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INTRODUCTION TO SSI UNITS
After gaining independence India in 1947, there was a felt need of economic prosperity and to revive the nation. Hence India focused on developing itself as a manufacturing base. The planners then took the decision of promoting the small scale industries. They were of the view that ssi can play a significant role in the economic progress of the country as it had huge potential in employment generation, which was the major problem faced during that period of time.
Earlier the small scale sector was a sector involved in traditional labor with outdated machineries and inefficient techniques of production. But since then due to the coordinated efforts of the government and the commercial banks the position of SSI has improved. These efforts include
* Reservation of items to be manufactured by the SSI
* Credit marketing
* Technology and entrepreneurship development
* fiscal, financial and infrastructural support
II. Small Scale Industries
2.1Small Scale and Ancillary Industries
Small scale industrial units are those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) does not exceed Rs.1 crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery. In the case of ancillary units, the investment in plant and machinery (original cost) should also not exceed Rs. 1 crore to be classified under small-scale industry.
The investment limit of Rs. 1 crore for classification as SSI has been enhanced to Rs.5 crore in respect of certain specified items under hosiery, hand tools, drugs & pharmaceuticals, stationery items and sports goods by the Government of India.
2.2. Tiny Enterprises
The status of ‘Tiny Enterprises’ may be given to all small scale units whose investment in plant & machinery is up to Rs. 25 lac, irrespective of the location of the unit.
III. Small Scale Industries – Financing
Finance is the blood for any organization. It is that resource which provides the resources for other factors of production, hence its importance cannot be ignored. After the independence, the Government of India has built upon the network of institutions to provide financial assistance to the small scale industries.
Since small scale industries need promotionary help from the government and government has other sectors to look upon for the overall development of the country and hence it has entrusted this duty upon the commercial banks. They have evolved various methods of financing and left the traditional methods far behind and evolved themselves into development banks.
The importance of the SSI sector can be best explained by the census according to which this sector employees around 60 million persons. And if we talk in terms of value then this sector accounts for about 48% of manufacturing output and 42% of the total exports of the country.
3.1 Types of Industrial Finance:
Depending upon the time period requirement of funds the financing can be classified into the following three types:
1) Short term financing: this refers to those funds which are required by the entrepreneurs for short term ie. For a period ranging less than one year. The motive of such funding is to meet the working capital requirements of the enterprise.
2) Medium term financing: this refers to those funds which are required by entrepreneurs for a period ranging from one to five years. This type is needed to fund the permanent working capital requirements, small expansions, replacements, and modifications etc. these funds can be raised through the following resources:
– Issue of debentures
– Issue of shares
– Borrowing from banks and other financial institutions
– Ploughing back of profits ie the retained earnings
3) Long term financing: it refers to that financing which is extended for a period ranging for more than 5 years. Such funds are required by entrepreneurs for the purpose of investing into fixed assets, for expansion purpose, for bringing about modernization in the enterprise and introduction of new technology.
3.2 Means of finance: Credit Flow
The main source of input to the sustained growth of small scale sector industries is CREDIT. Credit has already been classified into short term, long term and medium term on the basis of requirement of the enterprise. The institutional arrangement for providing the capital requirement of the SSI is as follows:
– SSI are provided the working capital by the commercial banks and in some case this initiative is taken up by cooperative banks and regional rural banks.
– In case of term loans the provision is made by the state financial corporations, small industries development corporations, national small industries corporation and NABARD.
– Financial assistance to SSI by NSIC is also made in the form of supply of machinery on hire purchase basis.
– Even tiny units are able to get loans from commercial banks along with working capital in the form of composite loans.
– Refinancing facilities to the above institutions are provide by Small Industries Development Bank of India(SIDBI)
– Term loans on long term basis are provided to the small scale units by SFCs mainly through Single window Scheme and National equity fund.
– Under single window scheme also the SFC provide some part of working capital for pre operative expenses.
