West Bengal University Of Technology           Summer Project Work“Emerging SME Sectors in India and their           futur...
AUTHORISATIONThis project was undertaken at Bank of Baroda, SME Loan Factory, Kolkata from July 01,2010 to August 31, 2010...
ACKNOWLEDGEMENTI would like to express my gratitude to Mr. Victor Vincent, General Manager, HRD, Bank ofBaroda, Kolkata, f...
1.3              Types of Reform Measures for the Banking       13                 Sector1.4              Limitations of t...
7.5            Conclusion & Recommendations   99SECTION- 8.0   Pharmaceuticals                1028.1            SME Model ...
1.0) INDUSTRY OVERVIEW1.1 Banking IndustryA Banking sector performs three essential functions in an economy: the operation...
Reserve Bank of India Act as the central bank of India (Chakrabarti, 2005). The ImperialBank of India was converted in to ...
Russia, economic institutions were not sufficiently developed for private banks to play thiscrucial development role. Acco...
1.2 Indian Banking: A Paradigm ShiftThe decade gone by witnessed a series of financial reforms, with many of them still in...
The major recommendations made by the Narasimham I committee report are listed below(Kalita, 2008).1. The ban on setting n...
2. Expressing concern over rising non-performing assets, the committee provided the ideaof setting up an asset reconstruct...
1.3 Types of Reform Measures for the Banking SectorSince the general importance of a banking sector for an economy is wide...
the fact that financial liberalization is essential for economic growth (King and Levine, 1993;Watchel, 2001).The banking ...
   Significant advancement in dematerialization and markets for securitized assets are      being developed.Prudential me...
1.4 Impacts of Reforms upon the Banking IndustryThe Indian banking industry had made sufficient progress during the reform...
5. Per capita Credit (Rs.)                              457      1434      4555   104406. Deposit (% to national income)  ...
   SLR requirements be related to prudential requirements and be brought down to       25% of net demand and time liabili...
of activities related to food processing, dairying and poultry in the priority sector list (Kalita,2008).This will increas...
3.5 Small And Medium Enterprises (SMEs) In IndiaThe small and medium enterprises segment has been a topic of intense delib...
segment also plays a major role in developing countries such as India in an effort toalleviate poverty and propel sustaina...
The SME sector has also registered a consistently higher growth rate than the overallmanufacturing sector. In fact, it pla...
Investments in the SME sector are not only by PE funds but this sector is also attractingFDI. In this respect the governme...
In business banking sector, Bank of Baroda offers products and services such as deposits, business banking services,loans ...
CHAPTER 3 : SME POLICY3.1 ObjectivesThe SME Loan Policy is framed with the following objectives:       To improve flow of...
    Composition of SME Sector        Broad guidelines on lending to SME Sector        SME Loan Factory Model        Cr...
 Clubs, Trusts, etc.     Financing under various Government schemes launched for MSME Sector.However, such units, which ...
3.6 Targets for Priority Sector / SME Sector LendingAs regards lending to SME Sector, Banks are advised to fix their own t...
Financial norms in case of takeover of SME accounts as per regulatory guidelines or SME accounts as perexpanded coverage:R...
3.8 SME ProductsThe following products are launched for SME sector across the country:       Baroda SME Gold Card providi...
4.) FOOD & AGRO BASED INDUSTRIES                30
4.1) EXECUTIVE SUMMARYEmerging Food Processing SMEs of India attempts to provide a platform to the FoodProcessing SMEs, so...
The Micro, Small and Medium Enterprises Development Act of 2006, which came into effectfrom October 2, 2006 defines SMEs a...
The Indian food processing industry holds tremendous potential to grow, considering thestill nascent levels of processing ...
However, though the organized sector is comparatively small, it is growing at a much fasterpace.Food Processing Units in O...
in this segment include vegetable curries in retortable pouches, canned mushroom andmushroom products, dried fruits and ve...
brands have been created by cooperatives like Amul (GCMMF), Vijaya (AP), Verka (Punjab),Saras (Rajasthan). Nandini (Karnat...
Exports of marine products have been erratic and on a declining trend which can be owedto the adverse market conditions pr...
growing at around 25% annually. Maharashtra has emerged as an important state for themanufacture of wines. There are more ...
processed foods in India. These are post-liberalisation trends that have given an impetus tothe sector.Consumption pattern...
Apart from these initiatives, the Centre has requested state Governments to undertake thefollowing reforms:       •      A...
•   Low availability of adequate infrastructural facilities   •   Lack of adequate quality control & testing methods as pe...
•      The sample covers over 98% of the food processing clusters, except a few inHimachal Pradesh and Jammu & Kashmir•   ...
TurnoverOver 50% of the companies in the sample have a turnover of less than Rs 100 mn, andmost of them were private limit...
Figure 03TopOwnership StructureThe North-based companies once again showed a preference for proprietary form ofownership, ...
BrandingAround 65% of the companies in the sample had branded products. The grain processingand packaged/convenience foods...
Table 2TopFuture PlansOf the total 245 companies in the sample, 61% have envisaged strategies for futuregrowth. The plans ...
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  1. 1. West Bengal University Of Technology Summer Project Work“Emerging SME Sectors in India and their future prospects At By WBUT Registration No: 091360710078 OF 2009-2010 WBUT Roll No: 09136009106 ARMY INSTITUTE OF MANAGEMENT KOLKATA 1
  2. 2. AUTHORISATIONThis project was undertaken at Bank of Baroda, SME Loan Factory, Kolkata from July 01,2010 to August 31, 2010 as an Assignment for Summer Internship Project in managementfor partial fulfillment of the PGDM Program at Army Institute of Management, KolkataDate: Aug,31st 2010 2
  3. 3. ACKNOWLEDGEMENTI would like to express my gratitude to Mr. Victor Vincent, General Manager, HRD, Bank ofBaroda, Kolkata, for giving me the permission to carry out my Summer Internship at Bank ofBaroda, SME Loan Factory, Kolkata.My sincerest gratitude also goes to Mr. Swapan Chandra, Chief Manager, SME LoanFactory, Kolkata, who took proactive steps granting requisite organizational facilities, He wasextremely kind and patient and his guidance and encouragement was of immense helpthroughout my project.I would like to thank Mr. Subir Sanyal, Senior Manager Credit, SME Loan Factory, Kolkatawho as my Project Guide has always encouraged me to do new things, to critically analyzethe cases and gave his inputs as and when it was necessary.My gratitude goes to Prof. Moushmi Bhattacharya, Army Institute of Management,Kolkata, who as my Faculty Guide has always motivated us to put our best foot forward bysetting high standards. I thank him for guiding us at every step of the project and motivatingus to do in-depth analysis.My special thanks also go to the following individuals at SME Loan Factory, Kolkata. Theircooperation has helped me immensely and made the experience of the internship programat Bank of Baroda, SME Loan Factory an enriching one.Mr. Arun Khandelwal, Manager CreditMr. Pankaj Biswas, Manager CreditMr. Jayanto Samadar, Manager CreditMr. Sunil Kumar Saha, Manager CreditMr. Ujjwal Roy, Manager CreditMs. Snehi More, Officer CreditLast but not the least; I would like to thank all my family members for their care,encouragement and support.TABLE OF CONTENTSCHAPTERS TOPICS PAGE NO.SECTION- 0 Title 1 Authorisation 2 Acknowledgement 3SECTION- 1.0 Industry Overview 71.1 Banking Industry 71.2 Indian Banking: A Paradigm Shift 10 3
  4. 4. 1.3 Types of Reform Measures for the Banking 13 Sector1.4 Limitations of the Study 161.5 Impacts of Reforms upon the Banking Industry 201.6 Small And Medium Enterprises (SMEs) In India 211.7 Role of Small and Medium Enterprises (SMEs) 221.8 Financing the SMEs 22SECTION- 2.0 Company Background 232.1 Bank’s Mission Statement 232.2 Brief History 242.3 Products And Services 242.4 Bank’s Logo 242.5 Business & Financial Performance. 24SECTION -3.0 SME Policy 253.1 Objectives 253.2 Scope of Policy 263.3 Small & Medium Enterprise Sector. 263.4 Bank’s approach towards SME 273.5 Establishment of SME Loan Factory 273.6 Targets for Priority Sector / SME Sector 28 Lending3.7 Guidelines for Takeover of Advance Accounts 283.8 SME Products 30SECTION- 4.0 Food & Agro Based Industries 314.1 Executive Summary 324.2 Methodology 324.3 Data Collection & Analysis 334.4 Findings 424.5 Conclusion & Recommendations 48SECTION- 5.0 Chemicals 515.1 Executive Summary 525.2 Methodology 535.3 Data Collection & Analysis 545.4 Findings 645.5 Conclusion & Recommendations 68SECTION- 6.0 Textiles 706.1 Executive Summary 716.2 Methodology 716.3 Data Collection & Analysis 726.4 Findings 776.5 Conclusion & Recommendations 83SECTION- 7.0 Automotive Components 867.1 Executive Summary 877.2 Methodology 877.3 Data Collection & Analysis 887.4 Findings 91 4
  5. 5. 7.5 Conclusion & Recommendations 99SECTION- 8.0 Pharmaceuticals 1028.1 SME Model 1038.2 Procedure of Processing 1038.3 Data Collection & Analysis 1048.4 Findings 1108.5 Conclusion & Recommendations 114 5
  6. 6. 1.0) INDUSTRY OVERVIEW1.1 Banking IndustryA Banking sector performs three essential functions in an economy: the operation of thepayment system, the mobilization of savings and the allocation of savings to the investmentprojects. By allocating capital to the highest value use while limiting the risks and the costsinvolved the banking sector can exert a positive influence on the overall economy and thusis of broad macroeconomic consequence (Roland, 2006; Jaffe and Levonian, 2001, Rajanand Zingales, 1998).Commercial banking has been one of the oldest businesses in India and the earliestreference of commercial banking in India can be traced in the writings of Manu. Modernbanking in India can be dated as far back as in 1786 with the establishment of General Bankof India (Kalita, 2008). In the early nineteenth century three Presidency Banks wereestablished in Bengal, Bombay and Madras and in 1921 they were merged in to newly formImperial Bank of India. In 1935, the Reserve Bank of India was established under the 6
