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Principles and Practices of Banking

Management

Problems faced by MSMEs in India

Presentation by:

Neha Sharma

Roll No. 960

VI Semester, B.B.A. LLB (Hons.)NLU Jodhpur

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Introduction Emergence Of MSME Scope Of MSME Why We Need MSME? Performance Of MSME In India MSME Act, 2006 Role Of Govt. in Promoting MSME Commercial Bank Services And

Promoting MSME Factors affecting MSME Advantages Of MSME Problems faced By MSME MSME In Europe Conclusion

CONTENTS

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• MSME stands for Micro, Small and Medium Enterprises also

known as ‘Town and Village’ Enterprises.

• In India, the enterprises have been classified broadly into two

categories

1. Manufacturing

2. Services.

• Both categories have been further classified into micro, small

and medium enterprises based on their investment in plant

and machinery or on equipment.

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INTRODUCTION TO MICRO, SMALL AND MEDIUM ENTERPRISE

Manufacturing Sector:

Service sector:

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EMERGENCE OF MSMES UNITS IN INDIA

SMALL SCLAE INDUSTRIES PERIOD

MSMEs PRE-INDEPENDENCE

MSMEs POST INDEPENDENCE

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Before Independence, the present small scale industry was meant to

denote the village and the urban cottage industry.

This group included a variety of industries ranging from

manufacturing of Iron safes, locks, carpets, marble jigs,

baskets, hand-loom cloth and the like.

In fact, at that time the term Cottage and Small scale industries was

used in juxtaposition to large scale industries, which were established

under the British patronage.

They received encouragement and support during the freedom

movement.

The small scale industries found a prominent place in the economic

programme envisaged by the Indian National Congress.

MSMES PRE-INDEPENDENCE

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After 1947

Jawaharlal Nehru maintained separate entities of small scale industries.

He was of the view that a small industry was the middle sector and it

would overlap both the cottage and the large industries.

1977 Industrial Policy

The basic policy support of MSME sector had its roots in the Industrial

Policy Resolution 1977, laid emphasis on reservation of items.

The reservation economically viable and technologically feasible

products to be exclusively manufactured by small scale industry began

with a list of 47 items which was gradually extended to too many

products.

At Present 812 items are in the reserved list.

MSMES POST-INDEPENDENCE

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SCOPE OF

MSME UNITS

TRADING INDUSTRIES

SERVICES INDUSTRIES

MANUFACTURING

INDUSTRIES

SCOPE OF MSMES IN DIFFERENT SECTORS

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VILLAGE AND

COTTAGE INDUSTRIES

HANDLOOMS &

HANDICRAFTS

MANUFACTURING INDUSTRIES

THESE ARE CARRIED ON IN HOMES OF WORKER

(USE LOCAL RESOURSES , USE LOCAL

MARKET ,LOCAL SKILLS )

THESE INDUSTRIES INCLUDE ARTISANS,

SKILLED CRAFT MEN SHIP

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WHOLESALER

RETAILER

COMMISSION AGENT

TRADING INDUSTRIES

Person or firm that buys large quantity of goods from various producers or vendors, warehouses them, and resells to retailers.

A business or person that sells goods to the consumer, as opposed to a wholesaler or supplier, who normally sell their goods to another business.

Commission agents thrive in a variety of businesses. International agents work in the export/import arena. Insurance and real estate agents also often work on a sales-based commission.

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ACTIVITY WISE MSME

SOURCE: ANNUAL REPORT MSME, 2013-2014

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1. Predominantly rural , traditional household

industries;

2. Small and medium industries functioning with

obsolete technologies; and

3. Modern, small and medium enterprises which are

owned and operated by mostly young techno-

entrepreneurs operating in relatively newer fields like

Bio-technology.

