2011 Manasvi Mohan 1PI10MBA79[SIDBI-A SUCCESSFUL FINANCIAL INSTITUTION IN SME FINANCING][Type the abstract of the document here. The abstract is typically a short summary of the contentsof the document. Type the abstract of the document here. The abstract is typically a short summaryof the contents of the document.]
INTRODUCTIONSmall and medium enterprises (SMEs) play a catalytic role in the development of anycountry. They are the engines of growth in developing and transition economies. In India theyaccount for a significant proportion in manufacturing, exports and employment, and aremajor contributors to GDP. The Importance of SMEs in any economy cannot be overlookedas they form a major chunk in the economic activity of nations. They play a key role inindustrialization of a developing country like India.India has been witnessing the transformation from a centrally planned and highly directedeconomy to a market friendly economy. But the growth – oriented structural changesengineered through the economic reform agenda are yet to cover the SMEs. Although SMEsare today recognized as a priority in almost all countries, It is estimated that half to two -thirdof businesses, all over the world are SMEs .They comprise a widely divergent spectrum ofestablishments, engaged in economic activities ranging from engaged in economic frommicro and rural enterprise to modern industrial units using sophisticated technologies.. Due totheir contribution to their respective national economies, the importance and emphasis onSMEs has been accentuated in the minds of policy makers, planners and the industry in therecent past. This is a consequence of the recognition that the shift from agrarian to industrialand to post industrial knowledge based societies shall not be through the large industrialhouses but through individual and small initiatives by visionaries the SMEs.There are some leading financial institutions such as Small Industrial Bank of India (SIDBI)has been started with the aim of contributing to industries that have the ability to grow andcontribute towards GDP, till now SIDBI has satisfactorily contributed in credit disbursementto small and medium enterprises in India. In fact, it owns the major chunk of pie in the graphof overall SME financing in India.OBJECTIVES: To study the assistance provided by SIDBI for the growth small and medium enterprises (SMEs) in India. To study the Sanctions and Disbursements with respect to Refinance Assistance, Bills Financing, Project Financing of SIDBI.METHODOLOGY:Based on the objectives of this topic, information was gathered about various financingactivities and other services rendered by SIDBI. This study is mainly based on secondarydata. A study of assistance provided by SIDBI to the SMEs was done with the help of variousarticles published in journals and various news papers. Required data was collectedregarding financing activities of SIDBI over the past years and a comparative analysis wasdone. The data has been depicted with the help of charts.
THE GROWTH OF SMES IN INDIASMEs may be defined in different ways by different countries .Most countries have adoptedthe benchmarks of employment. Some define them in terms of assets, a few in terms of salesand yet others, in terms of shareholders fund. In India, the term SSI (Small Scale Industries)is used far more often than SME and is based upon investment in assets. Although definitiondiffer across countries, they have one thing in common; the vast majority of SMEs arerelatively small and over 95% of SMEs in Asia employs less than 100 people. Suchenterprises exist in the form of factories, workshops, trading and service organizations.Ownership patterns range from proprietorship and partnership to companies and co-operatives.CHARACTERISTICS OF SMES Born out of individual initiatives &skills Greater operational flexibility Low cost of production High propensity to adapt technology High capacity to innovate & export High employment orientation Utilization of locally available human & material resourcesThe SMEs sector plays a pivotal role in the overall industrial economy of India. It isestimated that in terms of value, the sector accounts for about 39% of the manufacturingoutput and around 33% of the total export of the country. Further, in recent years the SMEssector has consistently registered higher growth rate compared to the overall industrial sector.The major advantage of the sector is its employment potential at low capital cost. As peravailable statistics, this sector employs an estimated 31 million persons spread over 12.8million enterprises and the labour intensity in the SMEs sector is estimated to be almost 4times higher than the large enterprises.SMEs are expected to contribute 22 per cent to Indias Gross Domestic Product (GDP) by2012, up from about 17 per cent at present, according to a survey by ASSOCHAM. Thesurvey states that the projected increase in this contribution of SMEs to the country’s GDPwould be on account of increased production due to technological up gradation.A survey said that SMEs contribution to GDP is projected to go up by a minimum of 5 percent and touch 22 per cent by 2012, since over 60 per cent of them are aggressivelyupgrading themselves technologically.It was also pointed out in the study that liberalisation and deregulation in the industry wouldalso contribute to the SME sectors growth, and that the sector could go on to register a 40 percent growth in the next five years, from 35 per cent in the last two years.