  7. 7. Reserve Bank of India Act as the central bank of India (Chakrabarti, 2005). The ImperialBank of India was converted in to State Bank of India under the State Bank of India Act,1955.In spite of all these developments, independent India inherited a rather weak banking andfinancial system marked by a multitude of small and unstable private banks whose failuresfrequently robbed their middle-class depositors of their life’s savings. After independence,the Reserve Bank of India was nationalized in 1949 and given wide powers in the area ofbank supervision through the Banking Companies Act (later renamed Banking RegulationsAct). The nationalization of the Imperial bank through the formation of the State Bank ofIndia and the subsequent acquisition of the state owned banks in eight princely states bythe State Bank of India in 1959 made the government the dominant player in the bankingindustry. In keeping with the increasingly socialistic leanings of the Indian government, 14major private banks, each with deposits exceeding Rs. 50 crores, were nationalized in 1969.This raised the proportion of scheduled bank branches in government control from 31% toabout 84%(Kalita, 2008 ) .In 1980, six more private banks each with deposits exceeding Rs200 crores, were privatized further raising the proportion of government controlled bankbranches to about 90%(Chakrabarti, 2005).While there are those who have emphasized the political importance of public control overbanking, most arguments for nationalizing banks are based on the premise that profitmaximizing lenders do not necessarily deliver credit where the social returns are thehighest. The Indian Government when nationalizing all the larger Indian banks in 1969argued that banking was “inspired by a larger social purpose” and must “sub serve nationalpriorities and objectives such as rapid growth in agriculture, small industry and exports”(Banerjee et.al, 2004, Das et. al., 2005).There are essentially two views that justify Government’s ownership of financial markets.The optimistic or „developmental‟ view is that of Alexander Gerschenkron who emphasizedon the necessity of financial development for economic growth (La Porta et.al. 2002;Dobson 2006).Gerschenkron argued that privately owned commercial banks had beencrucial for channelising savings into industry in the second half of the 19th century inindustrialized nations such as Germany. However, in some countries, most conspicuously 7
  8. 8. Russia, economic institutions were not sufficiently developed for private banks to play thiscrucial development role. According to Gerschenkron “...no bank could have successfullyengaged in long term credit policies in an economy where fraudulent banking practices hadalmost elevated to the rank of a general business practice…” (La Porta et. al., 2002).Banking in India has grown at a rapid pace with the number of commercial banks increasingfrom 89 in 1969 to 284 in 1995 (RBI Banking Statistics, 2009).Prakash Tandon, former chairman of the Punjab National Bank (nationalized in 1969)describes the rationale for nationalization as follows:The two significant aspects of nationalization were rapid branch expansion and channeling ofcredit according to Plan priorities (Mohan, 2002).As in other areas of economic policy-making, the emphasis on government control began toweaken and even reverse in the mid-80s and liberalization set in firmly in the early 90‟s.The poor performance of the public sector banks, which accounted for about 90% of allcommercial banking, was rapidly becoming an area of concern. The continuous escalation inNon-Performing Assets (NPAs) in the portfolio of banks posed a significant threat to the verystability of the financial system. They were the „smoking gun threatening the very stabilityof the Indian Banks‟ (Bidani, 2002). The lack of recognition of the importance oftransparency, accountability and prudential norms in the operations of the banking systemled also to a rising burden of non-performing assets (Ghosh and Prasad, 2007).Banking reforms, therefore, became an integral part of the liberalization agenda whichprovided the necessary platform for the banking sector to operate on the basis ofoperational flexibility and functional autonomy enhancing productivity, efficiency andprofitability (Kalita, 2008).For good reason, India chose a „gradualistic‟ approach to thereform over a „big-bang‟ approach (Bhinde, Prasad and Ghosh, 2002). As pointed out byBhide et.al., 2002, such gradualism was due to the fact that reforms were not introduced inface of a prolonged economic crisis, and most importantly; gradualism was a result ofIndia’s democracy and highly pluralistic polity in which reforms could be undertaken only ifbased on popular consensus. While expansion of credit was desirable to help the economygrow, equally important was the need for proper credit appraisal. 8
  9. 9. 1.2 Indian Banking: A Paradigm ShiftThe decade gone by witnessed a series of financial reforms, with many of them still in theprocess of implementation. The 1990s saw India implementing Macroeconomic AdjustmentProgram of which the financial sector reform is a major component (Narayana, 2000).Thebasic principle guiding financial sector reform was that the financial system has a crucialrole to play in the mobilization of savings and their allocation to the most productive uses.Research studies have time and again proved that financial liberalization had a positiveeffect on bank performance (Koeva, 2003). The ground for reform was the severaldistortions which had crept into the financial system rendering it unable to meet thechallenges of a competitive environment. Joshi and Little (1996) had characterized theIndian banking sector as „...unprofitable, inefficient and financially unsound…‟ The firstNarasimham Committee set the stage for financial and bank reforms in India. Interestrates, previously fixed by the Reserve Bank of India, were liberalized in the 90‟s anddirected lending through the use of instruments of the Statutory Liquidity Ratio which wasreduced (Chakrabarti, 2008). While several committees have looked into the ailments ofcommercial banking in India, three of them – the Narasimham committee I (1992) and II(1998) and the Verma committee – have aimed at major changes in the banking system.The financial reform process is often thought of as comprising two stages – the first phaseguided broadly by the Narasimham Committee I report while the second is based on theNarasimham Committee II recommendations. The aim of the former was to bring about“operational flexibility” and “functional autonomy” so as to enhance “efficiency, productivityand profitability”. The latter focused on bringing about structural changes so as tostrengthen the foundations of the banking system to make it more stable (Chakrabarti,2008).The Narasimham Committee had acknowledged the success of public sector banks inrespect of branch expansion, deposit mobilization in household sector, priority sectorlending and removal of regional disparities in banking. But during the post nationalizationperiod, the banking sector suffered serious erosion in its efficiency and productivity (Dhar,2003). Moreover, the sound banking system had been disturbed by the system of directedcredit operation in the form of subsidized credit flow in the under banked and priority areas,IRDP lending, loan festival, etc. According to the committee the operational expenditure ofthe public sector banks had tremendously increased due to rise in number of branches, poorsupervision, rising staff level and high unit cost of administering loan to the priority sector. 9
  10. 10. The major recommendations made by the Narasimham I committee report are listed below(Kalita, 2008).1. The ban on setting new banks in private sector should be lifted and the licensing policy inthe branch expansion must be abolished.2. The govt. has to be more liberal in the expansion of foreign bank branches and alsoforeign operations of Indian banks should be rationalized.3. The Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) should beprogressively brought down from 1991-92.4. The directed credit program should be re-examined and the priority sector should beredefined to comprise small and marginal farmers, the tiny industrial sector, small businessoperators and weaker sections.5. Banking industry should follow BIS/Basel norms for capital adequacy within three years.6. Interest rates should be deregulated to suit the market conditions.7. The govt. should tighten the prudential norms for the commercial banks.8. The govt. share of public sector banks should be disinvested to a certain percentage likein case of any other PSU.In order to initiate the second generation of financial sector reforms a committee onBanking Sector Reforms (BIS) was formed in 1998 under the chairmanship of M.Narasimham. The committee submitted its report on 23rd April 1998 to the Finance Ministerof Govt. of India (Kalita, 2008). Narasimham committee report II observed that CentralBank’s role should be separated from being monetary authority to that of regulator of thebanking sector.The major recommendations of the second Narasimham II report were mentioned below(Kalita, 2008).1. The committee favoured the merger of strong public sector banks and closure of someweaker banks if their rehabilitation was not possible. 10
  11. 11. 2. Expressing concern over rising non-performing assets, the committee provided the ideaof setting up an asset reconstruction fund to tackle the problem of huge non-performingassets (NPAs) of banks under public sector.3. The report emphasized the need of enhancement of capital adequacy norms from thepresent level of 8 percent but did not specify the amount to which it should be raised.4. The Banking Sector Reform Committee further suggested that existence of a healthycompetition between public sector banks and private sector banks was essential.5. The report envisaged flow of capital to meet higher and unspecified levels of capitaladequacy and reduction of targeted credit. 11
  12. 12. 1.3 Types of Reform Measures for the Banking SectorSince the general importance of a banking sector for an economy is widely accepted, thequestions arise under which coordination mechanism – state or market – it best performs itsfunctions, and, if necessary, how to manage the transition to this coordination mechanism(Kaminsky and Schmukler, 2002).Currently, there are opposing views concerning the mostpreferable coordination mechanism. According to the development and political view of stateinvolvement in banking, a government is through either direct ownership of banks orrestrictions on the operations of banks better suited than market forces alone to ensure thatthe banking sector performs its functions. The argument is essentially that the governmentcan ensure a better economic outcome by for example channeling savings to strategicprojects that would otherwise not receive funding or by creating a branch infrastructure inrural areas that would not be build by profit-maximizing private banks.In the words of Lenin „...Without big banks, socialism would be impossible. The „big banks‟are the state apparatus which we need to bring about socialism and which we take readymade from capitalism…” (La Porta et. al., 2002). , Governments acquire control ofenterprises and banks in order to provide employment, subsidies and other benefits tosupporters, who return the favour in the form of votes and political contributions. Theattraction of such political control of banks is greatest in economies with underdevelopedfinancial systems and poorly protected property rights, because the government does nothave to compete with the private sector. The view of state ownership is buttressed byconsiderable evidence documenting the inefficiency of government enterprises, the politicalmotives behind the provision of services and the benefits of privatization The activeinvolvement of government thus ensures a better functioning of the banking sector, whichin turn has a growth enhancing effect (Denizer, Desai and Gueorguiev, 1998; La Porta,Lopez de Silanes and Schleifer, 2002).The proponents of financial liberalization take an opposite stance. In their view, repressivepolicies such as artificially low real interest rates, directed credit programs and excessivestatutory pre-emption that are imposed on banks have negative effects on both the volumeand the productivity of investments. Removing these repressionist policies and giving moreimportance to market forces will, in the view of the proponents of financial liberalization,increase financial development and eventually lead to higher economic growth(Demetriades and Luintel, 1997, p. 311; Denizer, Desai and Gueorguiev, 1998).However, amajority of the empirical studies support the financial liberalization hypothesis supporting 12