Indian MSME can be divided into three classes:

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• FOR EMPLOYMENT GENERATION

• FOR BALANCED REGIONAL GROWTH

• FOR MOBILISATION OF LOCAL RESOURCES

• FOR EXPORT PROMOTION

• FOR CONSUMER SURPLUS

• FOR DEVELOPMENT OF ENTERPRENEURSHIP

• FOR LARGE SCALE EMPLOYMENT WITH LOW

INVESTMENT

• FOR ATTAINING SELF RELIANCE AND SELF

DEPENDANCE

• FOR ENSURING EQUAL DISTRIBUTION OF

INCOME AND WEALTH

Why We Need Msme?

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Why MSME are more adoptable?

Simple to organize

Low risk

Innovation and new concepts

Low finance

Skill prompters

Independent structure

MSME

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MSME’s Financing Features

• Involvement of lesser amount of financial resources.

• Lower gestation period.

• They are mostly run by Sole proprietors /Owners.

• They are operated mainly in Rural and Semi Urban areas.

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PERFORMANCE AND CONTRIBUTION OF MSMES.

6000 products

MSMEs

31 Million Employment

40% Exports45% industrial

production

Creates more than 1 Million

jobs annually.

.

Contribution to GDP set to expand

to 22% by 2015 from current 17%.

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MSMES SHARE BY SECTOR

SOURCE: ANNUAL REPORT MSME, 2013-2014

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GROWTH PERFORMANCE OF MSMES IN INDIA

SOURCE: ANNUAL REPORT MSME, 2013-2014

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SOURCE: ANNUAL REPORT MSME, 2013-2014

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SOURCE: ANNUAL REPORT MSME, 2013-2014

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1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

0

50000

100000

150000

200000

250000

300000

Production (Rs. '000 crores) at 1993-94 prices

Production (Rs. 000' crores) at 1993-94 prices

PRODUCTION

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Rural

Non-metallic products contributed 22.7% to employment generated in rural areas. Food Products

accounted for 21.1%, Wood Products and Chemicals and chemical products shared between them

17.5%.

Urban

As for urban areas, Food Products and Metal Products almost equally shared 22.8% of employment.

Machinery parts except electrical, Non-metallic mineral products, and Chemicals & chemical products

between them accounted for 26.2% of employment.

EMPLOYMENT DISTRIBUTION

SOURCE: ANNUAL REPORT MSME, 2013-2014

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Tamil Nadu (14.5%)

Maharashtra (9.7%),

UttarPradesh (9.5%)

WestBengal (8.5%)

Gujarat (7.6%)

Karnataka (6.7%)

Punjab (5.6%)

STATE-WISE EMPLOYMENT DISTRIBUTION

DATA REALISED BY SIDO

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CONTRIBUTION OF MSME IN EXPORTS

MSME Sector plays a major role in India's present export performance.

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This takes place through merchant

exporters, trading houses and export

houses. They may also be in the form of

export orders from large units or the

production of parts and components for

use for finished exportable goods.

The product groups where the MSME sector

dominates in exports, are sports goods,

readymade garments, woolen garments

and knitwear, plastic products, processed

food and leather products.

MSME Sector contributes about 45%-50%

of the Indian Exports.

EXPORTS

Data realised by Commerce Ministry of India

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S. NO PRODUCT GROUP MAIN DESTINATION

1 Readymade Garment USA, West Asia, North Africa

2 Sports Goods UK, USA, Germany

3 Spices East Asia, Union , North Africa

4 Leather &Leather Items Germany , UK, Italy, USA, France

5 Wool & Woolen Knitted Garment Europe, Bangladesh , Japan , Sri Lanka , Bhutan ,

6 Processed Food Items Europe, Bangladesh ,Japan, USA

7 Tobacco And Tobacco Items East Europe

8 Electronic Item And Computer Software USA , UK , Hong Kong, UAE, Japan

9 Cashew Item USA, UK, Japan, Netherlands

10 Marine Products UK, USA, Germany, Europe, Bangladesh

MAJOR EXPORT DESTINATION

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RECENT TRENDS REGARDING MSMES

The contribution of micro, small and medium enterprises

(MSME) sector to manufacturing output, employment and

exports of the country is quite significant.

