80 percent share in
industrial employment and nearly 35 percent share in exports. The small scale
industries sector has been assigned an important role in the industrialization of the
country by the previous and current governments of India.

However, there is a clear distinction between the traditional and modern
small industries. The traditional small industries include Khadi and handloom,
village industries, handicrafts, sericulture, coir, etc. Modern small industries
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manufacture a wide variety of goods from simple items to sophisticated items such as
television sets; electronics control system, various engineering products, particularly
as ancillaries to large industries. The traditional small industries are highly labor-
intensive, while the modern small industries use highly sophisticated machinery and
equipment. The term small-scale industries are mostly used to represent modern
small industries. The SSIs manufacture many items which include rubber products,
plastic products, chemical products, glass and ceramics, mechanical engineering
items, hardware, electrical items, transport equipment, electronic components and
equipments, automobile parts, bicycle parts, instruments, sports goods, stationery
items and clocks and watches.

Since Independence, the growth and development of the small-scale
sector has been favored by the GoI on the following grounds: (1) generation of
employment opportunities by SSIs, (2) mobilization of capital and entrepreneurship
skills, (3) regional dispersal of industries and (4) equitable distribution of national
income. The policies pursued by the GOI over the years have helped in the growth
of the SSIs to a considerable extent.

HISTORY OF SMALL SCALE INDUSTRY:

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Ministry of Agro and Land Rural Industries and Ministry of SSI have been
merged into a single namely, Ministry of Micro Small & Medium Enterprises.

The President under Notification 9th May 2007 has amended the
Government of India (Allocation of business) Rules 1961,Pursuant to this amended
Ministry of Agro and rural Industries (Krishi Evam Gramin Udyog Mantralay) and
ministry of SSI (Laghu Udoyag Mantralay) have been merged into a single Ministry,
namely, Ministry of Micro Small & Medium Enterprises ( Suksham Laghu Aur
Medium Udyam Mantralay )

CONCEPT & DEFINATION OF SSI:

In most parts of the world the nomenclature used is small and Medium
Enterprises (SMEs) and the criteria for defining include the number of employees
and /or the turnover. In India the Small Scale Industry evokes different meanings for
different agencies and the financial institution. For example for the purpose of excise
and sales Tax Exemption, the turnover alone is the determining criterion. However in
broder terms, currently, an SSI is defined in terms of investment ceiling on the
original value of installed plant and machinery.

DEFINITION OF SSIs:

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The definition for small-scale industrial undertakings has changed over
time. Initially they were classified into two categories- those using power with less
than 50 employees and those not using power with the employee strength being more
than 50 but less than100capital investment limit fixed by the Government of India for
the small scale sector. As per the last definition which is effective since December
21, 1999, for any industrial unit to be regarded as Small Scale Industrial unit the
following condition is to be satisfied: -

YEAR INVESTMENT LIMITS
1960 Upto Rs 5 lacs in Plant & Machinery
1966 Upto Rs 7.5 lacs in Plant & Machinery






CLASSIFICATION OF SSIs:

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A common classification is between traditional small industries and modern
small industries.

Traditional small industries include Khadi and handloom, village industries,
handicrafts, sericulture, coir, etc. Modern SSIs produce wide range of goods from
comparatively simple items t sophisticated products such as television sets,

Electronics, control system, various engineering products, particularly as ancillaries
to the large industries...

The traditional small industries are highly labour-intensive while the modern
small-scale units make the use of highly sophisticated machinery and equipment. For
instance, during 1979-80, traditional small-scale industries accounted for only 135 of
the total output but their share in total employment was 56%. As against this, the
share of modern industries in the total output of this sector was 74% in

1979-80 but their share in employment was only 33%. That means these industrial
units have higher labour productivity.

One special characteristic of traditional small-scale industries is that they
cannot provide full time employment to workers, but instead can provide only
subsidiary or part time employment to agricultural laborers and artisans. Among
traditional village industries, handicrafts possess the highest labour productivity,
besides handicrafts make a significant contribution to earning foreign exchange for
the country.

Nowadays Indian small-scale industries (SSIs) are mostly modern small-
scale industries. Modernization has widened the list of products offered by this
industry. The items manufactured in modern

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Small-scale service & Business enterprises in India now include rubber products,
plastic products, chemical products, glass and ceramics, mechanical engineering
items, hardware, electrical items, transport equipment, electronic components and
equipments, automobile parts, bicycle parts, instruments, sports goods, stationery
items and clocks and watches.