  13. 13. the fact that financial liberalization is essential for economic growth (King and Levine, 1993;Watchel, 2001).The banking sector reforms started in the early 1990s essentially followed a two prongedapproach; first, the level of competition was gradually increased within the banking systemwhile simultaneously introducing international best practices in prudential regulationsupervision tailored to Indian requirements (Kalita, 2008). In particular, special emphasiswas placed on building up the risk management capabilities of Indian banks while measureswere initiated to ensure flexibility, operational autonomy and competition in the bankingsector.Secondly, active steps were initiated to improve the institutional arrangements like legaland technological frameworks (Mohan, 2006). Some of the measures undertaken in thisregard are as follows (Kalita, 2008; Mohan, 2006; Roland, 2006; Singh, 2005).Competition Enhancing Measures  Allowing operational autonomy and reduction of public ownership in public sector banks by raising capital from equity market up to 49 percent of paid up capital.  Transparent norms for entry of Indian private sector banks, foreign banks and joint venture banks.  Permission for foreign investment in the financial sector through foreign direct investment (FDI) as well as portfolio investment.  The banks are allowed to diversify product portfolio and business activities.  Roadmap for foreign banks and guidelines for mergers and amalgamation of private sector banks with other banks and NBFCs.  Instructions and guidelines on ownership and governance in private sector banks.Measures enhancing role of market forces  Reduction in pre-emption through reserve requirement, market determined pricing for govt. securities, disbanding of administered interest rates and enhanced transparency and disclosure norms to facilitate market discipline.  Introduction of auction-based repos and reverse repos for short term liquidity management, facilitation of improved payments and settlement mechanism. 13
  14. 14.  Significant advancement in dematerialization and markets for securitized assets are being developed.Prudential measures  Introduction of international best practices norms on capital to risk weighted asset ratio (CRAR) requirement, accounting, income recognition, provisioning and exposure. Following the Basel Accord of 1988, the capital to risk-weighted assets ratio (CRAR), which took into account the element of risk involved in both balance sheet as well as off-balance sheet business, emerged as a well recognized and universally accepted measure of soundness of the banking system. Accordingly, as a part of banking sector reforms, India adopted the Basel norms in a phased manner. In fact, India went a step further and stipulated CRAR at nine per cent as against the international norm of eight per cent from March 31, 2000. Furthermore, India also prescribed the capital charge for market risk in June 2004, broadly in line with the 1996 amendment to Basel norms.  Measures to strengthen risk management though recognition of different component of risk, assignment of risk weights to various asset classes, norms of connected lending, risk concentration,  Introduction of capital charge for market risk, higher graded provisioning for NPAs, guidelines for ownership and governance, securitization and debt restructuring mechanism norms, etc.  Introduction and roadmap for implementation of Basel II. 14
  15. 15. 1.4 Impacts of Reforms upon the Banking IndustryThe Indian banking industry had made sufficient progress during the reforms period. Beforethe start of the 1991 reforms, there was little effective competition in the Indian bankingsystem for two reasons. First, the detailed prescriptions of the RBI concerning for examplethe setting of interest rates left the banks with limited degrees of freedom to differentiatethemselves in the marketplace. Second, India had strict entry restrictions for new banks,which effectively shielded the incumbents from competition (Roland, 2006; Joshi and Little,1997) .Through the lowering of entry barriers; competition has significantly increased sincethe beginning of the 1990s. Seven new private banks entered the market between 1994and 2000. In addition, over 20 foreign banks started operations in India since 1994. ByMarch 2004, the new private sector banks and the foreign banks had a combined share ofalmost 20% of total assets Deregulating entry requirements and setting up new bankoperations has benefited the Indian banking system from improved technology, specializedskills, better risk management practices and greater portfolio diversification (RBI Report onTrend and Progress of banking in India).Kumar and Gulati (2008) have examined the issue of convergence of efficiency levelsamong Indian public sector banks (PSBs) during the post-reforms period spanning from1992/1993 to 2005/2006. Their empirical results indicate that the majority of PSBs haveobserved an ascent in technical efficiency during the post-reforms years. Further, theinefficient PSBs have been noted to be catching up with the efficient ones. That is, thebanks with low level of efficiency at the beginning of the period are growing more rapidlythan the highly efficient banks. In sum, the study confirms a presence of convergencephenomenon in the Indian public sector banking industry.Table 1.1: Progress of Scheduled Commercial Banks in India Pre and Post-ReformsProgress of Scheduled Commercial Banks in India June March March MarchIndicators 1980 1991 2000 20051. No. of SCBs 154 272 298 2882.No. of bank offices 34594 60570 67868 68355Of which Rural and Semi-urban 23227 46550 47693 474853. Population per Office („000) 16 14 15 164. Per capita Deposit (Rs.) 738 2368 8542 16091 15
  16. 16. 5. Per capita Credit (Rs.) 457 1434 4555 104406. Deposit (% to national income) 36 48.1 53.5 68.3Interest rate deregulationPrior to the reforms, interest rates were a tool of cross-subsidization between differentsectors of the economy. To achieve this objective, the interest rate structure had grownincreasingly complex with both lending and deposit rates set by the RBI. One of the majorfactors that affected the banks‟ profitability was the high pre-emptions in the form of CashReserve Ratio (CRR) and Statutory Liquidity Ratio which had reached at the historically highlevels of 63.5% in early 1990s. The administered structure of interest rates did not allowbanks to charge the interest rates depending upon the credit worthiness of the borrowerand thus, impinged on the allocated efficiency of resources (Report on Currency andFinance, RBI, 2006-2008). The deregulation of interest rates was a major component of thebanking sector reforms that aimed at promoting financial savings and growth of theorganized financial system (Singh, 2005, Roland, 2006). Deregulation of interest ratesimplied that banks were able to fix the interest rates on deposits and loans depending uponthe overall liquidity position and their risk perceptions (for lending rates).The Narasimham Committee having commended the Indian Banking system for itsimpressive quantitative achievements during the two decades since nationalisation in 1969noted the decline in productivity and efficiency of the system and the related erosion ofprofitability (Narayana, 2000). In the Committees view the major elements leading to lowproductivity and profitability were-  Constraints on operational flexibility owing to directed investment in terms of SLR together with cash reserve ratios and directed credit programs.  Decline in portfolio quality owing to political and administrative interference in credit decision making.  Concessional interest rate on directed investment and credit.  Expansion of branch network into rural and semi-urban areas turning many offices into primarily deposit centres without adequate credit business and income.The above diagnosis of the maladies of banking led the Committee to recommend- 16
  17. 17.  SLR requirements be related to prudential requirements and be brought down to 25% of net demand and time liabilities.  The borrowing rates to be brought closer to market rates. CRR be turned into an instrument of monetary policy.  Directed credit program be phased out in the long run; redefine priority sector in the short run, and review the concessional interest rate. Use fiscal instruments rather than the credit system to help the weaker sections.  Dismantle the administered interest rate structure and allow interest rates "to perform their main function of allocating scarce loan-able funds to alternative use”.The motive behind the liberalization of interest rates in the banking system was to allow thebanks more flexibility and encourage competition. Banks can charge rates according to theircost of funds and to reflect the creditworthiness of different borrowers. Banks can varynominal rates offered on deposits in line with changes in inflation to maintain real returns(Ahluwalia, 2002).The most important and far reaching impact of banking liberalization in India has been thederegulation of the interest rate (Kalita, 2008). The Indian banks are now adopting acompletely market driven interest rate structure which was in earlier a govt. driven interestrate structure. The interest rate deregulation has resulted in the integration of the lendingrates across spectrum. The prime lending rate of each bank is now synchronized with thebank rate. The bank rate was revived by the RBI to serve as the reference rate for thebanking sector.Directed credit Policies: Directed credit policies have been an important part of India’sfinancial sector reforms. Under the directed credit policy commercial banks are required toprovide 40% of their commercial loans to the priority sectors which include agriculture,small-scale industry, small transport operators, artisans, etc. (Kalita,2008). Within theaggregate ceiling there are various sub-ceilings for agriculture and also for loans to povertyrelated target groups. The Narasimham committee had recommended reduction of thedirected credit to 10% from 40%. The committee had also suggested narrowing down thedefinition of priority sector to focus on small farmers and low income target groups.The policy of 40% of loans to the priority sectors has not been abolished by the govt.However, the definition of the priority sector activities has been broadened with the newinclusion and reclassifications. The Committee on Banking Reforms has suggested inclusion 17