The MSME sector employs about 42 million persons in over

13 million units throughout the country.

There are more than 6000 products, ranging from traditional

to high-tech items, which are being manufactured by the

MSMEs.

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Growth in GDP. MSME’s not only account for 80% of the total

number of Industrial Enterprises in the country but are also the

second largest employment providing sectors in the country

after agriculture.

This sector is a growth-driver in the economy.

40-50% of output/services originated from this sector.

40% of Indian Exports are on account of MSMEs.

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MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006

SALIENT FEATURES:

1. Industry replaced by enterprise which include

service enterprises also.

2. Constitution of MSME Board.

3. Simplification of registration procedure.

4. Progressive credit support.

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INDUSTRIAL POLICY

RESOLUTION 1948

INDUSTRIAL POLICY

RESOLUTION 1956

INDUSTRIAL POLICY

RESOLUTION 1977

INDUSTRIAL POLICY

RESOLUTION 1991

INDUSTRIAL POLICY

PACKAGE FOR SSI 2001-02

INDUSTRIAL POLICY ON SSIS

2004-05

GOVERNMENT POLICIES FOR MSMES

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ROLE OF GOVERNMENT IN PROMOTING MSMES

Role of Govt.

Reservations

Concessions in Excise

Sale Tax Exemption

Supply Of Raw Material

Financial Incentive

Industrial Estates

Marketing Assistance

SIDBI

Purchase Assistanc

e

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NATIONAL SMALL INDUSTRIES CORPORATION LTD. (NSIC)

SMALL INDUSTRIES DEVELOPMENT ORGANIZATION (SIDO)

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

SMALL INDUSTRIES –SERVICE INSTITUTE (SISI)

SMALL INDUSTRIES DEVELOPMENT CORPORATION (SIDC)

TECHNICAL CONSULTANC ORGANISATION (TCOs)

OTHER INSTITUTION ALSO HELP TO PROMOTE SSI

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GANGULY COMMITTEEThe “Ganguly Committee’ has thoroughly examined the

issues confronting SMEs and suggested the

following:

Institutional Finance should be made available on

suitable terms.

SIDBI/Banks to promote national level MSME

development fund.

SIDBI to provide technical support.

To promote a specific SME Rating Agency to

provide comfort to the banks financing SMES.

Setting up of Micro Finance Intermediaries to

accelerate the growth of MSMEs.

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ROLE OF BANKS IN PROMOTING AND

SERVICING MSMES

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COMMERCIAL BANKS IN PROMOTING MSMES

STATE BANK OF INDIA (SBI)

BANK OF INDIA

PUNJAB NATIONAL BANKS (PNB)

UNION BANK OF INDIA

SYNDICATE BANK

CANARA BANK

Loans upto Rs.10 lakh extended to units in the MSE sector.

(WITHOUT TAKING ANY COLLATERAL SECURITY)

Banks may, on the basis of good track record and financial

position of the MSE units, increase the limit of dispensation of

collateral requirement for loans up to Rs.25 lakh (with the approval

of the appropriate authority).

Public sector banks have been advised to open at least one

specialised branch in each district.

STEP TAKEN BY COMMERCIAL BANKS TO IMPROVE THE FLOW OF CREDIT TO SMALL

BUSINESSES

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RBI issued detailed Guidelines

to Scheduled Commercial

Bank for timely assistance to

Potentially Viable MSME Units

at Reduced Rate in 2002.

RBI advised Soft Loan

Assistance to Women

Entrepreneurs besides Usual

Term Loan in MSME to

promote Women

Entrepreneurs.

CONTD..