Micro, Small and Medium Enterprises Development act

MSMED Act – 2006 and its Impact

Clause Salient Features Impact
1. Establishment of Specific representation for Statutory Status,
National Small and Women Mandatory compact board and
Medium Enterprises Quarterly Meeting. quarterly meetings will
Board– Maximum No.
of members 47 address problems of
SMEs immediately to
take corrective action.
2. Concept of Enterprises Clear-cut demarcation of Facilitates SMEs to
manufacturing/production enter into service
and rendering services. enterprises aggressively.
3. Definition of Specific ceiling limit for Existing small units
Enterprises manufacturing/production can graduate into
and service enterprise Medium units and avail
definition for Medium facilities under the act.
enterprises.
4. Filing of memoranda Replacement of Facilitates SMEs to
optional for Micro and registration with avail the benefits of the
Small enterprises in memorandum. act immediately after
manufacturing and
setting up of the unit.
service sector Medium
enterprises in Service

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Sector but mandatory
for Medium
enterprises in
manufacturing sector.
5. Procurement Policies Notification of preference Facilitates opportunity
policies by central or for supply of
State Governments for goods/services without
goods and services
provided by Micro any hassles. Public
& Small enterprises. Procurement Policy
under Section 11 of
MSME Act, yet to be
notified.
6. Delayed Payment • Period of payment by SMEs can plan their
Penalty & dispute the procuring organizations cash flow/financial
resolution – 45 days requirement.
• Penal interest 200% of
PLR
7. Dispute Resolution Establishment of MSE Easy financial planning
facilitation Council; 90 and no waste of human
days framework for resources for chasing/
dispute resolution. follow up.
8. Delayed Payment: Deduction disallowed This will encourage
allowable deduction procurement agencies to
under IT Act 1961 ensure timely
payment to SMEs.
9. Closure of Business Statutory notification of Facilitates expedition of
scheme for closure liquidation.
10. Notification of Statutory Mandatory on all
guidelines or facilitating development
instructions for of SMEs ensuring fast
promotion of SMEs
Wrt. To Funds growth.
appropriation and
release
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11. Facilitating Credit Statutory Mandatory on all
providing Guidelines
for credit for 20% year
on year growth.

Statistics on SSIs:

The total number of SSI units increased from 2.082 million units in
1991-92 to 2.724 million units in 1995-96. During the same period, at constant
prices, the production increased from nearly $1.6 billion to approximately $2.2
billion. The total number of persons employed in SSIs increased from 12.9 million to
15.2 million. According to Second All-India Census of Registered SSI units, 42
percent of the units were functioning in rural areas, 48 percent in urban areas and 10
percent in metropolitan areas. 62.2 percent of the units were located in backward
areas. The rate of growth of this sector has been higher as compared to the whole
industrial sector.

In terms of the abovementioned development, the progress of the SSI sector
is considered impressive by experts. But the SSIs are mostly affected by a number of
problems that have hampered its absolute growth. According to the Seventh Five
Year Plan (1985-90) the growth of the SSIs has been constrained by various factors
``including technological obsolescence, inadequate and irregular supply of raw
materials, lack of organized market channels, imperfect knowledge of market
conditions, unorganized nature of operations, inadequate availability of credit,
constraint of infrastructure facilities including power etc. and deficient managerial
and technical skills.''

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For SMEs, sky is the limit:

Small and medium enterprises (SMEs), particularly in developing
countries, are the backbone of the nation's economy. They constitute the bulk of the
industrial base and also contribute significantly to their exports as well as to their
Gross Domestic Product (GDP) or Gross National Product (GNP).

INDIA'S SME SCENARIO:
India has nearly three million SMEs, which account for almost 50 percent of
industrial output and 42 percent of India’s total exports.
A special role for SMEs was earmarked in the Indian economy with the
advent of planned economy from 1951 and the subsequent industrial policy followed
by government. By and large, SMEs developed in a manner, which made it possible
for them to achieve the objectives of:
1. High contribution to domestic production
2. Significant export earnings

3. Low investment requirements
4. Operational flexibility
5. Low intensive imports
6. Capacity to develop appropriate indigenous technology
7. Import substitution
8. Technology-oriented industries
9. Competitiveness in domestic and export markets

However, as a result of globalization and liberalization, coupled with WTO
regime, SMEs have been passing through a transitional period. With enhanced

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competition from China and a few low cost centers of production from abroad many
units have of late been facing a tough time.

However, those SMEs who had a strong technological base, international
business outlook, competitive spirit and willingness to restructure themselves
withstood the current challenges and came out successful to make their own
contribution to the Indian economy.

It is the most important employment-generating sector and is an effective
tool for promotion of balanced regional development. These account for 50 percent
of private sector employment and 30 to 40 percent of value-addition in
manufacturing. It produces a diverse range of products (about 8000 odd items),
including consumer items, capital and intermediate goods.