  18. 18. of activities related to food processing, dairying and poultry in the priority sector list (Kalita,2008).This will increase the list of activities under the priority sector credit and also improvethe quality of the portfolio.The issue of priority sector lending, an important concern against privatization, is no longerthat crucial, since in 2003 the share of credit of private sector banks going to the prioritysector had surpassed that of public sector banks [In 2002-03, 42.5% of the total credit ofPSUs was given to the priority sector whereas 44.4% of the total bank credit was given byPrivate Sector Banks to priority sector] (Source: Trend and Progress of Banking in India,RBI). At present if a bank fails to fulfill the target for priority sector lending, it can invest theshortfall amount in RBI securities dealing with flow of funds towards agriculture and small-scale industries but it still desirable that banks adhere to the priority sector lending target(RBI, 2008).The current arrangement shows how the banking sector reforms have providedoperational flexibility to the banks even while meeting social objectives. The priority sectorlending norms have been fulfilled by a good margin by both public and private sector banksat present. While public sector banks, as a group, achieved the overall priority sectortargets 40%, they failed to achieve the various sub-targets for agriculture, tiny sector withinthe SSI sector, advances to weaker sections, etc. Significant variation was also observed inthe performance of different banks within the public sector banks with regard to theachievement of sub-targets (RBI, Annual Report, 2004-05).One of the major objectives of the reform was to bring in greater efficiency in the IndianBanking sector by permitting entry of private sector banks and increased operationalflexibility of the banks. Keeping this view several measures were initiated to instilcompetitiveness in the banking sector where the lack of threat to the entry of new playershad led to inefficiency in the banking sector. In January 199, norms for the entry of Privateplayers were announced. In the context towards deregulation, it was decided in 1992 togive greater freedom to banks in opening up branches. Following liberalization of entry ofnew private sector banks, 10 new banks were set up by 1998. Besides, 22 foreign bankswere also set up. The number of foreign bank branches increased from 140 at end-March1993 to 186 at end-March 1998. However, that the impact on competition remained mutedwas evident from the limited number of mergers (four). Normally when competitionintensifies, it inevitably leads to increased mergers and acquisitions activity. The lack ofenough competition was also reflected in the net interest margins (NIM) of banks, whichincreased during this phase from 2.51% in 1992-93 to 2.95 per cent in 1997-98 (RBIReport on Currency and Finance 2006-08, Vol. 1). 18
  19. 19. 3.5 Small And Medium Enterprises (SMEs) In IndiaThe small and medium enterprises segment has been a topic of intense deliberation among banks, financialinstitutions, industry and academicians. In India, ‘small and medium enterprises’ (SME) is a generic term used todescribe small scale industrial (SSI) units and medium-scale industrial units. As per the Micro, Small and MediumEnterprises Development Act of 2006, any industrial unit with a total investment in its fixed assets or leased assetsor hire-purchase asset upto Rs10 million is considered as a SSI unit and investment up to Rs. 100 million isconsidered as a medium unit. In addition, an SSI unit should neither be a subsidiary of any other industrial unit norcan it be owned or controlled by any other industrial unit.The SME sector produces a wide range of industrial products such as food products, beverage, tobacco and tobaccoproducts, cotton textiles, wool, silk, synthetic products, jute, hemp & jute products, wood & wood products,furniture and fixtures, paper & paper products, printing publishing and allied industries, machinery, machines,apparatus, appliances and electrical machinery. SME sector also has a large number of service industries.  In India, SME is the biggest provider of employment next only to Agriculture. The SMEs constitute 95% of total industrial units and constitute 40% of total industrial output.  Formerly, both Government and RBI credit policy placed emphasis on manufacturing units from the Small Scale Sector. However, in order to make the size of the unit and the technology employed by firms to be globally competitive, the definition of “Small Scale Sector” was revisited. Keeping in view the same and the global practices, it was decided to broaden the concept of SSI Sector by inclusion of services within its ambit as also including the “Medium Enterprises” in a composite sector of “Small & Medium Enterprises”.  Subsequently, MSMED Act was operationalised with effect from 2nd October 2006, which defines an “enterprise” instead of an “industry” to give recognition to service sector and also defines a “medium enterprise” to facilitate technology upgradation and graduation.  Banks were interalia advised to formulate comprehensive and more liberal policies than the existing policies in respect of loans to SME Sector.3.6 Role of Small and Medium Enterprises (SMEs)SMEs have been playing a pivotal role in country’s overall economic growth, and haveachieved steady progress over the last couple of years. From the perspective of industrialdevelopment in India, and hence the growth of the overall economy, SMEs have to play aprominent role, given that their labour intensiveness generates employment. The SME 19
  20. 20. segment also plays a major role in developing countries such as India in an effort toalleviate poverty and propel sustainable growth. They also lead to an equitable distributionof income due to the nature of business. Moreover, SMEs in countries such as India help inefficient allocation of resources by implementing labour intensive production processes,given the abundant supply of labour in these countries, wherein capital is scarce.The enactment of the Micro, Small and Medium Enterprises Development (MSMED) Act,2006 was a landmark initiative taken by the Government of India to enable the SMEs’competitive strength, address the issues and challenges and reap the benefits of the globalmarket. SME policy initiatives at the national and state level are aimed at strengthening therole of SMEs at the base as well as at the higher level.With globalisation, all forms of production of goods and services are getting increasinglyfragmented across countries and enterprises. With large players adopting different modelsof business that include involvement of the traditional partners, suppliers or distributors at adifferent level, SMEs now are experiencing a new model of functioning in the value chain.The past few years has seen the role of the SME segment evolve from a traditionalmanufacturer in the domestic market to that of an international partner. The restructuringof production at the international level through increased outsourcing is having significanteffects on small and medium entrepreneurs in a positive as well as negative manner.Demand in terms of new niche products and services are providing more opportunities forSMEs that are in a better position to take advantage of their flexible nature of operations.However, at the same time they have realized their drawback in terms of inadequateavailability of managerial and financial resources, lack of working capital, personnel trainingand inability to innovate on a faster pace.The combined effect of market liberalisation and deregulation has forced the SME segmentto change their business strategies for survival and growth. Some of the changes that SMEsare focusing on include acquiring quality certifications, increasing use of ICT, creating e-business models and diversification to meet the increasing competition. Globalisation,economic liberalisation and the WTO regime would undoubtedly open up a uniqueopportunity for the largest business community, i.e. SMEs through effective involvement ininternational trade by streamlining certain factors, such as, access to markets, access totechnology, access to skills, finance, development of necessary infrastructure, SME-taxfriendly environment, exchanges of best practices to name a few. 20
  21. 21. The SME sector has also registered a consistently higher growth rate than the overallmanufacturing sector. In fact, it plays a dual role since the output produced by SMEs is notonly about final consumption but also a source of capital goods in the form of inputs toheavy industries.3.7 Financing the SMEsIn Feb 2008, the Ministry of Micro, Small and Medium Enterprises (MSME), continued withits dereservation policy by removing 79 items from the list of 114 items reserved specificallyfor SSI (small scale industries) manufacturing. Only 35 items remain in the reservedcategory from the total 836 selected in 1994 denoting the declining monopoly of the SSIsegment on the reserved products. However, the government has set up various schemes inplace such as the Credit Linked Capital Subsidy Scheme, MSME Cluster DevelopmentScheme and ISO 9000 Reimbursement Scheme to help SMEs for procuring timely funds.Also the government has put in place the Credit Guarantee Scheme to encourage banks tolend up to Rs 0.50 million without collateral. There has also been a recent budgetannouncement of setting up of a Risk Capital Fund.Though SMEs are being touted as the priority sector within the economy, they continue toface problems pertaining to finance. When it comes to banks, they have a very traditionalway of lending to this segment against collateral and SMEs end up being under financed.Evidently, the biggest challenge before the SMEs today is to have access to non debt basedand non-traditional financial products such as external commercial borrowings, privateequity, factoring etc.Lately this segment has been witnessing winds of change in the new sources of capital- inthe form of private equity (PE) and foreign direct investments (FDI). In Jan 2008, The SorosEconomic Development Fund (SEDF), Omidyar Network and Google.org announced a Smallto Medium Enterprise Investment Company with an initial corpus of $17 million for providingcapital to SMEs in underserved markets. Mauritius-based Frontline Strategy launched a$200 million India Industrial Growth Fund (IIGF) for investment in SMEs targetingcompanies, primarily in the industrial space with revenues between Rs 200 – 1,000 million.In 2007, Mauritius-based Horizon advisors launched Ambit Pragma Fund I, an Indiadedicated PE fund, with a corpus of $100 million for providing equity capital andprofessional management advice to SMEs. 21
  22. 22. Investments in the SME sector are not only by PE funds but this sector is also attractingFDI. In this respect the government has removed the 24 per cent cap on FDI in the SMEsector. Foreign entities are also keen on promoting trade and cooperation between SMEs ofdifferent countries. Genesis Initiative, an UK-based organization consisting ofentrepreneurs, policy makers and SMEs, is trying to forge mutual cooperation betweenSMEs in India and UK for in terms of JVs and partnerships in sectors such as textiles, IT,infrastructure etc.CHAPTER 2 : COMPANY BACKGROUNDBank of Baroda (BoB) is the 3rd largest bank in India, after State Bank of India and Punjab National Bank andahead of ICICI Bank. BoB has total assets in excess of Rs. 2.27 lakh crores, or Rs. 2,274 billion, a network of over3000 branches and offices, and about 1100+ ATMs. It offers a wide range of banking products and financial servicesto corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries andaffiliates in the areas of investment banking, credit cards and asset management. [1]2.1 Bank’s Mission Statement2.2 Brief HistoryBank of Baroda was incorporated in 1908 by Maharaj Sayajirao Gaekwad III. It launched its first branch in 1910 inAhmedabad. In 1953, its first branches in Kampala and Mombasa became operational. Its overseas branch inNairobi was opened in 1954.2.3 Products And ServicesBank of Baroda provides it banking products and services in several categories like personal, international, business,treasury, corporate and rural. In personal banking section Bank of Baroda offers products like deposits, debit cards,Gen-Next, personal banking services, loans, lockers and credit cards. 22