3.2.1 Credit to SSI Sector from Public Sector Banks
The table below gives the positions with regard to flow of credit to SSI Sector:-
At the end of March 2005
At the end of March 2006
At the end of March 2007
At the end of March 2008
At the end of March 2009
Net Bank Credit
Credit to SSI
No. of SSI Accounts (in lakhs)
SSI Credit as percentage of Net Bank Credit
There is a marginal decline in share of credit to SSI sector as a percentage of net bank credit.
3.2.2 Credit to Tiny Sector
The Table below gives the status of credit flow to tiny sector since 1995:-
At the end of March 1995
At the end of March 1996
At the end of March 1997
At the end of March 1998
Net Credit to Tiny Sector
Tiny credit as percentage of net SSI credit
The advances outstanding against Tiny sector increased from Rs.9515 crores at the end of March, 1997 to Rs. 10273 crores at the end of March, 1998. The share of tiny sector in the advances to SSI sector has, however, decreased from 30.2% at the end of March 1997 to 27.0% at the end of March, 1998. As per RBI guidelines, 40% priority sector lending going to SSI has to go to tiny units with investment in plant and machinery below Rs. 5 lakhs and another 20% to tiny units with investment in plant and machinery between Rs. 5 lakhs and Rs. 25 lakhs. Thus, against the target of 60% of SSI credit for tiny units, actual flow at 27% is very low.
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3.2.4 Steps taken by Reserve Bank of India to improve credit flow to SSI sector
a) Investment limit has been enhanced from Rs.60 lakhs to Rs.300 lakhs and for tiny units from Rs.5 lakhs to Rs.25 lakhs. As per the RBI guidelines the funds normally available to SSI sector, 40% be given to units with investment in plant and machinery up to Rs. 5 lakhs; 20% for units with investment between Rs. 5 lakhs to Rs.25 lakhs and remaining 40% for other units.
b) to expand the extent of ‘Single Window Scheme’ of SIDBI to all districts to meet the term loan & working capital financial requirements of SSIs.
c) With a view to manage the cost of credit to SSI units, banks are advised to grant loans to only those SSI units with a good track record.
Credit to SSIs is subject to regular monitoring by Reserve Bank of India, Department of SSI & ARI, National Advisory Committee of SIDBI, State Level Bankers Committee and District Level Coordination Committees of the Bank.
3.2.6 Fresh initiatives announced in the Budget of 2008-2009
In this budget speech the Finance Minister has announced the following measures for improving credit supply to SSI sector
a) A new credit insurance scheme launched.
The problem of inadequate provision of security to banks and the rate of low recovery are recognized as the constraints of flow of credit to SSI units.the problem is more complex in case of tiny sector units and export oriented units. And the above scheme is launched in the purview of this problem for the help of SSI units.
b) Composite Loan Scheme Limit Enhanced to Rs. 5 Lakhs
Another provision made in the budget is that the composite loan scheme of SIDBI and commercial banks designed to solve operational difficulties of the small borrowers by presiding term loan and working capital through a single window. The limit for composite loans has been enhanced from Rs. 2 lakhs to Rs. 5 lakhs.
c) Working Capital Limit Enhanced to Rs. 5 Crores
In the case of SSi units, the need for working capital is determined on the basis of 20% of the annual turnover. There is a provision in the banks to enhance this limit from 4 crore to 5 crore.
d) Credit Delivery to Tiny Sector
To increase the outreach of banks to the tiny sector, leading by banks to Non-Banking Financial Companies (NBFCs) or other financial intermediaries for purposes of on-lending to the tiny sector is being included within the definition of priority sector for bank lending.
3.2.7 High level committee for credit (Kapur committee)
Inorder to boost the financing activity of the SSI RBI appointed one man committee to improve the delivery system and simplify the procedures for the credit availability for the SSI.
