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  2. 2. DELHI, INDIA CERTIFICATE Certified that this project report “STUDY ON BANKING PATTERN AND NEEDS OF SMES.”is the bonafide work of “ NIIKHIL VIRMANI” who carried out theproject work under the supervision of Mr. Pranav Mishra. SIGNATURE SIGNATURE PRANAV MISHRA PRANAV MISHRAHEAD OF THE DEPARTMENT Project InchargeBBA BBALLDIMS LLDIMSMandi road, mandi Mandi road,mandiNew delhi - 49 New delhi -49 2NIIKHILVIRMANI16719201711
  3. 3. DECLARATION This work has not previously been accepted in substance for any degree and is not being concurrently submitted in candidature for any degree / diploma. Signed: …………………….. Date: ……………………….. Statement 2 This project is the result of my own independent work/investigation, except where otherwise stated. Other sources are acknowledged by giving explicit references. A bibliography is appended. Signed: …………………….. Date: ……………………… 3NIIKHILVIRMANI16719201711
  4. 4. ACKNOWLEDGEMENT I owe a great many thanks to a great many people who helped and supported me during the writing of this report. My deepest thanks to Lecturer, [MR.PRANAV MISHRA] for correcting various documents of mine with attention and care. He has taken pain to go through the projectand make necessary correction as and when needed. I express my thanks tothe hod of, [B.B.A], for extending his support. My deep sense of gratitude to MR.PRANAV MISHRA, [STUDY ON BANKING PATTERN ANDNEEDS OF SMES] support and guidance. Thanks and appreciation to thehelpful people at [STUDY ON BANKING PATTERN AND NEEDS OF SMES], for their support. I would also like to thank my Institute and my faculty members without whom this project would have been a distant reality. 4NIIKHILVIRMANI16719201711
  5. 5. 1. 1 Cover page2. Certificate 23. 3 Declaration4. 4 Acknowledgement5. 5 Table of content 1. Introduction 05-35 2. Objectives & Scope of Project 36-37 3. Methodology 38-41 4. Analysis and Interpretation 42-64 5. Limitations 65-65 6. Conclusion 66-70 7. Bibliography 71-71 5 NIIKHILVIRMANI 16719201711
  6. 6. INTRODUCTIONSmall and Medium Enterprises (SMEs) have played a significant role worldover in the economic development of various countries. Over a period oftime, it has been proved that SMEs are dynamic, innovative and mostimportantly, the employer of first resort to millions of people in the country.The sector is a breeding ground for entrepreneurship. The importance ofSME sector is well-recognized world over owing to its significantcontribution in achieving various socio-economic objectives, such asemployment generation, contribution to national output and exports,fostering new entrepreneurship and to provide depth to the industrial base ofthe economy.Small and medium-sized enterprises (SMEs) are the backbone of alleconomies and are a key source of economic growth, dynamism andflexibility in advanced industrialized countries, as well as in emerging anddeveloping economies. SMEs constitute the dominant form of businessorganization, accounting for over 95% and up to 99% of enterprisesdepending on the country. They are responsible for between 60-70% net jobcreations in Developing countries. Small businesses are particularlyimportant for bringing innovative products or techniques to the market.Microsoft may be a software giant today, but it started off in typical SMEfashion, as a dream developed by a young student with the help of familyand friends. Only when Bill Gates and his colleagues had a saleable product 6NIIKHILVIRMANI16719201711
  7. 7. were they able to take it to the marketplace and look for investment frommore traditional sources. SMEs are vital for economic growth anddevelopment in both industrialized and developing countries, by playing akey role in creating new jobs. Financing is necessary to help them set upand expand their operations, develop new products, and invest in new staffor production facilities. Many small businesses start out as an idea from oneor two people, who invest their own money and probably turn to family andfriends for financial help in return for a share in the business. But ifthey are successful, there comes a time for all developing SMEs whenthey need new investment to expand or innovate further. That is wherethey often run into problems, because they find it much harder thanlarger businesses to obtain financing from banks, capital markets or othersuppliers of credit.Common Characteristics of SMEs(a) Born out of individual initiatives & skillsSME startups tend to evolve along a single entrepreneur or a small group ofentrepreneurs; in many cases; leveraging on a skill set. There are otherSMEs being set up purely as a means of earning livelihood. These includesmany trading and retail establishments while most countries continue SMEsto manufacturing services, others adopt a broader definition andinclude retailing as well.(b) Greater operational flexibility 7NIIKHILVIRMANI16719201711
  8. 8. The direct involvement of owner(s), coupled with flat hierarchical structuresand less number of people ensure that there is greater operational flexibility.Decision making such as changes in price mix or product mix in response tomarket conditions is faster.(c) Low cost of productionSMEs have lower overheads. This translates to lower cost of production,least upto limited volumes.(d) High propensity to adopt technologyTraditionally SMEs have shown a propensity of being able to adopt andinternalize the technology being used by them.(e) High capacity to innovate export:SMEs skill in innovation, improvisation and reverse engineering arelegendary. By being able to meet niche requirements, they are also able tocapture export markets where volumes are not huge.(f) High employment orientation:SMEs are usually the prime drives of jobs, in some cases creating up to80%. Jobs SMEs tend to be labour intensive per se and are able to generatemore jobs for every unit of investment, compared to their biggercounterparts. 8NIIKHILVIRMANI16719201711
  9. 9. (g) Reduction of regional imbalancesUnlike large industries where divisibility of operations is more difficult,SMEs enjoy the flexibility of location. Thus, any country, SMEs can befound spread virtually right across, even through some specific location semerge as ‘clusters’.SMEs in IndiaIndia has a vibrant SME sector that plays an important role in sustainingeconomic growth, increasing trade, generating employment and creatingnew entrepreneurship in India. In keeping in view its importance, thepromotion and development of SMEs has been an important plank in ourpolicy for industrial development and a well-structured programme ofsupport has been pursued in successive five-year plans for. SMEs in Indiahave recorded a sustained growth during last five decades. The number ofSMEs in India is estimated to be around 13 million while the estimatedemployment provided by this sector is over 31 million. The SME sectoraccounts for about 45 per cent of the manufacturing output and over 40 percent of the national exports of the country.India embarked on the path of opening up its economy and integrating itwith the global economy in 1991. The liberalization of economy, whileoffering tremendous opportunities for the growth and development of Indianindustry including SMEs, has also thrown up new challenges in terms offierce competition. The very rules which provide increased access for ourproducts in the global markets also put domestic industry under increasedcompetition from other countries. In today’s world, access on a global basis 9NIIKHILVIRMANI16719201711
  10. 10. to modern technology, capital resources and markets have become the mostcritical determinants of international competitiveness.Defining SMEsIn India, the enterprises have been classified broadly into two categories:(i) Manufacturing; and(ii) Those engaged in providing/rendering of services.Both categories of enterprises have been further classified into micro, smalland medium enterprises based on their investment in plant and machinery(for manufacturing enterprises) or on equipments (in case of enterprisesproviding or rendering services). The classification on basis of investment isas under: Table 1.1 Classification Of Micro, Small And Medium Enterprises Classificatio Investment Ceiling for Plant, Machinery or n Equipments Manufacturing Service Enterprises Enterprises Micro Upto Rs.25 lakh Upto Rs.10 lakh Small Above Rs.25 lakh & upto Above Rs.10 lakh & upto Rs.5 crore Rs.2 crore Medium Above Rs.5 crore & upto Above Rs.2 crore & upto Rs.10 crore Rs.5 crore Table 1.2 10NIIKHILVIRMANI16719201711