However, the SMEs in India, which constitute more than 80 percent of the
total number of industrial enterprises and form the backbone of industrial
development, are as yet, in technological backwaters vis-á-vis advances in science
and technology. These suffer from problems of suboptimal scales of operations and
technological obsolescence.

While most of the large companies, even in developing countries, have
financial as well as technical capacity to identify technological sources and evaluate
alternate technologies that would suit their requirements, unfortunately, this capacity
is conspicuously missing in most SMEs.

It is these features of SMEs that make them an ideal target for technological
up gradation through technological cooperation with foreign and local enterprises,
with R&D institutions and centre’s of technology development.

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So, what these SMEs need today is primarily access to new technology.
Poor financial situations and low levels of R&D, poor adaptability to changing trade
trends, non-availability of technically trained human resources, lack of management
skills, and lack of access to technological information and consultancy
services and isolation from technology hubs, etc. are some of the reasons why these
SMEs are not being able to surge ahead.

Small and Medium enterprises are the backbone of India's economy. They
have to now work hard to get out of this impending scenario. There has to be a major
change in policy on how they are operating. SMEs have to put in more effort on
research and development (R&D) and on ways to use technology at par with the
international standards.

PROMBLES FACED BY SME SECTOR:

Indian governments have proclaimed many policies and also implemented
several initiatives and programs. Most of the policies before the 1990s were aimed at
protecting the small sector rather than making it competitive. Some of the major
issues that these policies did not address are as follows:

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Problems in obtaining credit One of the serious problems affecting the
small scale sector is the hardship of obtaining credits from the banking sector.
Although this has been a problem for past several years and though the issue has
been mentioned in budget speeches by government, none of the policies seem to
solve it. Many entrepreneurs who had been drawn into industrial activities hoping to
receive financial assistance have subsequently found that working capital is not
forthcoming. The internal financial resources of the SSIs are held to be so small that
have no surplus money in times of business strain. This along with the situation of
unstable profits prevents the banks from issuing them unsecured loans. As a result,
many of these SSIs are still dependent for funds on money-lenders who charge high
interest rates. And those who have tried to obtain loans from the various financial
institutions have only faced corruption associated with grant of loans and long delays
in delivery.

In a 1996 survey of small entrepreneurs by the Confederation of the Indian
Industry (CII), a large proportion of the respondents attributed their problems to
delayed payments, high cost of borrowing and inadequate credit.

Sickness in the SSIs As of September 1992, about 233 thousand small-scale units
were sick. Many of the sick units ultimately close down due to finance and marketing
problems. Poor management has also been identified as a major cause of sickness.
Therefore a need exists to continuously provide help in terms of training for the
small enterprises to manage themselves. The recent policies and programs providing
management training by the SIDBI is hopefully a step towards solving this problem.

Negative impacts of reservation policy The previous and current small-
scale industries policies have followed the policy of reserving certain items to be
manufactured only by the SSIs. Many of the items that are reserved are in the

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mechanical engineering, chemical products and auto-ancillary industry groups.
Though the policy was mainly aimed at protecting the small firms from competition
from the large firms, the lack of any licensing to identify SSIs has resulted in the
entry by large firms into those areas. There is no enforceable penalty for moving into
reserved areas. It is also held by many authors that the policy is actually
counterproductive as those producing non-reserved items have performed better than
those in reserved areas. Hence the reservation policy tends to become large
redundant.

The Equity policy The New Small Industry Policy allows the large firms to
have equity in SSIs. This policy is contended to be a bad one as it only encourages
the small units to continue to act as dependent on the large firm. A fear that the large
firms might at a later stage takeover the small units is also expressed by some
industry experts.

Apart from the abovementioned critical issues, there are several other
issues such as non-classification of a separate medium enterprise under the Indian
industrial sector, regional imbalances in the concentration of small scale industries
and survey data showing that government institutions were the ``least important
sources of technological information.'' More information on these issues could not be
obtained.

Another concern is the lack of coordination between the various support
organizations set up by the government. It would also be interesting to know if any
evaluation systems are in place for these institutes and their programs. Information
on this aspect could not be gathered.

An article by Ira Gang mentions that policies intended to support the small
industry such the reservation, financial incentives, etc. are ``neither promoting
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employment nor improving the competitive base of small firms. Rather, they are
working as strong disincentives for growth of small firms.''

Though all the previous efforts at helping the SSIs to grow and modernize
seem to have had very little effect, the recent modernization efforts such as the
setting up of the Technology Development Board, the Technology Development and
Modernization Fund, greater emphasis on providing management skills and in
obtaining ISO 9000 certification seem more focused and promising. Since these have
very new, no specific conclusions as to their success or impact can be drawn at this
time. Hopefully, some systematic methods to ensure that SSIs are actually receiving
benefits and necessary assistance will be put in place.