The Committee has submitted its report to RBI on 30th June, 1998. Some of the major recommendations of the Committee are:-
i) Special treatment to smaller among small industries
ii) Enhancement in the quantum of composite loans
iii) Removal of procedural difficulties in the path of SSI advances
iv) Sorting out issues relating to mortgages of land including removal of stamp duty and permitting equitable mortgages
v) Allowing access to low-cost funds to Small Industries Development Bank of India (SIDBI) for refinancing SSI loans
vi) Non-obtaining of collaterals for loans up to Rs.2 lakhs;
vii) Setting up of a collateral reserve fund to provide support to first party guarantees;
viii) Setting up of a Small Industries Infrastructure Development Fund for developing industrial areas in/around metropolitan and urban areas;
ix) Change in the definition of sick SSI units;
x) Giving statutory powers to State Level Inter-Institutional (SLIIC);
xi) Setting up of a separate guarantee organisation and opening of 1,000 additional specialised branches; and
xii)Enhancement of SIDBI’s role and status to match with that of National Bank for Agriculture and Rural Development (NABARD).
Kapur Committee has made 126 recommendations out of which RBI has already accepted 40 recommendations for implementation.
3.3 Small Industries Development Bank of India (SIDBI)
SIDBI was set up by an Act of Parliament, as an apex institution for promotion, financing and development of industries in small scale sector and for coordinating the functions of other institutions engaged in similar activities. It commenced operations on April 2, 1990. SIDBI extends direct/indirect financial assistance to SSIs, assisting the entire spectrum of small and tiny sector industries on All India basis.
The range of assistance comprising financing, extension support and promotional, are made available through appropriate schemes of direct and indirect assistance for the following purposes:-
} direct credit to the SME(small & medium enterprises) .
} support to micro-finance institutions for capacity building and on lending .
} provides financial support to the sick / small scale industries.
} Principal Financial institution engaged in development initiative in rural sector and improving the SSI unit.
} Also encouraging SSIS and generating employment in rural India. The Bank also performing the rehabilitation duty and improving the performance of small Industries.
VARIOUS SCHEMES FOR FINANCING OF SSI
3.3.1 Direct Assistance Schemes
SIDBI directly assists SSIs under the following scheme:
Project Finance Scheme
Equipment Finance Scheme
Vendor Development Scheme
Infrastructural Development Scheme
Technology Development & Modernisation Fund
Venture Capital Scheme
These schemes aim at solving the key issues in SSI ie., the problems of high tech project, marketing, infrastructure development, quality improvement, export financing and venture capital assistance.
3.3.2 Indirect Assistance Schemes
Under its indirect schemes, SIDBI extends refinancing facility of loans to small scale sector by SFCs, SIDCs and Banks. Till now refinance is extended to 896 PLIs and these PLIs have their network extended to more than 67000 branches with the help of which they provide financing to these SSI.
3.3.3 Promotional and Development Activities
SIDBI is also into providing other assistance to the SSI for its development besides limiting itself to the provision of simple financing. It involves itself in Entrepreneurship development programmmes, modernization programmes and micro credit schemes inorder to bring about economic empowerment of women specially in the rural areas by providing them opportunities of training and development.
A.Refinance against term loans in respect of projects/activities eligible for assistance under the Scheme
Interest on term loans for fixed asets and working capital advances (excluding interest tax) (% p.a.)
Interest on Refinance (% p.a.)
(i)Upto and inclusive of Rs. 25,000
Over Rs. 25,000 and upto Rs. 2 lakh
Not exceeding 13.5
B.Refinance against term loans (Applicable to all eligible institutions) (except RRBs)
Interest on term loans (excluding interest tax) (% p.a.)
Interest on Refinance (% p.a.)
(i) Upto and inclusive of Rs. 25,000
(ii) Over Rs. 25,000 and up to Rs. 2 lakh
Not exceeding 13.5
Over Rs. 2 lakh
Not exceeding 14.0*
SIDBI’s efforts have resulted in increased flow of credit to SSI sector since inception as indicated below:
SIDBI’s assistance to:
(i) Tiny Units – about 89.2% of the total no. of projects under Refinance Scheme during the period of 2006-07 were tiny, receiving an assistance upto Rs. 5 lakh . The total sanctions for such projects accounted for 39.6% as against 36% of the total amount of sanctions in previous year.