  11. 11. Classification Of Micro, Small And Medium Enterprises Before 2ndOctober, 2006Classificatio Investment Ceiling For Plant, Machinery Or n Equipments*@ Manufacturing Service Enterprises EnterprisesMicro Upto Rs.25 lakh Upto Rs.10 lakhSmall Above Rs.25 lakh & upto Not defined Rs.1 croreMedium Not defined Not definedWhile calculating the investment in plant and machinery/equipment referredto above, the original price thereof shall be taken into account, irrespectiveof whether the plant and machinery/equipment are new or second hand. Incase of imported machinery/equipment, the following duty/charges/costsshall be included in calculating their value: • Import Duty (not to include miscellaneous expenses such as transportation from the port to the site of the factory, demurrage paid at the port); • Shipping Charges; • Customs Clearance charges; and Sales Tax or Value-added Tax. Cost of the following plant & machinery/equipments etc would be excluded:; 11NIIKHILVIRMANI16719201711
  12. 12. • Equipments such as tools, jigs, dies, moulds, and spare parts for maintenance and the cost of consumable stores; • Installation of plant &machinery; • Research and development and pollution control equipments; • Power generation set and extra transformer installed by the enterprises as per the Regulations of the State Electricity Board; • Bank charges and Service Charges paid to the National Small Industries Corporation or the State Small Industries Corporation; • Procurement or Installation of cables, wiring bus bars, electrical control panels (not mounted on individual machines) • Oil circuit breakers or miniature circuit breakers which are necessarily to be used for providing electrical power to the plant and machinery or for safety measures; • Gas producer plants; • Transportation charges (other than sales tax or value-added tax and excise duty) for indigenous machinery from the place of their manufacture to the site of the enterprise); • Charges paid for technical know-how for erection of plant machinery; • Such storage tanks which store raw materials and finished products only and are not linked with the manufacturing process; • Fire-fighting equipment; and • Such other items as may be specified, by notification from time to time.In case of Service Enterprises, the original cost to exclude furniture, fittingsand other items not directly related to the services rendered. Land and 12NIIKHILVIRMANI16719201711
  13. 13. Building would also not be included while computing themachinery/equipments cost.SME would be meant to include Micro Small and Medium Enterprises(MSMEs). The above definitions of Micro, Small and Medium Enterpriseswould be in place of the existing definitions of Small & Medium Industriesand SSSBEs/Tiny Enterprises. • Micro Enterprises would include Tiny Industries also. • Small Enterprises (Manufacturing) would mean Small Scale Industries (SSIs). • Medium Enterprises (Manufacturing) would mean Medium Industries (MIs). • Small Enterprises (Services) and Medium Enterprises (Services) would mean other Small & Medium Enterprises. Thus, SME Advances would be categorised as under: • All advances to segments viz. Micro, Small and Medium Enterprises in the Manufacturing sector irrespective of sanctioned limits, (including advances against TDRs/Govt. Securities etc for business purposes to these categories of Borrowers), and • Advances to Services Sectors such as Professional & Self-Employed, Small Business Enterprises, and Small Road/Water Transport Operators and other enterprises, engaged in providing/rendering of services, conforming to the above investment criteria and enjoying borrowing/non-borrowing facilities with the Bank (including advances against TDRs/Govt. Securities etc for business purposes to these categories of Borrowers). 13NIIKHILVIRMANI16719201711
  14. 14. • Those enterprises exceeding the investment ceilings would be categorized as Large Enterprises and be outside the purview of SME. • The sanctioned limits would no longer be the criteria determining the status as micro or small or medium enterprises in these cases. • Reserve Bank of India has since reviewed the definition on Priority Sector and have issued revised guidelines on lending to Priority Sector vide their Master Circular dated 2nd July, 2007. As per this circular Retail Trade is excluded from the activities classified as SME. (http://www.bankofindia.com/smepol.aspx last accessed on 26 Nov, 2009)Development of SMEs In IndiaMaking the best use of the material resources by employing higher order ofskill and artistic talents through traditional handicrafts, India hasoccupied a permanent place of pride in the world before industrialresolution. However, the advent of modern large scale mechanizedindustry, the imposition of restrictions on Indian trade by the British rulersand deteriorating socio-economic conditions lead to the decline ofSmall Scale Industry. But with the provisions of permanent place in thenations policy of economic development after the attainment of theIndependence, it has staged a grand recovery and is now well entrenchedon the path of progress towards great expansion.SME has emerged into prominent sector in Indian economy in general andindustry in particular. SSI sector in India has posted impressive growth in 14NIIKHILVIRMANI16719201711
  15. 15. 1990s from 15% in 1991-92 to 55% in 2001-02.The growth inemployment generation has been equally impressive from 3% to 45%during the same period. Employment in SME touched 19 million, justbehind agriculture. Share of SSI exports crosses 40% of total exports.Growth by itself in SME sector is impressive enough indicating apositive response to the Economic Reform process initiated in the countrysince 1991. --- Development of infrastructure --- Assured supply of Raw Materials --- Availability of Cheap Credit --- Concessionary Taxes and Tariffs. --- Financial subsidies --- Equity contributions are all the protective measures for the sector Table 1.3 Progress Of SMEs In India Year Total SME Units Fixed Investment (Rs (Lakhs) Crores) 1990-91 67.87 93555 1991-92 70.63 100351 1992-93 73.51 109623 1993-94 76.49 115795 1994-95 79.60 123790 1995-96 82.84 125750 1996-97 86.21 130560 1997-98 89.71 133242 1998-99 93.36 135482 1999-00 97.15 139982 2000-01 101.1 146845 15NIIKHILVIRMANI16719201711
  16. 16. 2001-02 105.21 154349 2002-03 109.49 162317 2003-04 113.95 170219 2004-05 118.59 178699 2005-06 123.42 188113(http://www.smechamberofindia.com/rol_of_sme_sector.aspx last accessedon 27 Nov, 2009)Small and Medium Enterprises - Industrial policy:The small and Medium industries have a specific role to play by theIndustrial policy 1948 which stated that cottage and small scaleindustries are particularly suited for better utilization of local resourcesand for the achievement of local self-sufficiency in respect of certaintype of essential goods. A Small and Medium Industries Board wasconstituted in 1954 and a number of helping schemes such as supply ofmachinery on hire purchase, liberal and wider grants.The Government announced its second Industrial policy in 1956 whichreplaced the Industrial policy resolution of 1948.While such measurescontinue to be taken wherever necessary, the aim of the state policy is toensure that the decentralized sector acquires sufficient vitality to beself supporting and its development is integrated with that of largescale industry. Besides, the Government intended to strengthen the existingarrangements to finance small scale units and make changes if necessary toease the credit problems of the sector. The system of reservation ofitems for exclusive production by small scale units would continue in future.The Industrial policy statement of 1985 was also accorded importance tosmall scale sector and made some suitable policy changes. The definition of 16NIIKHILVIRMANI16719201711
  17. 17. small scale unit was revised to include all manufacturing units havinginvestment in Plant and Machinery unto Rs.35 Lakhs. In case ofancillary units, the investment ceiling was Rs.45 Lakhs.In the policy statements of 1991, the state followed a policy ofsupporting small enterprises in the country. Small and Medium enterprisesaccount for 55% of industrial production, 40% of exports and above 88% ofmanufacturing employment. Hence, this sector is considered as dynamicand vibrant sector of the country. The relative importance tendsto vary inversely with the level of development and their contribution.Small and Medium enterprises have emerged as the leaders in the industrialsector. In recognition of their significance and stature, the then governmentannounced policy measures on August 6, 1991 for the first time in the postindependence period. This was to promote and strengthen small, tiny andvillage enterprises. This is almost a U-turn in policy stimulants andstructure of micro and small enterprises in the country.Problems of SMEsDespite its commendable contribution to the Nations economy, SME Sectordoes not get the required support from the concerned GovernmentDepartments, Banking Sector, Financial Institutions and Corporate Sector,which is a handicap in becoming more competitive in the National andInternational Markets and which needs to be taken up for immediate and 17NIIKHILVIRMANI16719201711