FINANCING OF SSI:

`Government has recognized the important role of entrepreneurs in the
industrial development of the economy, especially through the small-scale industries
(SSIs). SSI is essential for Indian economy in terms of employment generation,
foreign exchange earnings, and its share in industrial output, and contribution to
national income. The government of India and state governments provides a number
of special facilities and incentives.

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The incentives not only motivate entrepreneurs to set up industries in the
small scale sector, but also strengthen the entrepreneur’s base in the economy. Of all
the elements that go into a business, credit is the perhaps the most crucial. The best
plans can come to naught if adequate finance is not available at right time. SSIs need
credit support not only for running the enterprise & operational requirements but also
for diversification, modernization / up gradation of facilities, capacity expansion etc.
In respect of SSIs, the problem of credit becomes all the more critical whenever any
episodic event occurs such as a large order, rejection of consignment, inordinate
delay in payment etc. In general, SSIs operate on tight budgets, often financed
through owner’s own contribution, loans from friends and relatives and some bank
credit. Government of India recognized the need for a focused credit policy for SSI
in the early days of promotion of SSIs and RBI has been instrumental in devising a
multi-stage approach / financial system for credit dispensation to different sectors of
the economy, for example, agriculture, industry, exports, SSIs etc. This section
focuses on the role of SIDBI, SFCs and commercial banks in granting credit to small
scale and tiny sector.

ROLE OF BANKS IN DEVELOPMENT OF SME’s:

Many of the banks in India is providing loan to SME Sector. Such as
SIDBI, PNB, SBI, etc. Maharashtra Small Scale Industries Development
Corporation was established in 1962.The basic objective was to help the small scale
Industries to develop and grow to the fullest extent enabling them to play their role
towards realization of the national objective of accelerating the place of Industrial
Development, generation of employment and income.

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The main objective of assisting Small and Medium scale industries (SME)
Units in the State. The Company failed to achieve fully its main objective of assisting
SSI units, as there was continuous decline in number of SSI units assisted during
1997-2002.

(i) Aid, counsel, assist, finance, protect and promote the interests of SSI to enable
them to develop and improve their methods of manufacture, management, marketing
and techniques of production.

(ii) Enter into contracts for fabrication, manufacture, assembly and supply of goods,
materials, articles and equipment and to arrange for the performance of such
contracts by sub-contracting with small scale units.

(iii) effect co-ordination between large industries with a view to procure orders for
SSI and to enable them to manufacture parts, accessories, ancillaries, components
and other articles required by large industries. Pursuant to its objectives, the
Company undertook the following major Activities

a) Procurement and distribution of raw materials

b) Assistance in marketing of products

c) Commercial warehousing

d) Assistance in import of raw materials and export of products

e) Running of emporia for handicrafts and production centre.

Recent modernization scenario:

In spite of the existence of all the aforementioned organizations to help the
development of the SSI, an increasing spread of sickness is reported in the sector.
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Acknowledging this fact, the DCSSI set up a working group in 1985 to make
recommendations for a suitable action. The suggestions made by this group included
the following:

• Establish a well-equipped design and technology development cell in the
office of the DCSSI to coordinate programs of modernization in the small
small-scale sector.

• Special cells called ``Product-cum-Process Development Centers'' will be
necessary for undertaking research, locating sources of modern technology,
identifying suitable technology for transfer and help the small-scale industries
in obtaining inputs.

• Liberal imports of technology and equipment should be allowed to modernize
the small-scale sector.

• Incentives should be provided to enterprises with modern technologies to
transfer them to the SSIs.

In August 1991, the GoI announced its new policy towards the small scale
sector. The government announced that a Technology Development Cell would be
set up in the Small Industries Development Organization (SIDO). This Cell would
provide technology inputs ``to improve productivity and competitiveness of the
products of the small scale sector''. The Technology Development Cell would
coordinate with other industrial research and development organizations to achieve
its objectives. Information on whether such a Cell had been set up was not available.

Under its scheme of direct assistance, the SIDBI had launched the
Technology Development and Modernization Fund. The main objective of this fund
is ``to encourage existing industrial units in the small scale sector to modernize their
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production facilities and adopt improved and updated technology so as to strengthen
their export capabilities''. Through this fund, its helps the SSIs meet the costs of
purchasing capital equipment, acquisition of land, expenditure incurred in obtaining
ISO 9000 series certification and also the costs for improvements in packaging. The
SSIs have to meet some criteria before they can apply for financial assistance under
this scheme, for e.g. units must be in operation for at least three years. It is also
working towards prospects of marketing the products of SSIs in the internal and
international markets.

One of Development and Support Services extended by the SIDBI is the
Enterprise Strengthening service. Under this service, there are specific programs
including technology transfer, technology up gradation in indentified industry
clusters and management development.