  23. 23. In business banking sector, Bank of Baroda offers products and services such as deposits, business banking services,loans and advances and lockers. In corporate banking section, Bank of Baroda offers products and services likewholesale banking, loans and advances, deposits and corporate banking services.2.4 Bank’s LogoBank’s new logo is a unique representation of a universal symbol. It comprises dual ‘B’ letterforms that hold therays of the rising sun. They call this the Baroda Sun.The sun is an excellent representation of what our bank stands for. It is the single most powerful source of light andenergy – its far reaching rays dispel darkness to illuminate everything they touch. At Bank of Baroda, it seek to bethe source that will help all our stakeholders realise their goals. To our customers, we seek to be a one-stop, reliablepartner who will help them address different financial needs. To our employees, we offer rewarding careers and toour investors and business partners, maximum return on their investment.2.5 Business & Financial PerformanceThe Bank has reported a healthy growth in its business and profits with improvement in all key parameters duringFY10. [2]  As stated earlier, its Global Business touched a new milestone of Rs 4,16,080 crore in FY10 reflecting a growth of 24.0% (y-o-y).  Both its domestic deposits and advances increased at the above-industry pace of 22.4% and 21.3%, respectively.  The Bank recorded a growth of 44.0% in SME credit, 27.0% in farm credit and 24.0% in retail credit reflecting a well-diversified growth achievement.  Total assets of the Bank’s overseas operations increased from Rs 51,165 crore to Rs 68,375 crore registering a growth of 33.6% during the year under review.  The Bank’s Net Profit at Rs 3,058.33 crore for FY10 reflected a robust year-on-year growth of 37.3%.  As the Bank’s primary objective has been to grow with quality, the Bank focused on containing the impaired assets to the minimum possible level. While the Gross NPA in domestic operations stood at 1.64% at end-March 2010, the same for Overseas Operations was at 0.47%. In spite of growing slippages for Indian banking industry during FY10, our Bank succeeded in restricting its global Gross NPA level to 1.36% and Net NPA level to 0.34% by end-March, FY10. 23
  24. 24. CHAPTER 3 : SME POLICY3.1 ObjectivesThe SME Loan Policy is framed with the following objectives:  To improve flow of credit to SME Sector.  To formulate norms of lending to SME sector, to ensure availability of adequate and timely credit to the sector.  To provide guidelines to the branches to dispense credit to SME Sector.  To devise an organizational structure at all levels for handling SME credit portfolio in a more focused manner.  To comply with terms of Policy package announced by Hon’ble Union Finance Minister on 10.08.2005 and further guidelines received from Reserve Bank of India from time to time for improving flow of credit to SME Sector.3.2 Scope of PolicyThis Policy will form a part of Bank’s Domestic Loan Policy and will coverfollowing: 24
  25. 25.  Composition of SME Sector  Broad guidelines on lending to SME Sector  SME Loan Factory Model  Credit Rating and Pricing Policy  Identifying Thrust Industries  Discretionary lending powers  Training needs  Reporting and Monitoring System3.3 Small & Medium Enterprises SectorThe SME segment is broadly classified as under in MSMED ACT, 2006 :Particulars Investment in Plant & Investment in Equipment Machineries in case of in case of Service Sector Manufacturing Enterprises * Enterprises *Micro Enterprises Upto Rs. 25/- lacs Upto Rs.10/- lacsSmall Enterprises Above Rs. 25/- lacs and Above Rs.10/- lacs and upto Rs.500/- lacs upto Rs.200/- lacsMedium Above Rs.500/- lacs and Above Rs.200/- lacs and upEnterprises upto Rs.1000/- lacs to Rs.500/- lacs* original cost excluding land and building and the items specified by the Ministry of Small Scale Industries** original cost excluding land & Building and Furniture, Fittings and other items not directly related to the servicerendered or as may be notified under MSMED Act, 20063.4 Bank’s Approach Towards SME SectorSMEs are growth engines for development of Economy. Bank has therefore for internal purposes given focusedattention to finance all Commercial enterprises i.e. enterprises which may be outside the purview of regulatorydefinition of SME but having turnover upto Rs 150.00 crores and new infrastructure and real estate projects wherethe project cost is upto Rs. 50/- crores by treating them as part of SME segment. SME Banking business will thusinclude the following across the bank:  Micro, Small and Medium Enterprises – as per regulatory definition irrespective geographical location, i.e. rural, semiurban, urban, metro areas.  All other entities with their annual sales turnover of Rs. 1/- crore to Rs. 150/- crores and new infrastructure and real estate projects, where the project cost is upto Rs. 50/- crores.  SMEs which are Associate/sister concerns of Wholesale Banking customers. 25
  26. 26.  Clubs, Trusts, etc.  Financing under various Government schemes launched for MSME Sector.However, such units, which are outside the purview of regulatory definition will not form part of Priority Sectorlending.3.5 Establishment Of SME Loan FactoriesBusiness Model which operates on assembly line principle is adopted by the bank for hassle free and fasterdispensing of credit to SME segment. This model titled SME Loan factory has separate Hub for CentralizedProcessing of SME proposals.SME LOAN FACTORY :To grab vast business opportunities available and with an aim to extend focused attention to Industries & ServiceSector, Bank of Baroda has come out with an unique model in the form of SME LOAN FACTORY exclusivelyfor SMEs.  It is a revolutionary step taken by Bank of Baroda amongst the Nationalised Banks. It envisages setting up of Centralized Processing Hub to ensure speedy appraisal and sanctioning of proposal of SME Sector within a time bound schedule.  The model works on assembly line principles with simplified processes using latest technology and in- house skilled men power to deliver focused services to SME customers.  A team of Relationship Officers/Relationship Managers have been stationed at different key places spread over the micro segment of the city who will reach out to SME customers.  As of March, 2009, 34 SME Loan Factories have been operationalized across the country.Attractive features of the model are as under :  Team of officers having expertise in the area of credit with positive approach is selected.  Instead of appointing DSAs(Direct Selling Agents), bank has appointed officers from existing dedicated team only.  The hub’s main role is ensuring speedy appraisal & sanctioning of proposals pertaining to SME sector in a time bound program.  The team members reach out to different market segments.  Its important feature is working of the SME Loan Factory on assembly line principles with simplified processes.  We have two nodes to take care of the marketing /sales(SALES HUB) and credit processing sanction(CREDIT HUB), under a single umbrella of the SME Loan Factory. 26
  27. 27. 3.6 Targets for Priority Sector / SME Sector LendingAs regards lending to SME Sector, Banks are advised to fix their own target in order to achieve a minimum 20%YOY growth in credit to SME as per statutory guidelines so as to double flow of credit to SME sector by the year2009-10. There is no sub-target fixed for lending to small enterprises sector. However in order to ensure that creditis available to all segments of the Small Enterprises sector, banks are advised to ensure that 60% of the totaladvances to small enterprises sector should go to Micro Enterprises as under:  40% to Micro (manufacturing) enterprises with investment in plant and machinery upto Rs.5 lacs and Micro(service) enterprises having investment in equipment upto Rs.2 lacs  20% to Micro (manufacturing) enterprises with investment in plant and machinery above Rs.5 lacs and upto Rs.25 lacs and Micro(service) enterprises having investment in equipment above Rs.2 lacs and upto Rs.10 lacs.3.7 Guidelines for Takeover of Advance Accounts:There are two types of compliances:Non-Financial norms to be complied in case of takeover of SME accounts as per regulatory guidelines orSME as per expanded coverage:Sr.N Norms Deviation allowedo.a. Various authorities have been Profit-making (i.e. net profit before tax) concerns only as per authorized to permit deviations in last audited Balance Sheet. respect of accounts.b. Accounts be rated as per the new credit rating model (BOBRAM) subject to ‘minimum’ BOB 6. Accounts, which are not covered under BOBRAM Credit Rating System, may be considered under permitted deviation as per extant guidelines issued from time to time.c. There should not have been any reschedulement /restructuring in the account during last two years.d. Satisfactory report from the existing bank/FI and/or Various authorities have been satisfactory conduct of account as per latest statement of authorized to permit deviations in accounts. respect of accounts.e. Accounts with existing lenders should be under the category of “Standard Assets”.f. All other existing norms, guidelines as applicable to borrowal accounts are to be scrupulously followed. 27
  28. 28. Financial norms in case of takeover of SME accounts as per regulatory guidelines or SME accounts as perexpanded coverage:Ratio Norms Authority who can allow Deviation 1 2 3 Proposed Micro & Small Medium Units Industries Enterpris outside the under es under purview of manufactu- manufact- regulatory ring sector uring sector definition and service and service but covered Sector as per Sector as per under SME regulatory regulatory Sector as guidelines guidelines Per expanded definition.Current Minimum Minimum Minimum Various authorities have been authorizedRatio 1.17 & 1.20 & 1.33 & to permit deviations in respect of above above above accounts.Debt Maximum Maximum Maximum Various authorities have been authorizedEquity 4:1 3:1 3:1 to permit deviations in respect ofRatio accounts...(TTL /TNW)Total Maximum Maximum Maximum Various authorities have been authorizedoutside 4.5:1 4.5:1 4.5:1 to permit deviations in respect ofliability/ accounts..TNWAverage Minimum Minimum Minimum Various authorities have been authorizedDSCR 1.75 with a 1.75 with 1.75 with a to permit deviations in respect offor condition a condition accounts.Term that in any condition that in anyLoan one year it that in one year it should not any one should not be below year it be below 1.25 should 1.25 not be below 1.25 28
  29. 29. 3.8 SME ProductsThe following products are launched for SME sector across the country:  Baroda SME Gold Card providing additional 10% facility over the assessed MPBF for meeting emergent business requirements.  Baroda SME Loan Pack providing single line of credit for meeting SME borrowers’ working capital as well as long term requirements within the overall limit approved by the bank as per the eligibility, i.e. 4 times of borrower’s tangible net worth as per last audited Balance Sheet, or Rs. 2/- crores, whichever is lower.  Baroda Overdraft against Land & Building is a unique product for financing working capital requirements, long term margin requirements of SME borrowers against the security of unencumbered land and building belonging to the unit, or, promoters of the unit, upto a maximum limit of Rs. 2/- crores depending on the location, viz. rural and semi-urban, urban and metro.  Baroda Vidyasthali Loan providing finance to Educational Institutional upto a limit of Rs. 5/- crores on liberalized terms. This scheme is implemented at select branches of the Bank depending on the business potential.  Baroda Arogyadham Loan for providing finance for setting up new Nursing Homes, Hospitals including Pathological Laboratories, renovation of existing Nursing Homes/Hospitals, purchase of medical diagnostic equipments as also office equipments etc. and to meet working capital requirement upto a maximum limit of Rs.5/- crores, depending on the location, on liberalized terms. This scheme is also implemented at select branches of the bank.  Scheme for financing existing SME customers/Current Account holders for purchase of new vehicles upto a limit of Rs. 50/- lacs with 10% margin. 29