  18. 18. proper redressal. SME sector faces a number of problems - absence ofadequate and timely banking finance, limited knowledge and non-availability of suitable technology, low production capacity, follow up withvarious agencies in solving regular activities and lack of interaction withgovernment agencies on various matters.Some of the major problems are briefly as follows:a)Financial problems of SMEs:The financial problem of SMEs is the Root Cause for all the otherproblems faced by the SME sector. The small and medium industrialists aregenerally poor and there are no facilities for cheap credit. They fall into theclutches of money lender who charges very high rates of interest, or elsethey borrow from the dealers of their goods, who exploit them bycompleting them to sell their products at very low price. After thenationalization of 14 major Indian Banks in July, 1969, the Commercialbanks were providing only a small proportion of SMEs financialrequirements. Credit to the SME sector continues to be non-commensuratewith its contribution to the total industrial output. As against the share ofthe village and SME at 40% in the industrial output, its share in total creditto the industrial sector is only about 30%.b) Raw Material problem of SMEs:This difficulty is experienced in a very pronounced form. The quantity,quality and regularity of the supply of raw materials are not 18NIIKHILVIRMANI16719201711
  19. 19. satisfactory. There are no quantity discounts, since they arepurchased in small quantities and hence charged, higher prices bysuppliers. Difficulty is also experienced in procuring semi-manufacturedmaterials. Financial weakness stands in the way of securing raw materials inbulk in a competitive market.c) Production problem of SMEs:SME units suffer from inadequate work space, power, lighting andventilation, and safety measures etc. These short comings have tended toendanger the health of workmen and have adversely affected the rate ofproduction. Many units are following primitive methods ofproduction. Adoption of modern techniques is either disliked by theentrepreneurs is not feasible. Wage rates and service conditions ofsmall industries are not attractive to skilled labor.d) Technological problem of SMEs:Today technology is changing at a very fast phase; it becomes difficult forSMEs to cope up with changing technology. Technology up gradation andthe frequent need to renew the equipment has emerged as a big problem.d) Marketing problem of SMEs: As marketing is not properlyorganized, the helpless artisans are completely at the mercy of middle 19NIIKHILVIRMANI16719201711
  20. 20. man. The potential demand for their goods remains under developed. TheSMEs have to face the competitions from large scale units in marketing theirproducts. It causes damage to the growth and stability of SMEs. SMEscannot afford to spend lavishly for advertisement to promote their sales.e) Managerial problem of SMEs:Small scale industries in our country have suffered from the lack ofentrepreneurial ability to develop initiative and undertake risks inthe unexplored industrial fields. The in efficiency in managementcomes first among managerial problems. The entrepreneurial abilityof promoters of cottage industries and SMEs are handicapped by technicalknow how in the areas of production, finance, accounting and marketingmanagement.f) Sickness of SMEs:A serious problem which is hampering small and medium sector has beensickness. Many small units have fallen sick due to one problem or theother. Sickness is caused by two sets of factors, Internal and external factors.From among the various internal and external causes of sicknessthe important ones are bud management, high rate of capitalgearing, inadequacy of finance, short of raw materials, outdated plant andmachinery, low labor productivity etc.The above figure shows that finance has been the major reason for thesickness of SME units. The other major reasons are ineffective managementand technology upgradation according to the latest technological changes. 20NIIKHILVIRMANI16719201711
  21. 21. SME FinancingSME Finance is the funding of small and medium sized enterprises andrepresents a major function of the general business finance market – inwhich capital for firms of types is supplied, acquired, and costed/priced.Capital is supplied through the business finance market in the form of bankloans and overdrafts; leasing and hire-purchase arrangements;equity/corporate bond issues; venture capital or private equity; and asset-based finance such as factoring and invoice discountingImportance The economic and social importance of the small and mediumenterprise (SME) sector is well recognized in academic and policy literature.It is also recognized that these actors in the economy may be underserved,especially in terms of finance. This has led to significant debate on the bestmethods to serve this sector. There have been numerous schemes andprogrammes in markedly different economic environments. However, thereare a number of distinctive recurring approaches to SME finance. Collateral based lending offered by traditional banks and finance companies is usually made up of a combination of asset-based finance, contribution based finance, and factoring based finance, using reliable debtors or contracts. Information based lending usually incorporates financial statement lending, credit scoring, and relationship lending. Viability based financing is especially associated with venture capital. 21NIIKHILVIRMANI16719201711
  22. 22. There is also a more favorable environment now with the Govt. committedto give fillip to this sector through infrastructure development; skill setdevelopment/entrepreneurship development, technology up gradation etc.With the deregulation of the financial sector, the general ability of the banksto service the credit requirements of the SME sector depends on theunderlying transaction costs, efficient recovery processes and availablesecurity. There is an immediate need for the banks generally to focus oncredit and finance requirements of SMEs. Although the banks are allowed tofix their own targets for funding SMEs in order to achieve a minimum 20%year-on-year growth, the Government’s objective is to double the flow ofcredit to the SME sector from Rs.67,600 crore in 2004-05 to Rs.1,35,200crore by 2009-10 i.e. within a period of 5 years. Also, Credit risk in the SMEsector is widely dispersed and Banks get better yield from SME advances asagainst the traditional advances where the spread is getting graduallyreduced. The SME clientele base could also be utilized by the Branches tostep-up “cross selling” of various other products including technology-enabled products.SME Financing GapA substantial portion of the SME sector may not have the security requiredfor conventional collateral based bank lending, nor high enough returns toattract formal venture capitalists and other risk investors. In addition,markets may be characterized by deficient information (limiting theeffectiveness of financial statement-based lending and credit scoring). Thishas led to claims of an "SME finance gap”. The SMEs that fall into thiscategory have been defined as Small Growing Businesses (SGBs) at a 22NIIKHILVIRMANI16719201711
  23. 23. workshop in Geneva in July 2008, hosted by The Network for Governance;Entrepreneurship & Development (GE&D) There have been at least twodistinctive approaches to try to overcome the so-called SME finance gap.The first has been to broaden the collateral based approach by encouragingbank lenders to finance SMEs with insufficient collateral. This might bedone through an external party providing the collateral or guaranteesrequired. Unfortunately, to the extent that the schemes concerned runcounter to basic free market principles they tend to be unsustainable. Thus,the second approach has been to broaden the viability based approach. Sincethe viability based approach is concerned with the business itself, the aimhas been to provide better general business development assistance to reducerisk and increase returns.(http://en.wikipedia.org/wiki/SME_finance last accessed on 27 nov, 2009)Sources of SME Finance: The most common sources of SME finance areas followsProblems of SMEs FinancingThe main problem faced by SME’s when trying to obtain funding is that ofuncertainty:• SME’s rarely have a long history or successful track record that potentialinvestors can rely on in making an investment;• Larger companies (particularly those quoted on a stock exchange) arerequired to prepare and publish much more detailed financial information –which can actually assist the finance-raising process; 23NIIKHILVIRMANI16719201711