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SCHEME OF SMALL ENTERPRISES FINANCIAL CENTERS (SEFCS):

As per announcement made by the Governor in the Annual Policy

Statement 2005‐06, a scheme for strategic alliance between branches

of banks and SIDBI located in clusters, named as “Small Enterprises

Financial Centres” has been formulated in consultation with the

Ministry of SSI and Banking Division, Ministry of Finance,

Government of India, SIDBI, IBA and select banks and circulated

to all scheduled commercial banks on May 20, 2005 for

implementation. SIDBI has so far executed MoU with 15 banks

(Bank of India, UCO Bank, YES Bank, Bank of Baroda, Oriental Bank of

Commerce, Punjab National Bank, Dena Bank, Andhra Bank, Indian Bank,

Corporation Bank, IDBI Bank, Indian Overseas Bank, Union Bank of India, State

Bank of India and Federal Bank).

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PNB SCHEMES FOR MSME’S MSEs credit growth through financial inclusion by way of collateral free and without third

party guarantee lending

As per RBI mandatory guidelines, loans upto Rs.10 lakh to Micro and Small Enterprises,

which are eligible for coverage under Credit Guarantee Scheme, are to be considered on

merits without accepting any collateral security / third party guarantee and all such cases

must be got covered under guarantee scheme of CGTMSE.

Further, as per Banks guidelines, MSE proposals up to Rs.100 lakh, which are eligible

under Credit Guarantee Scheme, are to be sanctioned by the competent authority without

taking any collateral security/third party guarantee.

Disposal of Loan Applications within the prescribed time limit is to be ensured as under:

1. Upto Rs. 2 lakh 2 Weeks

2. Above Rs.2 lakh & upto Rs.50 lakh 4 weeks

3. Above Rs.50 lakh & upto Rs.100 lakh 5-6 weeks

4. Above Rs.100 lakh & upto Rs.100 crore 6-7 weeks

5. Above Rs.100 crore 8-9 weeks

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CONTD..

Sufficient Loaning Powers have been vested to ensure

faster disposal of MSMEs loan applications: i) Branch

Managers have been vested with higher powers to directly

dispose of proposals at branch level for financing Micro

Enterprises (manufacturing/service).

At present there is a system of online filing of loan

applications by MSEs on Bank’s website. The Bank is

providing 20% concession in processing/upfront fee, in

case such applications received online.

Special concession to Women owned enterprises have

been extended in margin requirement and interest rates,

irrespective to the amount of loan.

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The Bank has approved Credit Rating

agencies like SMERA, CRISIL, ICRA,

ONICRA and BRICKWORK for rating

of the MSME units and is extending

interest concession of 0.50% for

first two rating grades and 0.25% to

third rating grade only.

PNB: MSMEs and Credit Rating

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PARAMETERS CONSIDERED BY BANKS WHILE LENDING TO MSMES

The following parameters are used in various connotations by

banks/FI for their lending decisions:

1. Prospects: This refers to both the Industry and Firm analysis in terms of

growth prospects, financial stability, threat perceptions and the like.

2. Purpose: The need and form of Loan.

3. Payment: The possibility of repayment.

4. Person: The will and ability of a person to repay.

5. Protection: The type of security provided to the lender, its value and

ease of liquidation.

Applying the same parameters, without factoring their uniqueness,

has resulted in a skewed Net Bank Credit to the MSMEs sector:

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Of the Rs. 477,899 crore Net Bank Credit,

only 11.1% was available to the MSME sector.

The lending, based on category of the

borrowers as opposed to a fair and systematic

credit appraisal system has led to the longevity

of the informal sector despite its atrocious

lending rates and recovery mechanisms.

Organizational structure of MSMEs also play a

critical role in Banks decision of lending to

MSMEs.

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SOURCE: ANNUAL REPORT MSME, 2013-2014

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SOURCES OF FINANCE FOR MSMES

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FACTORS AFFECTING MSMES Accessing adequate and timely financing on

competitive terms, particularly longer tenure

loans.

Factors that include policy, legal/regulatory

framework (in terms of recovery, bankruptcy and

contract enforcement), institutional

weaknesses (absence of good credit appraisal

and risk management/ monitoring tools), and lack

of reliable credit information on MSMEs.

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CONTD. It has become difficult for lenders to be able to assess risk premiums

properly, creating differences in the perceived versus real risk profiles of

SMEs.