(ii) Women entrepreneurs – under various schemes available for financing of SSI the total assistance amounting to Rs. 19.07 crores was given to 1067 women entrepreneurs during 2006-07.
(iii) Backward areas – during 2006-07, the projects originating from backward areas for which the need for financing was felt, received an assistance to the level of Rs. 778 crores of the total sanction which accounted for 33% of total assistance under Refinance Scheme of SIDBI.
3.3.6 Main Schemes of SIDBI
A brief summary of the Schemes available with SIDBI. More details are available under the Section Policies & Schemes.
National Equity Fund Scheme providing support to those entrepreneurs which are into setting up of projects in tiny sector.
Technology Development & Modernisation Fund Scheme this scheme aims for providing financial assistance to existing SSI units for matters relating to technology upgradation/modernisation.
Single Window Scheme aims to provide both term loan as well as working capital loans to the small scale units through the same agency.
Composite Loan Scheme this aims at providing loans for equipment and/or working capital and also for worksheds to artisans, village and cottage industries in Tiny Sector.
Mahila Udyam Nidhi (MUN) Scheme this scheme aims to promote women as entrepreneurs by providing equity support to them for setting up projects in Tiny Sector.
Scheme for financing activities: the need is even felt for the assistance in the field of marketing the products produced by the SSI and these include marketing research, R&D, product upgradation, participation in trade fairs and exhibitions, advertising branding, establishing distribution networks etc.
Equipment Finance Scheme this scheme is available inorder to help SSI with ease in using the hi-tech machinery and equipment for facilitating quality production.
Venture Capital Scheme this is a provision made to encourage SSI ventures to acquire capital equipment,for building up of export capabilities/import substitution including cost of total quality management and acquisition of ISO-9000 certification and for expansion of capacity.
Technology Development & Modernisation Fund
SIDBI has set up Technology Development & Modernisation Fund (TDMF) scheme for the assistance os small scale sector units so as to enable them to modernize their production techniques with the help new and improved technology so that their products can stand the foreign competition and the quality of their products can be enhanced. This would also help them to reduce their cost of production and removal of the inefficiencies in the production techniques. Assistance is available for meeting the expenses on purchase of capital equipments, acquiring of technical know-how, upgrading of process technology.
The Coverage of the TDMF scheme has been enlarged w.e.f. 1.9.1997. Non-exporting units and units which are graduating out of SSI sector are now eligible to avail assistance under this scheme.
National Equity Fund
National Equity Fund (NEF) under Small Industries Development Bank of India (SIDBI) provides equity type assistance to SSI units, tiny units at one per cent service charges. The scope of this scheme was widened in 1998-99 to cover all areas excepting Metropolitan areas, raising the limit of loan from Rs. 1.6 lakhs to Rs. 2.6 lakhs and covering both existing as well as new units:
(a) The following are eligible for assistance under the scheme:-
i. New projects in tiny and small scale sectors for manufacture, preservation or processing of goods irrespective of the location (except for the units in Metropolitan areas).
ii. Existing tiny and small scale industrial units and service enterprises as mentioned above (including those which have availed of NEF assistance earlier), undertaking expansion, modernisation, technology upgradation and diversification irrespective of location (except in Metropolitan areas).
iii. Sick units in the tiny and small scale sectors including service enterprises as mentioned above, which are considered potentially viable, irrespective of the location of the units (except for the units in Metropolitan areas).
iv. All industrial activities and service activities (except Road Transport Operators).
(b) Project cost (including margin money for working capital) should not exceed Rs. 10 lakhs in the case of new projects in the case of existing units and service enterprises, the outlay on expansion/modernisation/technology upgradation or diversification or rehabilitation should not exceed Rs. 10 lakh per project.