  24. 24. • Banks are particularly nervous of smaller businesses due to a perceptionthat they represent a greater credit risk.Because the information is not available in other ways, SME’s will have toprovide it when they seek finance. They will need to give a business plan,list of the company assets, details of the experience of directors andmanagers and demonstrate how they can give providers of finance somesecurity for amounts provided. Prospective lenders – usually banks – willthen make a decision based on the information provided. The terms of theloan (interest rate, term, security, and repayment details) will depend on therisk involved and the lender will also want to monitor their investment. Acommon problem is often that the banks will be unwilling to increase loanfunding without an increase in the security given (which the SME ownersmay be unable or unwilling to provide).A particular problem of uncertaintyrelates to businesses with a low asset base. These are companies withoutsubstantial tangible assets which can be use to provide security for lenders.When an SME is not growing significantly, financing may not be a majorproblem. However, the financing problem becomes very important when acompany is growing rapidly, for example when contemplating investment incapital equipment or an acquisition. Few growing companies are able tofinance their expansion plans from cash flow alone. They will therefore needto consider raising finance from other external sources. In addition,managers who are looking to buy-in to a business ("management buy-in" or"MBI") or buy-out (management buy-out" or "MBO") a business from itsowners may not have the resources to acquire the company. They will needto raise finance to achieve their objectives 24NIIKHILVIRMANI16719201711
  25. 25. 1.2 ROLE OF PUBLIC SECTOR BANKS IN SME FINANCINGBanks are playing a major role in financing SMEs in India. Nearly 82% ofthe total SME financing in year 2006-07 is through banks. And among themthe major share is of public sector banks i.e. 57%. Thus it is clear that themost common source of finance for SMEs is Bank Financing. There is no. ofbanks that help in assisting the SMEs for financing. The main channel usedby the SMEs via Banks is Specialized loans by various Banks. TheMain reason for choosing bank loans by SMEs compared to other sources offinancing like venture capital, PE funding etc is that is only interest to bepaid no stake is to be diluted thus the whole command of the SME is withthe owner only. There are a number of Private as well as Public sector bankswho assist SME in Financing Figure 1.4 Sources Of SME Finance (2006-07) Others 18% Public sector Private sector banks abnks 57% 25%(http://www.businessworld.in/bw/2009_11_19_Reforms_To_Improve_Credit_Access_To_SMEs.html last accessed on 5 Jan, 2010) 25NIIKHILVIRMANI16719201711
  26. 26. The role of Banks, in general, has become very important in the abovecontext The SME sector’s demands were comprehensively taken care of bythe Public sector Banks through several initiatives such as: • Single Window dispensation, • Quick decision with least Turnaround Time through specially constituted SME Cells, and above all, • Better service. Cluster-based Schemes are also on the list of the Bank’s initiatives. The Bank prioritized the following more particularly:- • Provision of timely and adequate credit to the SMEs, • Encouraging Technology Up gradation, for better quality and competitiveness of their product(s), and • Proactively detecting sick and viable units in time so as to nurse them back to health through appropriate re-structuring. • Financing of Clusters with adequate and concessional Bank finance on liberal terms in several pockets for specified activities concentrated in these pockets, which would result in reducing transaction cost and greater economies of scale.Credit to SME sector from Public Sector BanksThe table below gives the status of credit flow to the micro and smallenterprises(SME) sector from the public sector banks since 2000: Table 1.5 Credit to SME sector from Public Sector Banks 26NIIKHILVIRMANI16719201711
  27. 27. Year Net Bank Credit to SMEs % of NBC Credit 2000 316427 46045 14.6% 2001 341291 48400 14.2 2002 396954 49743 12.5 2003 477899 52988 11.1 2004 558849 58278 10.4 2005 718772 67634 9.4 2006 1017614 82492 8.1 2007 1317705 104703 8.0(http://www.rbi.org.in/scripts/PublicationsView.aspx?id=11993 lastaccessed on 11 Jan, 2010) Figure 1.5 Steps For SME Loans By Public Sector Banks Application for loan by SME to local branch of a particular bank in that area . Inspection/Survey of SME by the Executives of that Local branch. Sending the Documents of survey by Local branch to SMECC branch Preparing credentials of Promoters and firm by SMECC branch and investigating the same Estimating the amount of loan to be sanctioned and forwarding the documents for sanctioning. If the loan is been sanctioned by the central authority then disbursement of the loan amount into account of the SME. 27NIIKHILVIRMANI16719201711
  28. 28. The above figure shows the steps for availing finance through Publicsector Banks using loans. Here is the brief description of the above shownprocedure: • First of all the SME who wants to avail loan has to visit the local branch office of the bank of their area, where by the loan application is been filled by the SME. • After that the executives of that branch check whether all the necessary documents are provided by the SME or not, then if all necessary documents are submitted the next step comes whereby the officials of that local branch go to the premises of that SME and just have a brief survey of promoter as well as the premises. • After they are satisfied they send the file of necessary documents to the SMECC branch, which is a special branch for SME loans. Where by the credit appraisal takes place, which consist of credit appraisal of promoter, financial appraisal, determining cost of project, understanding various means of finance used, profitability estimate, cash flow projections , marketing appraisal etc., which is explained in next section. This step brings out the clear picture whether the loan should be given to the SME or not? • If the SMECC branch is satisfied with the details then it forward the request of granting loan to the sanctioning authority. • And finally after the verification by sanctioning authority, the disbursement of loan amount takes place in the account of that SME 28NIIKHILVIRMANI16719201711
  29. 29. • This whole procedure right from application to disbursement of loan amount takes approximately 20-25 days as the procedure involves analysis of documents by various branches and thus the movement of documents amongst them, if all this procedure would have taken place at single place then it would take only 10-12 days for disbursement.Some Public sector Banks offering SME financing schemes are as follows:1) State bank of India and its subsidiaries 7) Central Bank ofIndia2) Allahabad Bank 8) Punjab NationalBank3) Oriental Bank of Commerce 9) IDBI Bank4) Bank of Baroda 10) Indian Bank5) Bank of India 11) Canada Bank6) Punjab & Sind Bank 12) CorporationBank State Bank of IndiaState Bank of India has been playing a vital role in the development of smallscale industries since 1956.The Bank has financed over 8 lakhs SSI units inthe country. It has 55 specialized SSI branches, 99 branches in industrialestates and more than 400 branches with SIB divisions. The Bank finances 29NIIKHILVIRMANI16719201711
  30. 30. for Small Business activities which are of special significance to a largenumber of people as many of these activities can be started with relativelylower investment and with no special skills on the part of the entrepreneurs.The following are the SME products offered by State Bank Of India: • Commodity Packed Warehouse Receipt Financing • Surabhi Deposit Scheme • Traders Easy Loan Scheme • SSI Loans • Business Current Accounts • Open Term Loan • Retail Trade • Doctor Plus • SBI Shoppe • Cyber Plus • SME Credit Plus • Small Business Credit Card • SME Petro Credit • Dal Mill Plus • Paryatan Plus • Auto Loans • Transport Operators • Rice Mills Plus • School Plus 30NIIKHILVIRMANI16719201711
  31. 31. (http://www.sbi.co.in/user.htm last accessed on 27 Nov, 2009) IDBI BankIDBI Bank has been actively engaged in providing a major thrust tofinancing of SMEs. With a view to improving the credit delivery mechanismand shorten the Turn around Time (TAT), IDBI Bank has developed aspecial business model to serve the SMEs in India. The Bank has set up 24City SME Centres (CSCs) across India in Mumbai, Delhi, Kolkata, Chennai,Bangalore, Hyderabad, Pune to name a few. These CSCs are the Banks hubswhile dedicated SME desks have been set up in several branches acrossthese cities. These branches serve as front offices for sales delivery andcustomer service.IDBI Bank has a wide variety of products and services catering to the needsof different segments within small business. Long years of experience inbeing the trusted partner of large and mid corporates has translated intodeeper understanding of needs of business and industries. The Bank hasparameterised products for transporters, dealers, traders, and vendors. Inaddition, it has a separate Transaction Banking Group that has expertise inproducts like cash management services, letter of credit, bank guaranteesand treasury products”IDBI Bank provides following SME products: • Sulabh Vyapar Loan • Dealer Finance • Funding Under CGFMSE • Direct Credit Scheme-SIDBI • Preferred Customer Scheme 31NIIKHILVIRMANI16719201711