Access to skilled manpower, R&D facilities and marketing channels

is limited.

Availability of finance at cheaper rates and good management and

accounting practices, and access to modern technology.

Bribery, corruption, red tapism.

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EMPLOYMENT GENERATION

MEETS THE DEMAND OF THE

MARKET

SHARE IN NATIONAL INCOME

SOCIAL ADVANTAGES

MAKE USE OF INDUSTRIAL

WASTE

REDUCES REGIONAL DISPARITY

EXPORT PROMOTION

MOBILIZATION OF LOCAL

RESOURCES

Advantages Of MSME

ADVANTAGES OF Establishing MSME

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PROBLEMS FACED BY MSME IN INDIA

INTERNAL PROBLEMS

FAULTY PLANNING

POOR PROJECT IMPLEMENTATION

POOR MANAGEMENT

INADEQUATE FINANCE

PROBLEMS

LABOUR PROBLEMS

EXTERNAL PROBLEMS

LOCATION

POWER PROBLEMS

INPUT

MARKET PROBLEMS

GOVT. POLICY

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Comparative Analysis with Europe MSME’s Sector

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Europe’s MSME’s structure

23 million MSME’s • 57% sole

proprietorship

80% Private sector

employment

Source: 2008/09 European commission

52Source: 2008/09 European

commission

Europe

Italy&

Greece

o Italy and Greece – Highest MSME’s, Employees and Micro enterprise.

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Positive Points of Europe MSME’s structure

o Business friendly environment

o European Commission categories MSME’s in (2005) (for simplify

administrative and management)

- Staff headcount

- Turnover and/or balance sheet

o Europe Commission made Small Business Act, 2008.

- In which all Europe countries became member and promote

MSME’s sector in structure format and develop MSME friendly

environment. It is the first comprehensive EU SME policy framework,

including legislative proposals, which aims to:

• Facilitate MSMEs access to funding

• Help MSMEs to get most out of the EUs Single Market

• Create an entrepreneurial environment.

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The Portal gathers all information the EU provides on for MSMEs, ranging from practical advice to policy issues.

EU Small Business Portal

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This site helps MSMEs to apply for finance supported by European Union.

Access to Finance

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Apart from above, other European Commission support to MSME’s sector are…

o Simplified financial and administrative procedure o Promote Education and Business Environment

o Government policy support

o Simplify communication, creating awareness and improve information structure.

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European Commission Target 2007 to 2013

The structural funds 2007/13• Around 27

billion Euros support

• Promote technological support and innovations.

Launched JEREMIE (Joint European Regional Development Fund)• MSME access

finance through financial instruments

• Equity, Debt, Quasi equity and Technology transfer fund

European Globalisation Fund (EGF)• Utilize at the time

Economic crisis.

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What should India adopt from the Europian MSME’s industry?

1. Increase utilization of installed capacity

2. Increase information, orientation and facilities

3. Specialized training for administrative, local, national and world market, research and development, innovation and education

4. Improve - Management - Accounting - Consulting and supporting services - Primary and industrial education level

5. Improve quality of input-output by using more innovative and economic tools in all the level

CONCLUSION

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6. Create awareness about global trade laws

7. Subsidies import and export policy of

SME’s

9. Government should reserve rural market

for SME’s and protect them from

competition by big industrial houses

10. Facilitate by credit instruments support

and lowering down rates for start ups and

at the time of economic crisis.

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Seed Bed refers to

preparing the soil for

sowing of seeds for a

good crop. As it

provides conducive

conditions for the

Development And

Growth of

Entrepreneurs.

E.G:-Amul, Saras,

Himalaya.Pvt.Ltd

SMALL BUSINESS AS A SEED BED OF LARGE BUSINESS

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To sum up we can say that MSME

serves as a seed bed of

entrepreneurship as it provides

conducive conditions for the

development and growth of

entrepreneurs.

Small enterprises require low

investment and simple

technology and use local

resources to meet local demands

through personal contacts.

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