  30. 30. 4.) FOOD & AGRO BASED INDUSTRIES 30
  31. 31. 4.1) EXECUTIVE SUMMARYEmerging Food Processing SMEs of India attempts to provide a platform to the FoodProcessing SMEs, so as to facilitate their interface with potential global partners and buyers.The report has profiled 262 companies with a turnover of less than Rs 1,000 mn. Of these,83% are small-scale firms and 17% are medium scale. There are 53 companies havingpresence in more than one industry sub-segment. Of the balance 209 companies profiled,around 33% are into grain processing & spices, 10% each in non-alcoholic beverages andpackaged/convenience food, 8% in fruits & vegetables, 7% each in bakery and milk & milkproducts, 5% in sugar & confectionary, 4% each in meat & poultry and marine products,3% in alcoholic beverages and 9% in the others sub-segment.The regional representation of companies in the report suitably reflects the geographicalconcentration of the Indian food processing industry. The profiled companies are from 17states and 2 union territories. The list consists of 89 companies from West India (49%registered in Mumbai-Navi Mumbai region, followed by 8% each from Ahmedabad andPune), 82 from the South (20% each from Chennai and Hyderabad) and 68 companiesfrom the North (50% registered in Delhi, followed by 21% from Rajasthan). These regionsare the major industrial clusters of food processing SMEs in the country.Of the 262 companies profiled, as many as 245 companies provided us sufficient datapoints to enable a statistical analysis. Some of the insights revealed include the following:In terms of ownership patterns, 13% are proprietary firms, 17% partnership firms, 43%private limited companies and the rest 27% are public limited companies. As many as 65%of profiled companies are engaged solely in manufacturing, while 35% are engaged inmanufacturing as well as trading. Around 79% of the companies began operations duringthe 1980s and 1990s, while 18% of the companies are relatively new and have begunoperations post-2000. 71% companies have a single manufacturing facility while 27%operate with 2 or more plants. In terms of IT penetration, 42% companies have a website.The food processing industry is expected to continue its high-growth trajectory in the nearfuture, and SMEs are expected to play a critical role. Emerging Food Processing SMEs ofIndia will provide the right platform for SMEs, enabling them to become globallycompetitive.4.2) METHODOLOGY 31
  32. 32. The Micro, Small and Medium Enterprises Development Act of 2006, which came into effectfrom October 2, 2006 defines SMEs as entities that have an investment of above Rs 10 mnand below Rs 100 mn in plant and machinery for firms engaged in production of goods.Considering the challenges entailed in tapping financial information from a highlyfragmented sector, the analysis has formulated a correlation between investment andturnover to arrive at a benchmark of Rs 1,000 mn turnover for the SMEs.Emerging Food Processing SMEs of India focuses on processors of food and foodproducts across the value chain, from fruits & vegetables to meat & poultry, bakery, non-alcoholic beverages, packaged/convenience food, milk & milk products, marine products,alcoholic beverages and grain processing. Trading companies have been excluded. Thereport also includes diversified companies operating in the food processing and alliedsegments and having business interests in other industries. The report has excludedsubsidiaries of large Indian business houses, multinational companies and subsidiaries ofmultinational companies, thus honouring the true Indian entrepreneurial spirit that theSMEs represent.The companies that qualified on the basis of turnover were further screened throughanother set of parameters to arrive at a truly representative list of emerging SMEs.Companies with negative net worth and those declared financially sick by the Board forIndustrial & Financial Reconstruction (BIFR) were eliminated. Other considerations includedfinancial growth performance over the past two years, growth prospects and productionefficiencies.Every effort was made to ensure that the report covers food processors located across thelength and breadth of the country. Based upon the Annual Survey of Industries (ASI) andNational Sample Survey Organization (NSSO) And Centre for monitoring Indian economyand Capitaline database. we identified a large universe of auto component manufacturers.The sections titled Industry Report and SME Insights are special analyses on the foodprocessing industry which looks at current trends, competitive dynamics and the futureoutlook for the segment. The SME Insights section presents analytical findings drawn fromthe primary information collated by leading consulting firms across the world.4.3) DATA COLLECTION AND ANALYSISOverviewThe food processing industry in India is a sunrise sector that has gained prominence inrecent years. Availability of raw materials, changing lifestyles and relaxation in policies hasgiven a considerable push to the industry’s growth. This sector is among the few thatserves as a vital link between the agriculture and industrial segments of the economy.Strengthening this link is of critical importance to improve the value of agriculturalproduce; ensure remunerative prices to farmers and at the same time create favourabledemand for Indian agricultural products in the world market. A thrust to the foodprocessing sector implies significant development of the agriculture sector and ensuresvalue addition to it. 32
  33. 33. The Indian food processing industry holds tremendous potential to grow, considering thestill nascent levels of processing at present. Though India’s agricultural production base isreasonably strong, wastage of agricultural produce is sizeable. Processing of fruits andvegetables is a low 2%, around 35% in milk, 21% in meat and 6% in poultry products. Byinternational comparison, these levels are significantly low - processing of agricultureproduce is around 40% in China, 30% in Thailand, 70% in Brazil, 78% in the Philippinesand 80% in Malaysia. Value addition to agriculture produce in India is just 20%, wastage isestimated to be valued at around US$ 13 bn (Rs 580 bn).India, with an arable land of 184 mn hectares is, the highest producer of milk in the worldat 90 mn tonnes p.a., second largest producer of fruits & vegetables (150 mn tonnes), thirdlargest producer of foodgrains and fish and has the largest livestock population.Considering the wide-ranging and large raw material base that the country offers, alongwith a consumer base of over one billion people, the industry holds tremendousopportunities for large investments.Ministry of Food Processing IndustriesThe Ministry was set up in 1998 and the industry segments that come under its purvieware: • Fruit & Vegetable processing (including freezing and dehydration) • Grain Processing • Processing of Fish (including canning and freezing) • Processing and refrigeration of certain agricultural products, dairy products, poultry and eggs, meat and meat products • Industries related to bread, oilseeds, meals (edible), breakfast foods, biscuits, confectionery, malt extract, protein isolate, high protein food, weaning food and extruded food products (including other ready-to-eat foods) • Beer, including non-alcoholic beer • Alcoholic drinks from non-molasses base • Aerated water and soft drinks • Specialised packaging for food processing industries.The Ministry of Food Processing Industries, GoI, has estimated the size of the Indian foodmarket at US$ 191 bn (Rs 8,600 bn). The processed food market is projected to be overUS$ 100 bn, of which the primarily processed food market accounts for 60%, while thevalue-added processed food market is around 40%.The average annual growth of the food processing industry has been around 8% betweenFY01-FY08. The segments that have driven the growth are the beverages and meat & meatproducts and processed fish sectors. The food processing industry in India has a share of1.5% in the total GDP of the country, and as part of total manufacturing accounts for 9%.India’s share in world trade in respect of processed food is about 1.6%.An extensive and highly fragmented industry, the food processing sector largely comprisesof the following sub-segments: fruits & vegetables, milk and milk products, beer & alcoholicbeverages, meat and poultry, marine products, grain processing, packaged/conveniencefood and packaged drinks. A large number of players in this industry are small sizedcompanies, and are largely concentrated in the unorganised segment. This segmentaccounts for more than 70% of the output in volume terms and 50% in value terms. 33
  34. 34. However, though the organized sector is comparatively small, it is growing at a much fasterpace.Food Processing Units in Organised Sector (numbers)Source: Ministry of Food Processing Industries, Annual Report 2007-08.Industry Sub-SegmentsFruits & VegetablesThe installed capacity of fruits and vegetables processing industry has increased from 1.1mn tonnes in January 1993 to 2 mn tonnes in 2000 and further to 2.2 mn tonnes in 2008.The processing of fruits and vegetables is estimated to be around 2.2% of the totalproduction in the country. The prominent processed items in this segment are fruit pulpsand juices, fruit based ready-to-serve beverages, canned fruits and vegetables, jams,squashes, pickles, chutneys and dehydrated vegetables. Some recent products introduced 34
  35. 35. in this segment include vegetable curries in retortable pouches, canned mushroom andmushroom products, dried fruits and vegetables and fruit juice concentrates.The fruits and vegetable processing industry is highly decentralized, and a large number ofunits are in the cottage / household and small scale sector, having small capacities of up to250 tonnes/annum. Since 2000, the industry has seen significant growth in ready-to-servebeverages, fruit juices and pulps, dehydrated and frozen fruits and vegetable products,pickles, processed mushrooms and curried vegetables, and units engaged in thesesegments are export oriented.The domestic industry is yet to change its preference in favour of processed foods.Consumption of value added fruits and vegetables is low compared to the primaryprocessed foods, and fresh fruits and vegetables. The inclination towards processed foods ismostly visible in urban centers.A significant thrust can be given to this sector by strengthening linkages between farmersand processors. The weak linkage between farmers and markets, as well as, farmers andprocessing companies has brought about inefficiencies in the supply chain and encouragedthe involvement of middlemen. The Government of India’s National Agriculture Policyenvisages the participation of the private sector through contract farming and land leasingarrangements which not only assures supply of raw material for processing units, but also amarket for agriculture produce, accelerate technology transfer and capital inflow into theagriculture sector.Contract farming in wheat practiced in Madhya Pradesh by Hindustan Lever Ltd and byPepsi Foods Ltd in Punjab for tomatoes, foodgrains, spices and oilseeds are some successfulexamples of contract farming in India, which changed the farming landscape and promotedthe cultivation of processable variety of farm produce. Such innovative practices will powerthe fruits, vegetables and grain processing industry. Apart from such initiatives, fiscalincentives and tax concessions will also give impetus to the sector. The five-year 100% taxexemption announced by the Government in FY05 was one such incentive for upcomingfruits and vegetable processing units.Milk and Milk ProductsIndia has one of the highest livestock population in the world, accounting for 50% of thebuffaloes and 20% of the world’s cattle population, most of which are milch cows and milchbuffaloes. India’s dairy industry is considered as one of the most successful developmentprogrammes in the post-Independence era.As of 2008-09 total milk production in the country was over 100 mn tonnes with a percapita availability of 229 gms/day. The industry has been recording an annual growth of4% during the period 1993-2007, which is almost 3 times the average growth rate of thedairy industry in the world. Milk processing in India is around 35%, (with the organizeddairy industry accounting for 13% of the milk produced) while the rest of the milk is eitherconsumed at farm level, or sold as fresh, non-pasteurized milk through unorganisedchannels.Dairy Cooperatives account for the major share of processed liquid milk marketed in theIndia. Milk is processed and marketed by 170 Milk Producers’ Cooperative Unions, whichfederate into 15 State Cooperative Milk Marketing Federations. Over the years, several 35