  32. 32. • Vendor Financing Programme • Lending against the security of future Credit Card Receivables • Working Capital Financing • Finance to Medical Practitioners • Loans to SRWOTs • SME Hosiery Special Current Account(http://www.idbi.com/sme/ last accessed on 27 Nov, 2009) Bank of BarodaBank of Baroda started its operation in the year 1908 in Baroda though itsCorporate Centre is in Mumbai now. Its mission is "to be a top rankingNational Bank of International Standards committed to augment stakeholders value through concern, care and competence”. Bank of Barodaoffers following SME products and services: • Baroda Vidyasthali Loan • Baroda Arogyadham Loan • Baroda Laghu Udhyami Credit Card • Baroda Artisans Credit Card • Technology Upgradation scheme • SME short term loans • SME medium term loans • Composite Loans(http://www.bankofbaroda.com/bbs/sme.asp last accessed on 26 Nov, 2009) Union Bank of India 32NIIKHILVIRMANI16719201711
  33. 33. Union Bank is committed to extend its best services to Micro, Small andMedium enterprises and at a very competitive price. Union Bank of Indiahas adopted a policy package for stepping up credit to Small & MediumEnterprises.Union Bank of India has adopted a policy package for stepping up credit toSmall & Medium Enterprises [SME] with the approval of the Board in itsmeeting held on 30th September 2005 and subsequently following stepshave been initiated in this direction. • Union High Pride • Union Procure • Union Supply • Union Cyber • Union SME Plus • Union Transport • Financing SMALL HOSIERY UNITS in Kolkata(http://www.unionbankofindia.co.in/cb_sme.aspx last accessed on 27 Nov,2009) Canara BankCanara Bank was founded by Shri Ammembal Subba Rao Pai, a greatvisionary and philanthropist, in July 1906, at Mangalore, then a small port inKarnatakaThe Bank has adopted a Policy for lending to SME sector, in tune with Govt.of India guidelines as per MSMED Act, 2006, which has come into forcew.e.f. 2nd October, 2006. 33NIIKHILVIRMANI16719201711
  34. 34. LOAN PRODUCTSSchemes for Capital Investment • Term loan for acquisition of fixed assets • Standby credit for capital expenditure • Standby term loan scheme for Apparel Exporters • Loan scheme for reimbursement of investment made in fixed assets by SMEs • Soft loan scheme for Solar Water Heaters • Scheme for Energy Savings for SMEs • Technology Upgradation Fund scheme (TUFS) for textile & jute industries in SME sector • Credit linked capital subsidy scheme (CLCSS) • Loans under Interest Subsidy Eligibility Certificate (ISEC) Scheme of Khadi & Village Industries Commission (KVIC) to eligible institutionsSchemes for Working Capital • Simplified Open Cash Credit (SOCC) • Open Cash Credit (OCC) • Micro financing joint liability groups (Handloom weaver & Agarbathi manufacturer groups) • Laghu Udhyami Credit Card (LUCC) • Bill of Exchange discounting facility to Small Enterpreneurs at concessional rate of interest (BE-SE) 34NIIKHILVIRMANI16719201711
  35. 35. SCOPE AND OBJECTIVES OF THE STUDY3.1 Need of the studyThe researches that were conducted in past by the various professionals arein foreign context and not in Indian context. Study relating to SMEs, theirproblems and source of financing has been done but regarding the SMEfinancing schemes of public sector banks has not been done. This gap hasbeen identified and it has led to the present research to be undertaken. So,the need was felt to cover the areas neglected. Thus, here a study on SMEfinancing schemes of public sector banks was taken care of.3.2 Scope of the studyThe scope of this study was limited to Ludhiana city only.3.3Objectives of the study 35NIIKHILVIRMANI16719201711
  36. 36. Objectives are the guiding lights of a study. The present study wasundertaken to achieve the following objectives: - • To know about the various SME financing schemes of public sector banks and their usage. • To know the effectiveness of various SME financing schemes of public sector banks. • To know the problems faced by SMEs in getting credit from public sector banks. • To know the benefits of SME financing schemes of the public sector banks. • To check the satisfaction level of Small and Medium enterprises regarding SME financing schemes of the public sector banks. 36NIIKHILVIRMANI16719201711
  37. 37. METHODOLOGYResearch Methodology is a way to systematically solve the research problem. The Research Methodology includes the various methods and techniques for conducting a Research. “Marketing Research is the systematic design, collection, analysis and reporting of data and finding relevant solution to a specific marketing situation or problem”. D. Slesinger and M.Stephenson in the encyclopedia of Social Sciences define Research as “the manipulation of things, concepts or symbols for the purpose of generalizing to extend, correct or verify knowledge, whether that knowledge aids in construction of theory or in the practice of an art”. Research is, thus, an original contribution to the existing stock ofknowledge making for its advancement. The purpose of Research is todiscover answers to the Questions through the application of scientificprocedures. Our project has a specified framework for collecting data in an 37NIIKHILVIRMANI16719201711
  38. 38. effective manner. Such framework is called “Research Design”. Theresearch process followed by us consists of following steps:4.1 RESEARCH DESIGN This research was descriptive and conclusion oriented research. • Conclusion Oriented Research: -Research designed to assist the decision maker in the situation. In other words it is a research when we give our own views about the research. • Descriptive Research: -A type of conclusive research, which has as its major objective the description of something-usually market characteristics or functions. In other words descriptive research is a research where in researcher has no control over variable. It just presents the picture, which has already studied.4.2 SAMPLING DESIGNSampling can be defined as the section of some part of an aggregate ortotality on the basis of which judgment or an inference about aggregate ortotality is made. The sampling design helps in decision making in thefollowing areas: -4.2.1 Universe of the study-The universe comprises of two parts astheoretical universe and accessible universe 38NIIKHILVIRMANI16719201711
  39. 39. • Theoretical universe- It includes all the SMEs throughout the universe. • Accessible universe- It includes the SMEs in Ludhiana city.4.2.2 Sample Frame-Sample frame was Small and Medium enterprises allover India.4.2.3 Sample Unit- Sampling unit is the basic unit containing the elementsof the universe to be sampled. The sampling unit of the present study wasSMEs located in Ludhiana city in Punjab.4.2.4 Sample Size- Sample size is the number of elements to be included ina study. Keeping in mind all the constraints 100 respondents were selected.4.2.5 Sampling Techniques- The sampling techniques used wereconvenience technique and simple random sampling technique.4.3 DATA COLLECTION AND ANALYSIS4.3.1 Data Collection: Information has been collected from both Primaryand Secondary sources of data collection. • Secondary sources- Secondary data are those, which have already been collected by someone else, which already had been passed through the statistical process. Secondary data had been collected through websites, newspapers and journals. • Primary sources- Primary data are those, which are collected are fresh and for the first time and thus happen to be original in character. Primary data had been collected by conducting surveys through 39NIIKHILVIRMANI16719201711
  40. 40. questionnaire, which include several questions and personal and telephonic interview.b) Tools of Analysis and Presentation:To analyze the data obtained with the help of questionnaire, following toolswere used:Tools of Analysis: - • Summated Score: This tool was used for the analysis of questions based on Likert scale. • Weighted Average Score: This tool was used to calculate highest and lowest rank. Tools of Presentation: - • Tables: This tool was used to present the data in tabular form. • Bar Graphs and Pie Charts: These tools were used for analysis of data. 40NIIKHILVIRMANI16719201711
  41. 41. ANALYSIS AND INTERPETATION1. Demographic Profile of Respondents. Table 5.1 Demographic Features Demographics No. Of %Age Of Respondents Respondents Designation Owner 73 73 Partner 19 19 Other 6 6 Total 100 100 Location Ludhiana 100 100 Other 0 0 Total 100 100 Gender Male 95 95 Female 5 5 41NIIKHILVIRMANI16719201711