In the 1996-97 Union Budget, the government announced the setting up of
a Technology Development Board and this has been instituted under the Department
of Science and Technology. During the presentation of the budget, the Union
Minister for Finance proposed that the unutilized corpus of $1.75 billion under the
Technology Development and Modernization Fund Scheme of the SIDBI should be
provided to the State Financial Corporations and commercial banks. These banks
will in turn be able to make it available for the SSIs for modernization projects.

In addition, the SIDO and SISIs have introduced a program for promoting
technological modernization of the SSIs. Under this initiative, the small production
units are provided information, advice and training. Reports are distributed among
them for spreading modernization information. The SSIs can register for these
programs for a fee. As of March 1986, there were 570 enterprises registered under

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the modernization scheme of the SIDO. However only 24 of these have been
provided with modernization guides.

A recent change in the small-scale industrial policy allows the large firms
to hold up to 26 percent of equity in small enterprises without the requirement of
consolidation of accounts. This is considered as a good way to induce the transfer of
technology and skills from large industrial units to SSIs. Industry experts are
however skeptical about this. Most large units use the small-scale sector as sub-
contractors. Doubts have been expressed whether these large units would allow for
transfers of technology to SSIs and enable them to grow and become independent
units in their own right.

POSITIVE IMPACT OF SME:

The importance and potential contribution of the SME sector are supported
by both theoretical and empirical arguments and evidence. We turn first to the
former. Part of the contribution of the SME sector both to the overall total factor
productivity (efficiency, as usually defined) of an economy and to employment
generation and distributional equality comes by virtue of its pattern of technology
choice. SME technology tends to be intermediate between the highly labour intensive
technologies of micro enterprise, which as a result achieve only low average labour

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productivity, and the highly capital intensive technologies of large firms which
thereby achieve high labour productivity, but use more capital per worker than is
available for the economy as a whole. A larger SME sector is best thought of as the
alternative to a highly dualistic economy with most of the capital in the large scale
sector and most of the workers in the very small-scale sector. An economy which is
dominated by SMEs, as Taiwan’s has been, can generate a low level of inequality in
the distribution of primary income (before tax and transfer) whereas the dualistic
economy characterized by the combination of much large enterprise and much micro
enterprise typically generates a high level of primary inequality.

Its intermediate technology characteristic is what gives the SME sector a
special role (together with small-scale agriculture) in the generation of adequate or
decent employment. When most jobs are in the micro enterprise sector, too many of
them are destined to be low productivity and hence low income in character. SME
firms can be substantially more productive, so in terms of the potential to generate
“decent” jobs this sector competes with large private firms and the government, but it
has the advantage of being able to generate many more such jobs for a modest input
of capital. The key mechanism in generating decent employment in most developing
countries involves the expansion of this sector fast enough to absorb people
previously unemployed (a few) or engaged in low productivity informal sector jobs
(the bulk).

Developing countries without substantial SME sectors (hence often
described as having a “missing middle” in their firm size structure) tend not only to
have capital and the income from it concentrated in the larger firms but also to have a
“labour elite” in that sector, able to bargain for wages much higher than elsewhere in
the economy. With the economy’s capital stock almost completely used up by the

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large firms (usually a result of capital market imperfections), there is little remaining
capital to be distributed among the many workers not hired by large firms; this
produces a large micro enterprise sector with the SME sector squeezed out for lack of
capital. The equilibrium wage in the micro enterprise sector is very low and capital
incomes are low there as well. In short, income is very unequally distributed. When
the SME sector is large, these extremes in the distribution of both capital income and
labour income are avoided.

Apart from being the sector to which one would like to see a high share of
resources allocated at a given point of time, for the above reasons, the SME sector
also plays a key dynamic role in generating growth, especially pro-poor growth.
Nearly all developing economies have large micro enterprise sectors that, like the
SME sector itself, are highly heterogeneous in many respects--the goods or services
produced the entrepreneurial capacity of the owner, and the potential for growth, etc.
Many are survivalist in character but others have dynamic potential. In most
countries for which such data are available it appears that most small firms (of say
6-25 workers) began their lives as microenterprises and then grew

SIDBI

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VARIOUS BANKS POLICIES IN RESPECT OF SME SECTOR

SIDBI

Direct Finance:
Objective

SIDBI had been providing refinance to State Level Finance Corporations /
State Industrial Development Corporations / Banks etc., against their loans granted to
small scale units.

Since the formation of SIDBI in April, 1990 a need was felt/ representations
were made that SIDBI being the principal financial institution for the small sector,
should take up the financing of SSI projects directly on a selective basis.