(c) There is no change in the existing level of promoters’ contribution at 10% of the project cost. However, the ceiling on soft loan assistance under the Scheme has been enhanced from the present level of 15% lakh per project to 25% of the project cost subject to a maximum of Rs. 2.5 lakh per project.
3.4 State Financial Corporations (SFCs)
SFCs were set up mainly to finance small and medium scale units. The area of operation of SFC’s is generally limited to the States. SFCs also actively participate in assisting small scale units thereby helping them to modernize and upgrade the technology by making provision for term loans and soft loans and also restructuring the sick small scale units through rehabilitation and revival schemes through equity assistance under SIDBI seed capital scheme.
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At present, there are 18 SFCs (including TIIC which was set up as a company) in existence for more than 40 years and operate as Regional Development Banks. The SFCs have played an important role in the evolution and growth of small and medium scale industries in their respective states. They provide financial assistance to industrial units by way of term loans, direct subscription to equity, guarantees, etc. Over the years SFCs have expanded their activities and coverage of assistance.
3.5 National Small Industries Corporation (NSIC)
3.5.1 Bill Financing
Bills drawn by small scale units for the supplies made to the reputed and well established enterprises and duly accepted by them will be financed / discounted by NSIC for a maximum period of 90 days.
3.5.2 Working Capital Finance
working capital financing of sound and well managed units, will be done on selective basis in case of requirements emerging, to enable them to make payments for their purchases of consumable stores and spares and production related expenses particularly electricity bills, statutory dues, etc.
3.5.3 Export Development Finance
Finance for export development to export oriented units for meeting their emergent requirements. Pre and post shipment finance shall also be provided to such units at usual terms & conditions.
3.5.4 Equipment Leasing Scheme
The object of the Leasing Scheme is to assist SSI Units to procure industrial equipment for modernisation, expansion and diversification of their industries.
Exclusively for existing & financially viable SSI units including ancillary units, duly registered as SSI units with the Directorate of Industries.
Ø 100% financing at very liberal terms with easy repayment schedule.
Ø Simple formalities and speedy sanction.
Ø Single window system for imported equipment. The Corporation undertakes to complete formalities like procuring import licence, opening of Letter of Credit etc.
Ø Tax rebate on full 5 year lease rental.
VI. Review of some of the articles studied under the purview of the study
1) ISSUES IN SSI FINANCING
SOURCE: The Hindu Newspaper editorial dated 5 Dec 2006
ANALYSIS: the article argues that the provisions of the credit policy relating to the advances to the NBFC for on lending to SSI would be treated as priority sector. but financing of small units, especially those in manufacturing, is hardly an attractive proposition for NBFCs. Over the past few years, the concept of priority sector lending, implying a preferential access to bank funds that small entrepreneurs and other less privileged categories enjoyed , has been diluted by including in this category bank lending for individual housing, lending to State Finance Corporations (SFCs) and advances to NBFCs for financing small transport operators.
This has helped banks fulfill their “priority sector obligation” without having to oblige the thousands of needy individual entrepreneurs. Some of the “deemed” priority sector advances are in any case made by NBFCs or SFCs from public deposits and other resources that they command and deemed credit is thus unlikely to result in substantial additional financing of SSIs.
2) SIDBI PLANS Rs 250 CRORE MICRO FINANCING
(SOURCE: Business Line newspaper dated 7 th sep 2004)
ANALYSIS: as per the articles besides direct lending SIDBI is into provision of refinancing to the SFC for lending to SSI. It has been into lending to SSI or large corporate who buy goods from SSI including: BHEL, Escorts, Bajaj electrical etc
the SME Fund has been operational since April 1. SIDBI aims to disburse Rs 10,000 crore in the next two years, which would include refinance. During the last four months, they have already disbursed Rs 605 crore mainly to SSI sector.
3) SSI SHARE IN BANK CREDIT FALLING
(SOURCE: Business Line dated 25 aug, 2007)
ANALYSIS: according to this article the credit flow towards the small scale units have declined in the past few decades. This fact can be supported by the figure that the level of financing was 16.2% in 1991 and till 2006 it declined to 8.5%.