  42. 42. Total 100 100 Business Hosiery 100 100 Other 0 0 Total 100 100Analysis and Interpretation:It had been analyzed from the table that 73% of the respondents were theowner, 19% were co-partners and 6% were at some other designation.100%of the respondents were from the Ludhiana city. 95% of the respondentswere male and only 5% were female. All the respondents i.e. 100% werefrom the hosiery business. So it had been interpreted that maximum of the respondents were male,owner of the business and from Ludhiana city. All the respondents werefrom hosiery business.2. What are the sources of finance used by your enterprise? Table 5.2 To Know The Sources Of Finance Used By SMEs Sources of Finance No. Of Respondents %Age Of RespondentsOwners Financing 80 29Private financial 46 16institutionsEquity finance 12 4Bank financing 75 27Venture capital 14 5 42NIIKHILVIRMANI16719201711
  43. 43. Hire purchase and 24 9leasingBusiness angel 29 10financingTotal 280 100 Figure 5.1 To Know The Sources Of Finance Used By SMEs No. Of Respondents Owners Financing Private financial 10% institutions 29% Equity finance 9% Bank financing 5% Venture capital Hire purchase and leasing 27% 16% Business angel financing 4%Analysis and Interpretation:-The number of respondents had increased from 100 to 280, as this is amultiple-choice question. From the survey it was found that respondents usemultiple sources for financing their enterprises. The figure shows that 29% 43NIIKHILVIRMANI16719201711
  44. 44. respondents rely on their own funds for financing SMEs.28% respondentsuse bank financing and 16% take credit from private financial institutions.Equity finance and venture capital are the least used. 44NIIKHILVIRMANI16719201711
  45. 45. 3. Rank the obstacles that are faced by your enterprise in its growthfrom 1 to 5; 1 being the biggest obstacle. Table 5.3 Obstacles In The Growth Of Enterprise Obstacles Rank Rank Rank Rank Rank Weighte 1 2 3 4 5 d Average ScoreThe frequent need to 12 19 28 24 17 315renew the equipmentInstability of demand 7 16 16 28 33 364for product or serviceObtaining adequate 40 27 17 8 8 217financingLow profitability of 11 12 21 29 27 349the sectorTaxation levels 30 26 18 11 15 255Analysis and Interpretation: -In this above table weighted average score method is used where 1 rank isgiven to the biggest obstacle in the growth and 5 is the least important rank.As in the above table various obstacles faced by the enterprises in theirgrowth are being ranked. The obstacle of obtaining adequate finance isranked first with summated score of 217. Second rank is given to thetaxation levels charged by the government and third rank to the frequentneed to renew the equipment. The Fourth rank is given to the low 45NIIKHILVIRMANI16719201711
  46. 46. profitability of the sector and fifth to the instability of demand of product orservice.From the above table it can be concluded that obtaining adequate finance isthe biggest obstacle faced by SMEs in their growth followed by burden ofheavy taxes on them. Easy financing schemes should be provided. Rates oftaxes should also be decreased; it will help in the growth of SMEs in India.4. Have you ever raised finance from public sector banks? Table 5.4 To Know Whether SMEs Raise Finance From Public sector Banks Raised Finance No. Of Respondents %Age Of RespondentsYes 100 100No 0 0Total 100 100 Figure 5.2 To Know Whether SMEs Raise Finance From Public sector Banks 46NIIKHILVIRMANI16719201711
  47. 47. No. Of Respondents 0% Yes No 100%Analysis and Interpretation:-The above figure shows that 100% of the respondents have raised financefrom the public sector banks .This shows that public sector banks are themost popular source of SME financing. The reason is low rates of interestwhich gives them capital at low cost. The service fees and bank charges arealso less which results in low cost of financing than the other sources.5. What type of loan is taken by you? Table 5.5 Type Of Loan 47NIIKHILVIRMANI16719201711
  48. 48. Type of Loan No. Of Respondents %Age Of RespondentsSulabh Vyapar loan 67 28Transport loan 25 10Paryatan plus loan 56 23Open term loan 38 16Working capital loan 54 23Total 240 100 Figure 5.3 Type Of Loan No. Of Respondents 23% 28% Sulabh Vyapar loan Transport loan Paryatan plus loan Open term loan 16% 10% Working capital loan 23%Analysis and Interpretation:The number of respondents has increased from 100 to 280, as this is amultiple-choice question The above graph shows that 28% of therespondents have taken Sulabh Vyapar loan.23% of the respondents havetaken Paryatan plus and working capital loan. So Sulabh Vyapar loan is themost popular scheme of public sector banks for financing SMEs. 48NIIKHILVIRMANI16719201711
  49. 49. 6. For what purpose, your enterprise has taken loan? Table 5.6 Purpose Of Taking Loan Purpose Of Taking No. Of Respondents %Age Of Loan RespondentsReal estate acquisition to 40 15house the businessTo increase the 63 24productionConstruction, renovation 33 12or leaseholdimprovementsFor the flooring of 71 27inventory and for workingcapitalFor modernization and 58 22upgradation of technologyTotal 265 100 Figure 5.4 Purpose Of Taking Loan 49NIIKHILVIRMANI16719201711
  50. 50. No. Of Respondents Real estate acquisition to house the 15% business 22% To increase the production Construction, renovation or leasehold 24% improvements For the flooring of inventory and for working 27% capital For modernization and 12% upgradation of technologyAnalysis and Interpretation:-The number of respondents has increased from 100 to 265, as this is amultiple-choice question.27% of respondents have taken loan for theflooring of inventory and working capital and 24% to increase the size ofproduction. Most of the firms are taking loans for fulfilling their frequentneeds for the capital. For technological upgradation and modernization, 22%of the respondents have taken loan showing that SMEs require capital toupgrade their technologies which is changing at a very fast phase.7. Rank the benefits of these schemes on the scale of 1-5; 1 being themost important and 5 being the least important. Table 5.7 Benefits Of SME Financing Schemes Benefits Rank Rank Rank Rank Rank Weighted 1 2 3 4 5 Average ScoreBetter Service 8 12 12 30 38 378Single Window 8 12 22 30 28 358 50NIIKHILVIRMANI16719201711
  51. 51. DispensationAttractive financing 40 28 20 4 8 212conditionsEasy access 4 12 32 30 22 354Low rates of Interest 40 36 14 6 4 198Analysis and Interpretation: -In this above table weighted average score method was used where 1 rank isthe most important rank and 5 is the least important rank.As in the above table various benefits of SME financing schemes were beingranked. The benefit ranked first with summated score of 198 was low ratesof interest. This shows that public sector banks financing schemes providefinance at cheap rates. Second rank is with summated score of 212 wasgiven to the attractive financing conditions of these schemes. The schemesare designed in such a way that makes financing easier for SMEs.The third rank was given to easy access. The fourth rank was given to Singlewindow dispensation and fifth to Better service, being least preferred by therespondents. This shows that respondents were not satisfied by the serviceprovided by these banks.From the above table it can be concluded that Low rates of interest was mostpreferred of all other benefits. Attractive financing conditions and easyaccess were next in the preference order. Single window dispensation wasthe next preferred benefit. Better service was the least preferred benefit bythe respondents. 51NIIKHILVIRMANI16719201711
  52. 52. 8. What were the problems faced by your enterprise in raising financefrom public sector banks? Table 5.8 Problems Faced By SMEs In Raising Finance Problems Faced No. Of Respondents %Age Of RespondentsInsufficient collateral 68 22Poor documentation 39 13Delay in the sanction of loan 80 26Cost involved is high 25 8Biasness 76 25High rate of interest 20 6Total 308 100 Figure 5.5 Problems Faced By SMEs In Raising Finance No. Of Respondents Insufficient collateral 6% Poor documentation 22% 25% Delay in the sanction of loan Cost involved is high 13% 8% Biasness 26% High rate of interestAnalysis and Interpretation:- 52NIIKHILVIRMANI16719201711
  53. 53. The number of respondents has increased from 100 to 308, as this is amultiple-choice question. The most common problem faced by SMEs inraising finance is the delay made in sanctioning the loan with 26%.Thepublic sector bank employees work very slowly and usually an applicationtakes a lot of time for approval.25% respondents say biasness was oneanother problem faced by them.22% respondents find the inability toprovide sufficient collateral as a problem.9. What are the most common reasons given to your enterprise by thepublic sector bank for rejecting an application for Loan? Table 5.9 Reasons For Rejecting An Application For Loan Reasons No.Of %Age Of Respondents RespondentsThe management team is too 28 11inexperiencedThe application did not meet the criteria 43 17The application was not correctly 24 9completedPoor credit history 48 19The enterprise could not provide enough 60 23guaranteesNot a profitable venture 54 21Total 257 100 Figure 5.6 Reasons For Rejecting An Application For Loan 53NIIKHILVIRMANI16719201711