So it was decided to introduce direct assistance schemes to supplement the
other available channels of credit flow to the small industries sector. Since then, SIDBI
has evolved itself into a supplier of a range of products and services to the Small &
Medium Enterprises [SME] sector.

1.Direct Credit Schemes

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• SSIs • Medium Sector Enterprises
(MSE) and
• Service sector units
with project cost • Service sector units with
Upto Rs.25 crore project cost above Rs.25 crore
and Upto Rs.250 crore.
Eligible I] New or existing SSI units. i] New or existing medium sector
Borrowers ii] SSI unit graduating to enterprises, and
medium scale, and ii] Service sector units with an overall
iii] Service sector units with project cost above Rs.25 crore and
an overall project cost not Upto Rs.250 crore with Bank's
exceeding Rs.25 crore. assistance not exceeding Rs. 50 crore.
Constitution The unit should generally be The unit should generally be a private
a private limited / public limited / public limited company
limited company. However,
partnership firms, sole
proprietorship concerns and
Societies and Trusts would
also be considered on a case
to case basis.
Nature of Term loan and other forms of Term loan and other forms of
assistance assistance such as Working assistance such as Working Capital
Capital Term Loan and bills Term Loan, suppliers' & purchasers'
discounting (on selective bills discounting. Investment products
basis). such as debentures, optionally
convertible cumulative preference
shares, zero coupon bonds, etc.
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2.Technology Up gradation Fund Scheme for Textile Industries (TUFS)

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Note: At present this scheme is suspended until further instructions from Govt. of
India.

Purpose The Scheme is operated by the Ministry of Textiles, Govt. of India.
Policy guidelines are issued by the office of Textile Commissioner,
Govt. of India.
TUFS has been launched with a view to sustaining as well as
improving the competitiveness and overall long term viability of
the textile sector. The scheme intends to provide timely and
adequate capital at internationally comparable rates of interest in
order to upgrade the textile industry's technology level.
Special Features SIDBI is the nodal agency for SSI textile sector and cotton ginning

and pressing sector.
For SSIs: The borrowers can avail of any one of the following
benefits: 5% interest reimbursement on the interest actually
charged in respect of rupee loan or coverage of exchange rate
fluctuation not exceeding 5% p.a. from the base rate or cost of
forward cover premium Upto 5% p.a. on the base rate of exchange
in respect of foreign currency
OR
15% Credit Linked Capital Subsidy on eligible investment made
for modernization, for Small Scale Textile and Jute Industries in
respect of Rupee Loans; The units are permitted to make new
investment eligible under TUFS Upto Rs. One crore or till the unit
reaches SSI limit, whichever is higher.
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3.Scheme for Development of Industrial Infrastructure for SSI Sector (DII)

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Purpose Setting up of industrial estates / development of industrial areas
including such projects found eligible under KVIC model.

Strengthening of existing industrial clusters / estates by providing
increased amenities for smooth working of the industrial units. Setting
up of warehousing facilities for SSI products / units.

Providing support services viz., common utility centre’s such as
convention halls, trade centre’s, raw material depots, warehousing, tool
rooms / testing centre’s, housing for industrial workers, etc. Any other
infrastructural facilities which will benefit predominantly SSI units /
entrepreneurs.
Eligible All forms of organizations such as Public / Pvt. Ltd. Companies;
Borrowers Registered Societies / Trusts; Government Corporations; Corporate /
Co-operative entities / accredited NGOs approved by KVIC.
Norms Cost of Project: Not to exceed Rs.100 million.

Debt Equity Ratio: Not more than 3:1

Repayment Period - Not exceeding 10 years including initial
moratorium period of Upto 3 years.

4.Integrated Infrastructural Development (IID)

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Purpose For setting up of IID centre’s with facilities like water supply, power,
telecommunication, common services centre including for technological
back up services for small scale industries in rural backward areas as
envisaged under the policy for promoting and strengthening small, tiny
village enterprises announced by Govt. of India (GOI) on August 6,
1991.

The cost of improving / upgrading the deficient infrastructural facilities
to increase the productivity and optimum utilization of the existing
centre’s / clusters in backward / rural areas may also be covered under
the scheme.
Eligible Implementing agencies (a public sector corporation or a corporate body
Borrowers or a good NGO having sound financial position) entrusted with the task
of implementing the scheme by the concerned State / Union Territory
(UT) Govt.

5.Credit Linked Capital Subsidy Scheme (CLCSS)

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Note: At present this scheme is suspended until further instructions from Govt. of
India.