SIDBISIDBI began as a refinancing agency to banks and state level financial institutions for theircredit to small industries; it has expanded its activities, including direct credit to the SMEthrough its several branches in all major industrial clusters in India. It has been playing thedevelopment role in several ways.It is an apex body and nodal agency for formulating, coordination and monitoring the policiesand programme for promotion and development of small scale industries. Small IndustriesDevelopment Bank of India is an independent financial institution aimed to aid the growthand development of micro, small and medium-scale enterprises in India. Set up on April 2,1990 through an act of parliament, it was incorporated initially as a wholly owned subsidiaryof Industrial Development Bank of India. Current shareholding is widely spread amongvarious state-owned banks, insurance companies and financial institutions. Beginning as arefinancing agency to banks and state level financial institutions for their credit to smallindustries, it has expanded its activities, including direct credit to the SME through 100branches in all major industrial clusters in India. Besides, it has been playing the developmentrole in several ways such as support to micro-finance institutions for capacity building and onlending. Recently it has opened seven branches christened as Micro Finance branches, aimedespecially at dispensing loans up to Rs. 5.00 lakh.SIDBI was established with the purpose to boost up small scale industries. small scaleindustries were getting destroyed in lack of proper economic resources whereas this was bestoption for the livelihood of middle class people living in small cities and towns. SIDBIprovided these economic resources to small scale industries. Today, SIDBI is helping notonly tiny, small and middle industry rather this bank is also progressing by leaps and bounds.If we consider the statistics, then we can come to know that there was a significant growth of22% in the financial year 2009-2010 and it was Rs. 2,540 crore after provisions. As a resultof this, its profit also increased by 41% to Rs. 421 crore. Also, earning per share increased toRs. 9.36. Bank has declared higher equity dividend of 25% for the financial year 2009-2010.SIDBI retained its position in the top 30 Development Banks of the World in the latestranking of The Banker, London. As per the May 2001 issue of The Banker, London, SIDBIwas ranked 25th both in terms of Capital and assets.SIDBI provides financial assistance to units in the small-scale sector. SIDBI providesrefinance against term loans granted by banks to SSIs, equity assistance, bills financing,project financing and resource support to institutions that are engaged in the development ofSSIs. It also provides assistance to wide-range of industrial sectors including transport, healthcare, hotel and tourism and infrastructure. It also provides funds to the professional and self-employed persons setting up small-sized professional ventures.
THE MAIN FUNCTIONS OF SIDBI ARE:*Source: SIDBISIDBI has 6 product divisions, namely direct financing, bills financing, Refinancing,international finance, micro finance and fixed deposit. SIDBI’s objective was to help themasses and the industry that is the base of all development, i.e. small scale industries. Thuscame up the idea of financing these industries directly and on selective basis. So it wasdecided to introduce direct assistance schemes to supplement the other available channels ofcredit flow to the small industries sector. Since then, SIDBI has evolved itself into a supplierof a range of products and services to the Small & Medium Enterprises [SME] sector.Considering the level of competition in banking business due to globalized environment,SIDBI has now started spreading its wings either by way of diversifying its product portfolioor entering into the strategic alliance with other leading private sector banks, public sectorbanks and Non Banking Financial Institutions in order to achieve market development of itsexisting portfolio of services. It aims to provide all the services a Small and MediumEnterprise needs under one roof. Secondly, with the adoption of cluster development as thekey strategy to develop manufacturing sector’s competitiveness, SIDBI has an intention toadopt the cluster financing method to assist SMEs.
OPERATIONSAny bank’s operational excellence is measured by aggregate sanctions, subsequentdisbursement of the sanctioned amount, the amount of revenue generated from the differencein spread over the loan taken and advances granted, higher amount of fee based income andthe last and the most important timely recovery of dues. In addition, the bank’s assistancetowards promotional and developmental efforts in the form of loans and advances for projectfinancing as well as its overall utilization of available resources lying with the bank understudy is another significant indicator of operational effectiveness.OVERALL SANCTIONS AND DISBURSEMENTS OF SIDBISIDBI has booked the highest ever loan sanctions and disbursements by the end of financialyear 2009-10. It recorded loan disbursals of Rs. 31,918 crore and loan sanctions at Rs. 35,521crore. SANCTIONS (in crore) Figure 1 40000 35521 35000 29188 30000 25000 20000 16164 15000 11102 10000 5000 2410 0 1991 2007 2008 2009 2010 *Source : SIDBI Annual Report
DISBURSEMENT (in crore) Figure 2 35000 31918 30000 28298 25000 20000 15087 15000 10225 10000 5000 1839 0 1991 2007 2008 2009 2010 *Source: SIDBI Annual ReportFrom figure 1 and 2 we can observe that there has been in the steady increase in the totalsanctions and disbursements of sidbi over the years. This is the result of the extra efforts inpolicy making and aggressive help provided by the bank for the overall welfare of the smallscale industries.