  54. 54. No.Of Respondents The management team is too inexperienced The application did not 11% meet the criteria 21% The application was not correctly completed 17% Poor credit history The enterprise could not 23% 9% provide enough guarantees Not a profitable venture 19%Analysis and Interpretation:-The number of respondents has increased from 100 to 308, as this is amultiple-choice question. The above figure shows that 23% respondents saysthat the most common reason given by the banks for rejecting an applicationis that they could not provide enough guarantees.21 % says that banks rejectan application because they believe that it is not a profitable venture.19%says an application got rejected because of poor credit history as banks lieon the past performance of enterprises before granting any loan.10. What factors demotivate you in applying for finance from theseschemes of public sector banks? Table 5.10 Factors that Demotivate In Applying for Finance Factors that Demotivate No. Of %Age Of Respondents RespondentsWe were turned down before 40 24Procedure to obtain this type of financing 25 15is too complicatedThe process is lengthy 62 38Too much of documentation is required 38 23 54NIIKHILVIRMANI16719201711
  55. 55. Total 165 100 Figure 5.7 Factors that Demotivate In Applying for Finance No. Of Respondents We were turned down before 23% 24% Procedure to obtain this type of financing is too complicated The process is lengthy 15% Too much of 38% documentation is requiredAnalysis and Interpretation:-The number of respondents has increased from 100 to 165, as this is amultiple-choice question. The above figure shows that 38% respondents saysthat the factor that demotivates them for applying for finance from theseschemes is the lengthy process involved.24% respondents says that theywere turned down before.23% respondents says that they do not apply forloan from these schemes as too much of documentation is required.11. Are the Private sector banks SME financing schemes are better thanSME financing schemes of public sector banks? Table 5.11Whether Private Sector Banks Schemes Are Better Than Public Sector Banks Schemes 55NIIKHILVIRMANI16719201711
  56. 56. Private Sector Bank No. Of Respondents %Age Of Respondents Schemes Are BetterYes 64 64No 36 36Total 100 100 Figure5.8Whether Private Sector Banks Schemes Are Better Than Public Sector Banks Schemes No.Of Respondents 36% Yes No 64%Analysis and Interpretation:-The above figure shows that 64% of respondents think that private sectorbanks schemes of financing are better than that of public sector banksfinancing schemes and only 34% think that public sector banks schemes offinancing are better than that of private sector banks. The private sectorbanks use latest technology and provide better service. Moreover, the timeinvolved for obtaining loan is also comparatively less. But private bankscharge heavy rates of interest and charge heavy service fees. 56NIIKHILVIRMANI16719201711
  57. 57. 12. Please indicate your level of satisfaction with various aspects ofobtaining finance from these public sector banks. Kindly rate them on5-point scale basis; 5 being strongly satisfied and 1 being stronglydissatisfied Table 5.12 Satisfaction Regarding Various Aspects Of Obtaining Finance From Public sector Bank Schemes Various Strongly Satisfied Neutral Dissatisfie Strongly Summated Aspects Satisfied d Dissatisfie Score d 11.1) The 15 48 24 12 1 212 amount granted by the bank relative to the amount requested 11.2) The 12 52 31 3 2 231 simplicity of the application form 11.3) 24 71 2 3 0 184 Interest rate 11.4) 15 48 24 12 1 236 Service fees 11.5) Time 6 8 10 34 42 398 to obtain approval 11.6) 0 16 21 36 27 374 Guarantees required 57NIIKHILVIRMANI16719201711
  58. 58. by the institution 11.7) 10 22 12 30 26 340 Behavior of the bank staffNumber of respondents -100Maximum Score - 500Minimum Score - 100Analysis and Interpretation: -As from the above table no. 5.11 comparison was done between maximumscore and Summated score. Maximum score is the score, which representsthe dissatisfaction level among the respondents. So, information related tothe level of satisfaction or least satisfaction to various factors influencing thesatisfaction level of respondents was interpreted in following manner-:It was clear that respondents were satisfied with the ‘Rate of Interest’ as thisaspect lies between strongly agreed and agreed with summated score of 184.So the respondents were satisfied with this aspect. The factor “amountgranted by the bank relative to the amount requested lies between agree andneutral with summated score of 212 but was more close to satisfied. So,respondents are satisfied with the interest rate and the amount sanctioned.About other 2 factors ‘Simplicity of the application form’ and ‘Service fees’were with summated score of 231 and 236 were between agreed and neutralbut are more close to agreed level. So the respondents were satisfied withthese aspects. 58NIIKHILVIRMANI16719201711
  59. 59. The other three factors ‘behavior of the bank staff’, guarantees required bythe institution and the time to obtain the approval are between the neutraland dissatisfied. Respondents were not very satisfied with these aspects.13. Apart from such schemes, what initiatives government can take forimproving SME business in India? Table 5.13 Initiatives For Improvement Various Initiatives No. Of %Age Of Respondents RespondentsDecrease the amount of taxes 35 28 59NIIKHILVIRMANI16719201711
  60. 60. Support innovative technological 26 21companiesGuidance for upgrading skills & 15 12knowledge of entrepreneursAssistance and support for revival of 29 23sick unitsIntroduce a Single Window concept for 20 16helping SMEsTotal 125 100 Figure 5.9 Initiatives For Improvement No. Of Respondents Decrease the amount of taxes 16% Support innovative 28% technological companies Guidance for upgrading skills & knowledge of entrepreneurs 23% Assistance and support for revival of sick units 21% Introduce a Single 12% Window concept for helping SMEsAnalysis and Interpretation:-The number of respondents has increased from 100 to 125, as this is amultiple-choice question. The above graph shows that the 28% ofrespondents believe that there is need for guidance for upgrading skills andknowledge of entrepreneurs,23% respondents believe that assistance andsupport should be provided for the revival of sick units as number of sick 60NIIKHILVIRMANI16719201711
  61. 61. SME units are increasing at a rapid ratew..21% of the respondents believegovernment should support innovative technological companies. Moreovergovernment can introduce a single window concept for helping SMEs andcan provide guidance for upgrading skills and knowledge of entrepreneurs.After undertaking the study, the following findings were made about theusage of SME financing schemes of the public sector banks: • The respondents had used multiple sources for financing their enterprises. Most of the respondents had relied on their own funds for financing SMEs and bank financing. Private financial institutions came third in the preference. • Obtaining adequate finance was the biggest obstacle faced by SMEs in their growth followed by burden of heavy taxes on them. Easy financing schemes should be provided. Rates of taxes should also be decreased; it will help in the growth of SMEs in India. • Public sector banks were the most popular source of SME financing. The reason was low rates of interest which gives them capital at low cost. The service fees and bank charges were also less which results in low cost of financing than the other sources. • Sulabh Vyapar loan was the most popular scheme of public sector banks for financing SMEs followed by working capital loan. 61NIIKHILVIRMANI16719201711
  62. 62. • Most of the firms were taking loans for fulfilling their frequent needs for the capital. They took credit for the flooring of inventory and working capital and to increase the size of production. They had taken loans for technological upgradation also as SMEs require capital to upgrade their technologies which is changing at a very fast phase. • The most preferred benefit of these schemes was low rates of interest as government is charging very less rates in comparison to other sources. These schemes offer attractive financing conditions and easy access also. • The most common problem faced by SMEs in raising finance was the delay made in sanctioning the loan. The public sector bank employee’s work very slowly and usually an application takes a lot of time for approval. Biasness and insufficient collateral were another problems faced by them. • The most common reason given by the banks for rejecting an application was that the enterprises could not provide enough guarantees. Banks reject an application because they believed that it was not a profitable venture. An application also got rejected because of poor credit history as banks lie on the past performance of enterprises before granting any loan. 62NIIKHILVIRMANI16719201711