  36. 36. brands have been created by cooperatives like Amul (GCMMF), Vijaya (AP), Verka (Punjab),Saras (Rajasthan). Nandini (Karnataka), Milma (Kerala) and Gokul (Kolhapur).The milk surplus states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan, Gujarat,Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. The manufacturing of milkproducts is concentrated in these milk surplus States.As per data released by the Ministry of Food Processing Industries, exports of dairyproducts have been growing at the rate of 25% p.a. in quantity terms and 28% in valueterms since 2001. Significant investment opportunities exist for the manufacturing of value-added milk products like milk powder, packaged milk, butter, ghee, cheese and ready-to-drink milk products.Meat & PoultrySince 1995, production of meat & meat products has been steadily growing at a rate of 4%p.a.. Currently, the processing level of buffalo meat is estimated at 21%, poultry 6% andmarine products 8%. Only about 1% of the total meat is converted into value addedproducts like sausages, ham, bacon, kababs, meat balls, etc. Production of meat isgoverned under local by-laws as slaughtering is a state subject. Processing of meat islicensed under the Meat Food Products Order, 1973.In 2003 India had a livestock population of 470 mn that included 205 mn cattle and 90 mnbuffaloes. The country produces about 450 mn broilers and 30 billion eggs annually. Cattle,buffaloes, sheep and goat, pigs and poultry are the types of animals which are generallyused for production of meat. Slaughter rate for cattle as a whole is 20%, for buffaloes it is41%, pigs 99%, sheep 30% and 40% for goats. The country has 3,600 slaughter houses, 9modern abattoirs and 171 meat processing units licensed under the meat products order.The poultry industry is among the faster growing sectors rising at a rate of 8% per year.Vertical integration of poultry production and marketing has lowered costs of production,marketing margins and consumer prices of poultry meat. There are eight integrated poultryprocessing units in the country, which hold a significant share in the industry.Marine ProductsIndia is the third largest fish producer in the world and ranks second in inland fishproduction. India’s vast potential for fishes, from both inland and marine resources, issupplemented by the 8,000 km coastline, 3 mn hectares of reservoirs, 1.4 mn hectares ofbrackish water, 50,600 sq km of continental shelf area and 2.2 mn sq km of exclusiveeconomic zone.Processing of marine produce into canned and frozen forms is carried out almost entirelyfor the export market. Infrastructure facilities for processing of marine products include 372freezing units with a daily processing capacity of 10,320 tonnes and 504 frozen storagefacilities with a capacity of 138,229.10 tonnes. Apart from these, there are 11 surimi units,473 pre-processing centres and 236 other storages.Processed fish products for export include conventional block frozen products, individualquick frozen products (IQF), minced fish products like fish sausage, cakes, cutlets, pastes,surimi, texturised products and dry fish etc. 36
  37. 37. Exports of marine products have been erratic and on a declining trend which can be owedto the adverse market conditions prevailing in the EU and US markets. The anti-dumpingprocedure initiated by the US Government has affected India’s shrimp exports to the US.Grain ProcessingGrain processing includes milling of rice, wheat and pulses. As of 1999-00, there were over91,000 rice hullers and 2,60,000 small flour mills engaged in primary milling. Also, thereare about 43,000 modernised rice mills/huller-cum-shellers. Around 820 large flour mills inthe country convert about 10.5 mn tonnes of wheat into wheat products. Also there are10,000 pulse mills milling about 75% of pulse production of 14 mn tonnes in the country.Primary milling of grains is the most important activity in the grain processing segment ofthe industry. However, primary milling adds little to shelf life, wastage control and valueaddition. Around 65% of rice production is milled, mostly in modern rice mills. However,the sheller-cum-huller mills operating give low recovery. Wheat is processed for flour,refined wheat flour, semolina and grits. Apart from the 820 large flour mills, there are over3 lakh small units operating in this segment in the unorganised sector. Dal milling is thethird largest in the grain processing industry, and has approximately 11,000 mechanisedmills in the organised segment. Oilseed processing is another major segment, an activitylargely concentrated in the cottage industry. According to estimates, there areapproximately 2.5 lakh ghanis and kolus (animal operated oil expellers), 50,000 mechanicaloil expellers, 15,500 oil mills, 725 solvent extraction plants, 300 oil refineries and over 175hydrogenated vegetable oil plants.Indian rice, especially Basmati rice, has gained international recognition, and is a premiumexport product. Branded grains as well as grain processing is now gaining popularity.Beer & Alcoholic BeveragesIndia is the third largest market for alcoholic beverages in the world, and the domesticmarket is largely dominated by United Breweries, Mohan Meakins and Radico Khaitan. Thedemand for beer and spirits is estimated to be around 373 mn cases per year. There are 12joint venture companies having a licensed capacity of 33,919 kilo-litres p.a. for productionof grain based alcoholic beverages. Around 56 units are manufacturing beer under licensefrom the Government of India.The two segments in the liquor segment, country liquor and Indian Made Foreign Liquor,both cater to different sections of society. The former is consumed in r ural areas and bylow-income groups, while the latter is consumed by the middle and high income groups.There are approximately 23,000 licensed liquor outlets in India, with another 10,000outlets in the form of bars and restaurants. Regulations in this sector differ state-wise. InTamil Nadu, Kerala and Andhra Pradesh, the distribution is controlled by the stategovernment, and any change XVIII in the ruling party has a direct impact on the availabilityof alcohol. In Uttar Pradesh, liquor distribution licenses were earlier based on bidding, andthe highest bidder was given the license. This has not changed to the lottery allotmentsystem. Gujarat Government has banned the sale and distribution of liquor in the state.The wine industry in India has come into prominence lately and has been receiving supportfrom the Government as well. The market for this industry has been estimated to be 37
  38. 38. growing at around 25% annually. Maharashtra has emerged as an important state for themanufacture of wines. There are more than 35 wineries in Maharashtra, and around 1,500acres of grapes are under cultivation for wine production in the state. The MaharashtraGovernment has declared wine-making business as small-scale industry and has alsooffered excise concessions.Consumer FoodsThis segment includes packaged foods, aerated soft drinks, packaged drinking water andalcoholic beverages.Packaged / Convenience FoodsConsumer food industry mainly consists of ready-to-eat and ready-to-cook products, chips,salted snacks, pasta products, cocoa based products, bakery products, biscuits, soft drinks,etc.There are around 60,000 bakeries, 20,000 traditional food units and several pasta foodunits. The bakery industry is among the few processed food segments whose productionhas been increasing steadily in the country in the last couple of years. Bakery productsinclude bread, biscuits, pastries, cakes, buns, rusk etc. This activity is mostly concentratedin the unorganized sector. Bread and biscuits constitute the largest segment of consumerfoods with an annual production is around 4.00 mn tonnes. Bread manufacturing isreserved for the small scale sector. Out of the total production of bread, 40% is produced inthe organized sector and the remaining 60% in the unorganised sector. Similarly, in theproduction of biscuits, share of unorganized sector is about 80%.Cocoa ProductsThere are 20 units engaged in the manufacture of cocoa products like chocolates, drinkingchocolate, cocoa butter substitutes, cocoa based malted milk foods with an annualproduction of approximately 34,000 tonnes.Soft drinksThis segment is the 3rd largest in the packaged foods industry, after packed tea andpacked biscuits. The aerated soft drinks industry in India comprises over 100 plants andprovides direct and indirect employment to over 125,000 employees. It has attracted oneof the highest foreign direct investments in the country. Its position is strengthened bystrong forward and backward linkages with glass, plastic, refrigeration, sugar and thetransportation industry.Penetration levels of aerated soft drinks in India are quite low compared to otherdeveloping and developed markets, which is indicative of the potential the segment holdsfor further growth.Constraints & Drivers of GrowthGrowing urbanization, increasing disposable income, emergence of organised food retail,changing lifestyles and food consumption patterns are the key factors driving growth for 38