Purpose The Scheme is operated by the Ministry of SSI, Govt. of India. Policy
guidelines are issued by the office of DC (SSI), Govt. of India. The
objective of the scheme is to facilitate technology up gradation of tiny
and SSI units in the specified products / sub-sectors as indicated below
by providing 15% capital subsidy for induction of proven technologies
approved under the scheme in 45 products/sub-sectors viz., leather and
leather products including footwear and garments; food
processing( including Ice-cream manufacturing);Information and
Technology (Hardware);drugs and pharmaceuticals; auto parts and
components; electronic industry particularly relating to design and
measuring; glass and ceramic items including tiles; dyes and
intermediaries; toys; tyres; hand tools; bicycle parts; foundries - ferrous
and cast iron; and stone industry(including Marble Mining Industry).

Cap on amount of subsidy :
15% of the cost of eligible Plant & machinery or Rs. 15 lac
whichever is less. Ceiling on the Loan amount : Rs. 100 lakh
Eligible a) Existing SSI units registered with the State Directorate of Industries
Borrowers which upgrade with the state-of-the-art technology, with or without
Eligible expansion.
Primary
b) New SSI units which are registered with the State Directorate of
lending
Industries and which set up their facilities only with the appropriate
institutions
eligible and proven technology duly approved by the GTAB.
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Scheduled commercial banks and National Small Industries


7.SME-IT Loan Schemes

SIDBI for Business Enterprises

Introducing an easy-to-get, easy-to-pay finance bundle from SIDBI specially for
SMEs to computerise their business.

SIDBI and Intel have come together with a first-of-its kind initiative to help SMEs
set-up or step-up IT in their business. While Intel will deliver a range of world class
IT products and solutions, SIDBI will provide the financial assistance for SMEs to
buy them. Called SMEITLOANS, it provides an easy access for SMEs to get both
the finance and the technology to adopt IT, especially since the loan is available for
hardware, software, installations and services.

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8. Bills Finance Schemes:
Objective

Bills Finance Scheme involves provision of medium and short-term
finance for the benefit of the small-scale sector. Bills Finance seeks to provide
finance, to manufacturers of indigenous machinery, capital equipment,
components sub-assemblies etc, based on compliance to the various eligibility
criteria, norms etc as applicable to the respective schemes.

To be eligible under the various bills schemes, one of the parties to the
transactions to the scheme has to be an industrial unit in the small-scale sector
within the meaning of Section 2(h) of the SIDBI Act, 1989.

The various sub schemes that have been introduced are as listed on the
menu, on the left.

9.Receivable Finance Scheme

Purpose To enable SSI / SME / Eligible Service sector units (including
construction / small road transport operators) selling
components, parts, sub-assemblies, services, etc. to Medium &
Large scale units realise their sale proceeds quickly.
Eligible Limits are sanctioned by SIDBI to well established industrial
Borrowers units using components / parts / sub-assemblies / accessories /
services manufactured / provided by by SSI / SME / Eligible
Service sector units. Either seller or Purchaser need34 |qualify as
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Small & Medium Enterprises:

(SMEs) play a major role in global economic growth in terms of their
contribution to industrial employment, output and exports. SMEs occupy a place of
strategic importance in the Indian economy as well. However, since the early 1990s,
Indian SMEs have been exposed to intense competition due to the accelerated
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process of globalization. Therefore, the survival as well as growth of SMEs is under
strain. However, globalization has also brought, in its wake, newer opportunities for
SMEs.