  63. 63. • Most of the respondents get demotivated for applying for finance from these schemes because of the lengthy process involved and because they were turned down before. Some of the respondents did not apply for loan from these schemes as too much of documentation was required. The time to obtain the approval for loan and documentation involved demotivates the SMEs. • Most of the respondents think that private sector banks schemes of financing were better than that of public sector banks financing schemes .The private sector banks use latest technology and provide better service. Moreover, the time involved for obtaining loan was also comparatively less. But private banks charge heavy rates of interest and charge heavy service fees. • Most of the respondents were satisfied with the interest rate charged, amount of loan sanctioned and service fees .Respondents showed their dissatisfaction regarding time to obtain the approval, behaviour of the bank staff. • Most of respondents were of the opinion that there is need for guidance for upgrading skills and knowledge of entrepreneurs, that assistance and support should be provided for the revival of sick units as the number of sick SME units is increasing at a rapid rate. Some of the respondents were of the view that government should support innovative technological companies. Moreover government can 63NIIKHILVIRMANI16719201711
  64. 64. introduce a single window concept for helping SMEs and can provide guidance for upgrading skills and knowledge of entrepreneurs. LIMITATIONS OF THE STUDYDue to constraints of time and resources, the study is likely to suffer fromcertain limitations. Some of these are mentioned here under so that thefindings of the study may be understood in a proper perspective.The limitations of the study are: 64NIIKHILVIRMANI16719201711
  65. 65. • The research was carried out in a short period. Therefore the sample size and the parameters were selected accordingly so as to finish the work within the given time frame. • The information given by the respondents might be biased as some of them might not be interested to give correct information. • Some of the respondents could not answer the questions due to lack of knowledge. • Some of the respondents of the survey were unwilling to share information. CONCLUSION AND RECOMMENDATIONSOver a period of time, it has been proved that SMEs are dynamic, innovativeand most importantly, the employer of first resort to millions of people in the 65NIIKHILVIRMANI16719201711
  66. 66. country India has a vibrant SME sector that plays an important role insustaining economic growth, increasing trade, generating employment andcreating new entrepreneurship in India. But the SME sector faces a lot ofobstacles in obtaining adequate finance. Government of India has started anumber of SME financing schemes in its public sector banks .These publicsector banks are playing a major role in the development of SME sector inIndia. But due to few obstacles, these schemes are not as effective as theyshould be. The review of researches has showed that SME sector plays animportant role in the economic development of a country but obtainingadequate finance has emerged as a major problem faced by SMEs. The need,scope and objectives of the study provided the framework for furtherresearch. The basic purpose of conducting the study was to study the usageof SME financing schemes of the public sector banks. The data wascollected from SME units. Various tools of data analysis and interpretationwere used for carrying out the research. The major findings of the studywere that bank financing is the most popular source for financing SMEs inIndia. The SME financing schemes provide credit to this sector at low ratesof interest and at attractive conditions but the procedure involved is lengthy.Moreover, too much of documentation is required .Insufficient collateral andbiasness are also the major problems. The re-orientation program,workshops and seminars should be organized at district level to providelatest information to the SMEs about the various SME financing schemes ofthe public sector banks. New credit products may be developed to take careof the diverse, unexpected and short-term requirements of the SMEcustomers in a hassle free manner and in a short time the process followed 66NIIKHILVIRMANI16719201711
  67. 67. in sanctioning the loan and documentation required is cumbersome;hence it is suggested to make the process easier.After carrying on the study, the following recommendations have beenmade: - • The re-orientation program, workshops and seminars should be organized at district level to provide latest information to the SMEs about the various SME financing schemes of the public sector banks. • Product innovations in banks have set the rule of the game “Innovate or perish”. The same rule applies to SME segment. At present, there is a vast gap between requirements of the SME customer and availability of suitable/matching products and services in the public sector banks. New credit products may be developed to take care of the diverse, unexpected and short-term requirements of the SME customers in a hassle free manner and in a short time. • The conventional credit appraisal systems are heavily dependent on financial statements and miss the softer strengths inherent in the business. Banks may adopt a balanced score card model for credit assessment under which risk weights may be assigned to (i) managerial, technical and commercial competence of the entrepreneur 67NIIKHILVIRMANI16719201711
  68. 68. (ii) quality of trade references from suppliers/buyers (need not be in writing) (iii) potential of the industry, unit and person. • The appraisal system is to be made more realistic and transparent. The applicant and if required, his consultant, should be briefed on the objective procedures which bank applies to arrive at decisions so as to educate them to understand the requirements of bank and to prepare credit proposals in a scientific manner . • As 95.8% of SME customers are proprietorship type of customers, it is essential for the banks to closely focus on the non-financial parameters also during appraisal (i.e. ability of person behind the show). • The process followed in sanctioning the loan and documentation required is cumbersome; hence it is suggested to make the process easier. • Small entrepreneurs should make feasibility studies before they finalize their projects. They should undertake only such projects which are technically, operationally and economically and financially viable. • The problem that the SMEs face while acquiring funds from Public sector Banks is that their financial systems lack transparency. Credit Ratings can benefit both the parties. The credit ratings will give Public 68NIIKHILVIRMANI16719201711
  69. 69. sector Banks ratings an easy access to the financial information of SMEs that highlight the units strength and weaknesses, making it easy for them to take a decision while lending. • The issue of high cost of acquiring, serving and monitoring SME customers can be resolved by offering products which reduce frequent visit of SME customers to the branch, provide flexibility to the borrowers as well as to the bankers and fulfill other financial needs of the customer. • Most SME customers have to make several small payments through cash, bankers’ cheques or drafts. Banks may capitalize on emerging electronic payment and settlement systems such as ECS, EFT, RTGS, etc., to offer customized and cost effective retail payment/remittance solutions or cash management services to the SME customers. • Public Sector Banks should develop flexible systems and procedures for dealing with SME customers and modify their role to be a facilitator. It may either provide software to these customers to prepare stock and financial statements or help and guide them in preparation of renewal proposal / statements. • Banks may publish periodicals/magazines to disseminate information pertaining to various schemes of bank, various ministries, RBI, SIDBI, CBDT, CBEC and other tax related policy matters. It may also provide the same information through its website and e-mails. 69NIIKHILVIRMANI16719201711
  71. 71. Nambiar, P.C.D. (2007). Financing For Priority Sectors. S.B.I MonthlyReview, 6(8).Popli, G.S.and Rao, D.N. (2009). Service Quality Provided By Public SectorBanks To SME Customers: An Empirical Study In The Indian Context.Journal of Financial Services Research, 4.Raju, B.Y. (2002). Small Scale Industries In The Liberalized Era Beg ForAttention. Global Business Review, 3(2), 351-367.Rani and Rao, D.N. (2008). Financing Small enterprises: Recent Trends.ICFAI Journal of Entrepreneurship Development, 5(1), 6-22. 71NIIKHILVIRMANI16719201711