INCOME & PROFIT (in crore) Figure 3 3000 2540 2500 2082 2000 1638 1500 1187 1000 425 421 500 298 299 198 36 0 1991 2007 2008 2009 2010 Income Profit*Source : SIDBI Annual ReportFigure3 shows the income and profit of SIDBI over the years. Profits for SIDBI over theyears have been fluctuating as seen in the above, but we can observe that in the year 2010 theprofits have doubled.REFINANCE ACTIVITYSIDBI has remained the premier refinancing institute for the promotion and development ofsmall and medium enterprises. The mechanism used by SIDBI is it lends to Primary LendingInstitutions (PLIs) and they deliver the credit facility to existing entrepreneurs and firstgeneration entrepreneurs. This figure reveals the total sanctions and disbursement underrefinancing assistanceThe main objective of introducing Refinance scheme was to facilitate the flow of funds toindustrial units in the micro and small enterprises sector through eligible PLIs, comprisingscheduled banks, State Financial Corporation’s (SFCs) State Industrial DevelopmentCorporations(SIDCs), etc., SIDBI grants refinance against term loans granted by the eligiblePLIs to eligible industrial concerns for setting up industrial projects in the micro and smallenterprise sector and for their expansion / modernisation / diversification
REFINANCE ASSISTANCE (IN CRORE) Figure 4 19400 19260. 98 20500 19926.0 19200 9 20000 19000 19500 18800 18534. 19000 18600 24 18584.8 2 18400 18500 18200 18000 18000 17500 sanction disbursement Sanction Disbursement 2008-2009 2009-10*Source : SIDBI Annual ReportFigure 4 shows the refinancing details of SIDBI for the year 2008-09 and 2009-10. It showsthe net growth of increase in 3.45% in Sanctions and not so impressively increases indisbursement of 0.25%. This is the result of the extra efforts in policy making and aggressivehelp provided by the bank for the overall welfare of the small scale industries.MICRO FINANCESIDBI is the apex lending body for microfinance institutions in India. Through its Foundationfor Micro Credit (SFMC), SIDBI channelizes funds to the sector and provides a wide rangeof financial and non-financial services such as loan funds, grant support, equity andinstitution building support to the retailing microfinance institutions.Small Industries Development Bank of India has now opened a seven specialised micro-finance branches in various centres across the country at Lucknow, Hyderabad, Chennai,Bangalore, Kolkata, Bhubaneswar and Guwahati. It has a network of 120 partner micro-finance institutions
MICRO FINANCE (IN CRORE) Figure 5 1950 3000 2972.35 1920.73 2950 1900 2900 2850 1850 2800 1800 2750 2700 2671.61 1746.19 1750 2650 2600 1700 2550 1650 2500 sanction disbursement Sanction Disbursement 2008 -2009 2009-10*Source : SIDBI Annual ReportThe above figure 5 shows that the overall sanctions for micro financing by SIDBI has shownthe growth in FY 2009-10 from total sanctions amount of Rs. 1920.73 crore in the financialyear 2008-09 to Rs. 2972.35 crore in the FY 2009-10 which is almost 55% higher in than theprevious year.BILL FINANCINGBills financing have been another feather in the cap for SIDBI’s portfolio of financing forassistance of the SME’s. The objective of the scheme is to mitigate the problem of delayedpayments to SSI units. The schemes operating under Bills financing are Bills Re-discounting,Bills direct discounting, receivables financing scheme. This is for short term purposes andentrepreneurs in need of such short term requirements for working capital have favoured thisscheme along with their financing options.The main objective of SIDBI 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-assembliesetc, based on compliance to the various eligibility criteria, norms etc as applicable to therespective schemes.
BILL FINANCING (IN CRORE) Figure 6 6560 11000 6549.48 10485.3 6550 9 10500 6540 10000 6530 6520 9500 6510 9003.37 6504.48 9000 6500 8500 6490 6480 8000 sanctios disbursement sanctios disbursement 2008-2009 2009-2010*as per sidbi annual reportTotal sanctions and disbursements for the FY 2009 and FY 2010 can be seen from figure 6where the sanctions have increased by 60% in the year 2010 and disbursements haveincreased by 38.42% in the year 2010 which shows that the sanctions and disbursements arenot at par with the target of SME’s being able to attain the credit available.
CONCLUSION:The Importance of Small and Medium Enterprises in any economy cannot be overlooked asthey form a major chunk in the economic activity of nations. The singular contribution ofSMEs is on account of their unique characteristics .Their role in economic activity is beenbenefited in both tangible and intangible ways., it is pertinent to mention that Small IndustrialDevelopment Bank of India has achieved landmark results in the domain of small andmedium enterprise financing and fulfilling their credit requirements time to time in variousforms such as long term project finance, working capital finance, bill discounting etc.However considering the level of appetite for credit facilities of Indian small and mediumenterprises, private and public sector banks in India need to work out an unique andinnovative model of financing to this vital sector (SME) of Indian Economy.Bibliography www.sidbi.com www.ibef.org/artdisplay.aspx www.rupeeindia.com www.franchiseindia.com www.iipmthinktank.com - case on SME financing by Tarak Shah & Anshu Khedkar Indian sme’s and their uniqueness in the country- Dr. A.P.Pandey and Shivesh