Importance of SMEs to Indian economy:
SMEs are officially defined and exclusively identified for promotion in the
manufacturing sector of most national economies. The most important justification
for the exclusive promotion of SMEs is their potential for employment intensity. In
general, a SME generates more jobs per unit of capital investment than a large
enterprise. A SME has much other benefit: it can be started with relatively less
capital; it facilitates nurturing of entrepreneurship, which could emerge from within;
it can be used as an instrument for alleviating regional disparities in development etc.
Further, a SME is flexible in production, has the potential to be a training ground for
managerial skills, promotes individual initiatives, and encourages rich personal
relations. Therefore, it is often promoted as a source of technological innovations in
industrialized economies. However, there is no uniform definition of a SME in the
global economy. Different countries have defined SMEs in different ways. In Japan,
a SME in the manufacturing sector is defined in terms of upper limit of paid-up
capital of 300 million Yen or 300 employees (Small & Medium Enterprise Agency,
2004). In South Korea, SMEs are defined as firms, which are independently owned
and employ less than 300 persons in the manufacturing, mining, transportation and
construction sectors (Back, 2002). In the European Union, SMEs are defined in terms
of employment and turnover/balance sheet total (Table 1). To be classified as a SME,
an enterprise must satisfy the criteria for the number of employees and one of the two
financial criteria, that is, either the turnover total or the balance sheet total. In
addition, it must be independent. There is no official definition of a SME in India.
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Future Importance of SMEs?
What do present trends in the world and in developing countries suggest about
the future role of SMEs? There are several reasons to think that this role will not
wane in most developing countries, at least in the short and medium term. These
include:
1i) The end, at least in some parts of the world, of the observed upward trend in
the share of employment found in large private firms plus the government in those
countries achieving healthy GDP growth; (such increase has rarely occurred in
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slow growing countries). For reasons still in need of further research, it appears
that this gradual increase, once thought of as a stylized aspect of the development
process and a process by which the employment structure of developing countries
would gradually approach that of developed ones, may no longer be present.
When this is the case, we know that the share of employment found either in the
informal or the SME sector is not falling, so unless the SME employment share is
rising, that of the informal sector cannot be falling, though that decline is an
important goal if employment quality is to rise in a country. To illustrate the
problem, in Latin America, even after the return to modest growth in the 1990s,
the informal sector’s share of employment had not fallen as of about 2003, nor
that of the large scale sector risen. Probably the reasons for the levelling off or
decline of the large firm employment share include the near worldwide trend
towards more flexible labour contracts and towards subcontracting out of some
auxiliary functions previously carried out within the large firm. The falling role of
manufacturing employment probably also plays a role since the large firms
account for a higher share of manufacturing employment than that in most other
sectors of the economy. Globalization may be playing a role by inducing
increases in labour productivity in large firms operating in international markets
or having access to very low cost capital in the international market; that increase
in labour productivity accounts for the cases in which this sector’s output has
grown at a good clip but employment has stagnated or fallen. Chilean
manufacturing was a notable case of this during its 1990s boom as has been the
non-maquiladora part of Mexican manufacturing.

1ii) The information revolution may increase the relative competitiveness of
smaller firms. Informational monopolies often underpin large size and monopoly.

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Some, of course, are based on patents. We know that the accoutrements of
information technology have diffused first among larger, more sophisticated
firms, then among SMEs. What we cannot yet judge is how this revolution will
have affected relative competitive positions after the dust has settled and the
diffusion is more nearly complete.

1iii) More generally, it may be that small firms will play a larger role in
technological advance in the context of the information revolution and the rising
role of services than was earlier the case under the dominance of manufacturing.

1iv) Most developing countries have achieved large increases in the share of the
population completing primary education and in the share with a considerable
amount of secondary as well. This, together with the large microenterprise sectors
that server as a training ground in business management for some of those located
there, suggests a widening of the pool of entrepreneurial talent. Healthy SME
sectors require such a pool (for which Taiwan, for example, has always been
noted).

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Conclusion
Thus I would conclude that banks are playing major role in development of
small and medium scale Enterprise. Thus various benefits are arising from financing
of SME. From the view point of the national economy, the benefits arising from
higher order focus of SME financing may be classify as : Increasing the contribution
of the SME sector in the GDP of the country, Entrepreneurial interest would be
encouraged and growth in the number of SME may be possible. New product ,
services would be increasingly available for consumer. Competitiveness in business
will increase. The government of India has taken many measure for growth and
development of the SME sector.

Globalization has been affecting every economic activity in almost every
country across the world. Indian SMEs are no exception. The performance of SMEs
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has a determining significance for Indian economic growth due to their substantial
share of enterprises, employment, production and gross value added in the industrial
sector. However, in general, Indian SMEs lack technological strength to access and
exploit the benefits emerging from the intensifying process of globalization.
Therefore, technological transformation of SMEs should attract the focus of
attention of policymakers. In addition, FDI and TNC entry should be used to
promote inter-firm linkages for the benefit of SMEs. They need to be “consciously
guided” to enter the ever expanding global value chains of TNCs, both in the
manufacturing and retail sectors. Further, technological innovation and orientation of
SMEs should be promoted and information access be made easy. On the whole,
SMEs should be enabled to achieve self-sustainable competitiveness and reap the
fruits of globalization for their own growth and the growth of the Indian.
SIDBI has also floated several other entities foe related activities. Credit
guarantee fund trust for micro and small enterprise provides guarantee to banks for
collateral free loan extended to SME. SME rating agency of India Ltd (SMERA)
provides composite rating to SME.

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STATE BANK OF INDIA

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Date: 1/10/2010
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To whomsoever it my concern

This is to certify that Miss. Foram Navin Dedhia student of N.E.S Ratnam
College of Arts, Science & Commerce, Bhandup (West), Mumbai-78, visited our
Bank in relation to project work of Semester V, Third Year, Banking & Insurance,
Mumbai University (“ROLE OF BANK IN DEVELOPMENT OF SMALL &
MEDIUM SCALE ENTERPRISE” – Catch them young, watch them grow...)

We found her very Sincere & dedicated towards her project work. We wish
her luck in her future Endeavour.

Signature

(Chief Manager)

R. B. Khare

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