  39. 39. processed foods in India. These are post-liberalisation trends that have given an impetus tothe sector.Consumption patterns in India have been undergoing a visible shift. Earlier, the share ofcereal products was the highest, followed by milk & milk products, vegetables, edible oiland meat products. However, in recent years, the growth rates for fruits, vegetables, meatand dairy products have been higher than cereals and pulses. This shift in turn implies thatthere is also a need to diversify the food production base to match the changingconsumption preferences.This shift in consumption follows the pattern observed in developed countries in theevolution of the global food demand. There is a shift from carbohydrate staples to animalsources and sugar. Going by this pattern, in future, there will be increasing demand forprepared meals, snack foods and convenience foods and further on the demand would shifttowards functional, organic and diet foods.Some of the key constraints identified by the industry include: • Lack of suitable infrastructure in terms of cold storage, warehousing, etc • Lack of adequate quality control and testing infrastructure • Inefficient supply chain and involvement of middlemen • High inventory carrying cost • High taxation • High packaging cost • Affordability and cultural preference of fresh foodHighest priority has been accorded by the Government for the development ofinfrastructure. The Government has already taken several initiatives on this front whichinclude developing of food parks, packaging centres, modernised abattoirs, integrated coldchain facilities, irradiation facilities and value added centres.The initiative to develop food parks was taken primarily in order to assist the small andmedium enterprises which are unable to invest in capital intensive activities. So far, 22 foodparks have come into operation which provide common facilities like cold storage, foodtesting and analysis laboratories, packaging centres, etcIn terms of policy support, the ministry of food processing has taken the followinginitiatives: • Formulation of the National Food Processing Policy • Complete de-licensing, except for alcoholic beverages • Declared as priority sector for lending in 1999 • 100% FDI on automatic route • Excise duty waived on fruits & vegetables processing from 2000 – 01 • Income tax holiday for fruits & vegetables processing from 2004 – 05 • Customs duty reduced on freezer van from 20% to 10% from 2005 – 06 • Implementation of Fruit Products Order • Implementation of Meat Food Products Order • Enactment of FSS Bill 2005 • Food Safety & Standards Bill, 2005 39
  40. 40. Apart from these initiatives, the Centre has requested state Governments to undertake thefollowing reforms: • Amendment to the APMC Act • Lowering of VAT rates • Declaring the industry as seasonal • Integrate the promotional structureInvestmentsThe total inflow of foreign direct investment in the food processing sector has been aroundRs 55 bn between 1991 to November 2008. During the last five years, FDI witnessed aninflow of over Rs 24 bn of foreign investment. The highest investment in a single year wasin 2001-02 amounting to Rs 10 bn.Maharashtra was among the front-runners to receive the highest share of FDI in foodprocessing during the last five years. The dairy and consumer industrise received FDI worthRs 2.7 bn each as foreign investment. Nearly 30 per cent of FDI in the food processingsector comes from EU countries such as Netherlands, Germany, Italy and France. Perfetti,Cadbury, Godrej-Pilsbury, Nutricia International, Manjini Comaco are some of thesuccessful ventures from EU countries.Major Food Processing Companies in IndiaThe entry of multinational companies has increased competition in the food processingindustry. At the same time, these companies are facing tough competition from strongIndian brands. This level of competition has increased innovations, facilitating a sustainedgrowth of the sector and also improve global competitiveness. The emerging new growthphase of the sector is just in its initial stages with the potential for India to emerge as aleading food supplier to the world.SWOT Analysis of Food–Processing IndustryStrengths • Abundant availability of raw material • Priority sector status for agro-processing given by the central Government • Vast network of manufacturing facilities all over the country • Vast domestic marketWeaknesses 40
  41. 41. • Low availability of adequate infrastructural facilities • Lack of adequate quality control & testing methods as per international standards • Inefficient supply chain due to a large number of intermediaries • High requirement of working capital. • Inadequately developed linkages between R&D labs and industry. • Seasonality of raw materialOpportunities • Large crop and material base offering a vast potential for agro processing activities • Setting of SEZ/AEZ and food parks for providing added incentive to develop greenfield projects • Rising income levels and changing consumption patterns • Favourable demographic profile and changing lifestyles • Integration of development in contemporary technologies such as electronics, material science, bio-technology etc. offer vast scope for rapid improvement and progress • Opening of global marketsThreats • Affordability and cultural preferences of fresh food • High inventory carrying cost • High taxation • High packaging cost4.4) FINDINGSSME InsightThe attention that small and medium enterprises are lately commanding from banks,institutions, industry and academicians, has encouraged this study on the SME segment.The SMEs were relatively over-shadowed for long by other economic concerns. As a result,there has been a deficit of authentic information on this segment and has limited theestimation of value contributed by it to India’s economy. Through this primary researchundertaken by the leading consulting firms, we attempt to add value through insights thathave emerged from our study.This study aims to draw a profile of how small and medium companies in the foodprocessing space function. We have attempted to chart their operational structure, businesspractices, preferences, marketing, efficiency parameters, etc. For this quantitative exercise,a sample of 245 companies was considered; the requirement being that at least 80% of theinformation sought has been provided.Some key characteristics of the sample of 245 companies are: • Ownership pattern of companies include: proprietary firms 13.5%, partnership firms 16.5%, private limited companies 43% and public limited companies 27% 41
  42. 42. • The sample covers over 98% of the food processing clusters, except a few inHimachal Pradesh and Jammu & Kashmir• The geographical spread of the sample companies mirrors the concentrationof food processing companies in the country. The West and South have maximumrepresentation. Around 33.5% companies are located in the West, 31% in theSouth, 27.5% in the North and 8% in the East• Reflecting the low capital intensive nature of the industry, around 77% of thecompanies in the sample are small scale enterprises on the basis of investments inplant and machinery. The rest are medium enterprises. (Refer Fig 01)• The representation from the various sub-segments of the industry is asfollows: 34% in grain processing & spices segment, 14% into packaged /convenience food, 8% in non-alcoholic beverages which includes soft drinks, tea,coffee, fruit juices, water, etc, 7% each in milk & milk products and fruits &vegetable processing, 6% into bakery, 5% into sugar & confectionary, 4% in meat &poultry, 3% each into alcoholic beverages and marine products and 9% in theothers segment (Refer Fig. 2). The ‘others’ category include manufacturers of foodcolours, flavours, additives, seeds, guar gum etc. (Refer Fig 02)• Around 65% of the companies are solely into manufacturing, while 35% areengaged in manufacturing as well as trading• Around 78.5% of the companies in the sample began operations between1980 and 2000; only 4% were present prior to 1980s. The rest are relatively newhaving begun operations post-2000• 71% of companies have a single manufacturing facility while 27% operatewith 2 or more plants.• In terms of IT penetration, 42% of the companies have a website. 42
  43. 43. TurnoverOver 50% of the companies in the sample have a turnover of less than Rs 100 mn, andmost of them were private limited companies, followed by proprietary firms. Another 33%were earning over Rs 100 mn but less than Rs 500 mn. Of the remaining 17% of thecompanies which were in the turnover bracket of Rs 500 mn and Rs 1,000 mn, the publiclimited and private limited companies dominated with a share of 60% and 33%respectively.In terms of the regional spread of these companies, a large number of small firms wereconcentrated in the West. The northern and southern region showed a higher proportion ofcompanies falling in the Rs 500 mn and above turnover bracket. 43
  44. 44. Figure 03TopOwnership StructureThe North-based companies once again showed a preference for proprietary form ofownership, similar to that observed among textile SMEs. The companies in the South wereprominently private limited companies. The companies in the Western region were againpredominantly private limited companies. (Refer Fig. 04) 44
  45. 45. BrandingAround 65% of the companies in the sample had branded products. The grain processingand packaged/convenience foods segments were the most prominent among the brandowning companies. Brand consciousness among companies was widespread irrespective oftheir size. It was found that among the small scale companies with turnover less that Rs100 mn, 62% of the companies had branded products. Correspondingly, 69% of thecompanies in the turnover bracket of Rs 500-1,000 mn had developed brands for theirproducts.ExportsAround 114 companies, or 47% of the sample, were exporting their products and 36%were exporting more than 90% of their produce. Of the total exporting firms, 23 companieswere 100% exporters mainly in the grain processing, fruits & vegetables and meat &poultry segments, with many of them exporting directly to foreign clients.Of the exporting companies, 61% have branded products and almost 55% have qualitycertifications. The average capacity utilization among exporting companies was relativelyhigher (80%) compared with those selling only in the domestic market. Segment-wise, thepre-dominant exporters were companies in the grain processing and the fruits & vegetablessegments having a share of 29% and 15% respectively.In terms of the various sub-segments in the food processing industry and their exports, itwas found that companies exclusively into meat & poultry exported over 96% of theiroutput, followed by marine product manufacturers, which on an average exported 93% oftheir produce.Capacity UtilisationThe companies in the study were operating at an average capacity utilisation of 78%.Approximately 44% of the companies were operating at 90% and above of installedcapacity. Of these companies operating at 90% and above capacity, 38% were operating inthe Grain Processing & Spices segment followed by companies in Fruits & VegetableProcessing segment.Regionally, the North-based companies reflected higher capacity utilisation and were on anaverage operating at 82% of installed capacity. In terms of ownership, public limitedcompanies constituted a significant 36% of those operating at more then 90% capacity. Onthe basis of size, the enterprises having turnover between Rs 250-500 mn showed higheraverage capacity utilisation of an average 88%.Average capacity utilisation across segments 45
  46. 46. Table 2TopFuture PlansOf the total 245 companies in the sample, 61% have envisaged strategies for futuregrowth. The plans range from capacity expansion, modernisation, diversification to newmarketing initiatives and venturing into newer markets.Out of the total companies with future plans for growth, 45% of the companies have plansfor expanding their capacity in order to meet the growing demand. A substantial 29% ofthe companies have diversification plans into related or un-related fields.Segment-wise, the grain processing companies showed highest dynamism with 65% of thecompanies in this segment having divulged future growth plans. In terms of future plans, ofthe companies having capacity expansion plans, 33% were from the grain processingsegment followed by packaged/convenience foods (15%). Bakeries accounted for 13% ofthe companies having plans for diversifying their product segment, while 16% companieslooking for newer markets belonged to non-alcoholic beverages segment 46

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