Total financing of the priority sector has declined accounting for the total disbursements by the scheduled commercial banks was 14,45,847 crore. Out of this only 6.24% was made available to the SSI.
VII. Financing Norms:
1. The all India financial institutions stipulate a promoter’s contribution norm of 20% of the total project cost for industrial estates set up in notified less developed area and a 22.5% norm in other cases. In the case of estates costing less than Rs. 300 lakhs, the following margin money have been stipulated by IDBI to make them eligible for financing:
* 15% margin for estates set up by technician entrepreneurs or unemployed engineers where the sheds are to be acquired by them on hire basis.
* 20 to 30% margin for co-operative estates where the sheds are entirely by small scale units.
* 30 to 35% margin for estates set up by joint stock companies whose shareholders occupies majority of the sheds.
* 40 to 50% margin for estates set up by proprietary and partnership concerns.
I. SFC/ SIDC should maintain separate and distinct accounts of fresh disbursements made to SSI units and outstanding amounts there against.
II. Periodical statements to be obtained from SFC/ SIDC to monitor the position.
III. Annually, a certificate issued by SFC/ SIDC statutory auditors certifying that the outstanding borrowings from banks were fully covered by the non-overdue loans outstanding in respect of fresh disbursements made to SSI units from out of term finance/ lines of credit granted by banks.
IV. The rate of interest to be charged by banks on such term finance/ loans/ lines of credit will be in conformity with the directives on interest rates issued by the Reserve Bank from time to time.
* In order to ensure adequate credit to this sector, the credit requirements of village industries and other SSI units having aggregate fund-based working capital limits upto Rs. 5 crores from the banking system, will be computed on the basis of a minimum of 20 percent of their projected annual turnover for new as well as existing units.
VII. Analysis of growth of SSI’s
During Budget 2008-2009
1. The proposal that has been cornering much interest of industry players is minimum alternate tax (MAT), which has now been levied on technology companies. Though all technology firms have been brought under the ambit of MAT, the impact will not be much for big IT firms.
2. The Budget doesn’t allow pass-through status to VC start-ups in sunrise sectors of BPO, media, advertising, financial services and mobile value added services.
3. Another budgetary reform that could also prove to be a thorn in the path for the SMEs is the 12.5% service tax on leased premises. President of Nasscom, Kiran Karnik, calls the increase as “unjust”. “It is usually the small guy who leases property. The big companies own their land,”
4. FM has proposed to exempt from service tax all services provided by technology business incubators. In turn, their incubatees whose annual turnover does not exceed Rs 50 lakh will be exempt from service tax for the first three years.
How it affects SSIs
1. It was presented against a backdrop of high expectations with the economy having moved into the high growth trajectory of 8.5 per cent, supported by a strong growth in services and industry sector.
2. Yet many observers believe that big-ticket reform in Budget 2007-08 have not been taken on the way they should have and tax changes have left most quarters wanting, as substantial giveaways had been anticipated.
3. Small players felt serious impact on their net profits as now they would also have to shell out 11.33 percent MAT in addition to the 12 percent tax which they already pay. Also the small-sized BPO players suffered due to this levy.
4. The IT industry is happy with the proposal to grant pass-through status to VCFs investing in biotechnology and IT companies. But removal of this pass-through status for other areas such as mobile VAS and BPO had a negative impact.
Targets under priority sector lending
There are no targets set by domestic banks (both public sector and private sector banks) and foreign banks for lending to SSI’s. as given in data below
The targets and sub-targets set under priority sector lending for domestic and foreign banks operating in India are furnished below:
Domestic banks (both public sector and private sector banks)
Foreign banks operating in India
Total Priority Sector advances
40 percent of NBC
32 percent of NBC
Total agricultural advances
18 percent of NBC
10 percent of NBC
Export credit does not form part of priority sector
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