MSMEs in India, which has to its credit of providing the highest number of employment opportunities, face a severe problem in securing finance from the banks.

1. Principles and Practices of Banking
Management
Problems faced by MSMEs
in India
Presentation by:
Neha Sharma
Roll No. 960
VI Semester, B.B.A. LLB (Hons.)
NLU Jodhpur 1

2.  Introduction
 Emergence Of MSME
 Scope Of MSME
 Why We Need MSME?
 Performance Of MSME In India
 MSME Act, 2006
 Role Of Govt. in Promoting MSME
 Commercial Bank Services And Promoting
MSME
 Factors affecting MSME
 Advantages Of MSME
 Problems faced By MSME
 MSME In Europe
 Conclusion
CONTENTS
2

3. • MSME stands for Micro, Small and Medium Enterprises
also known as ‘Town and Village’ Enterprises.
• In India, the enterprises have been classified broadly into
two categories
1. Manufacturing
2. Services.
• Both categories have been further classified into micro,
small and medium enterprises based on their investment
in plant and machinery or on equipment.
3

4. INTRODUCTION TO MICRO, SMALL AND
MEDIUM ENTERPRISE
Manufacturing Sector:
Service sector:
4

5. EMERGENCE OF MSMES UNITS IN INDIA
SMALL SCLAE INDUSTRIES PERIOD
MSMEs PRE-
INDEPENDENCE
MSMEs POST
INDEPENDENCE
5

6.  Before Independence, the present small scale industry was meant to denote
the village and the urban cottage industry.
 This group included a variety of industries ranging from manufacturing of Iron
safes, locks, carpets, marble jigs, baskets, hand-loom cloth and the like.
 In fact, at that time the term Cottage and Small scale industries was used in
juxtaposition to large scale industries, which were established under the British
patronage.
 They received encouragement and support during the freedom movement.
 The small scale industries found a prominent place in the economic programme
envisaged by the Indian National Congress.
MSMES PRE-INDEPENDENCE
6

7. After 1947
 Jawaharlal Nehru maintained separate entities of small scale industries. He was
of the view that a small industry was the middle sector and it would overlap both
the cottage and the large industries.
1977 Industrial Policy
 The basic policy support of MSME sector had its roots in the Industrial Policy
Resolution 1977, laid emphasis on reservation of items.
 The reservation economically viable and technologically feasible products to be
exclusively manufactured by small scale industry began with a list of 47 items
which was gradually extended to too many products.
 At Present 812 items are in the reserved list.
MSMES POST-INDEPENDENCE
7

8. SCOPE OF MSMES IN DIFFERENT SECTORS
8

9. MANUFACTURING INDUSTRIES
9

10. TRADING INDUSTRIES
Person or firm that buys large
quantity of goods from various
producers or vendors, warehouses
them, and resells to retailers.
A business or person that sells goods to
the consumer, as opposed to
a wholesaler or supplier, who normally sell
their goods to another business.
Commission agents thrive in a variety of
businesses. International agents work in the
export/import arena. Insurance and real
estate agents also often work on a sales-
based commission. 10

11. ACTIVITY WISE MSME
11
SOURCE: ANNUAL REPORT MSME, 2013-2014

12. 1. Predominantly rural , traditional household
industries;
2. Small and medium industries functioning with
obsolete technologies; and
3. Modern, small and medium enterprises which are
owned and operated by mostly young techno-
entrepreneurs operating in relatively newer fields like
Bio-technology.
Indian MSME can be divided into three classes:
12

13. • FOR EMPLOYMENT GENERATION
• FOR BALANCED REGIONAL GROWTH
• FOR MOBILISATION OF LOCAL RESOURCES
• FOR EXPORT PROMOTION
• FOR CONSUMER SURPLUS
• FOR DEVELOPMENT OF ENTERPRENEURSHIP
• FOR LARGE SCALE EMPLOYMENT WITH LOW
INVESTMENT
• FOR ATTAINING SELF RELIANCE AND SELF
DEPENDANCE
• FOR ENSURING EQUAL DISTRIBUTION OF
INCOME AND WEALTH
Why We Need Msme?
13

14. Why MSME are more adoptable?
Simple to
organize
Low risk
Innovation
and new
concepts
Low
finance
Skill
prompters
Independent
structure
MSME
14

15. MSME’s Financing Features
• Involvement of lesser amount of financial resources.
• Lower gestation period.
• They are mostly run by Sole proprietors /Owners.
• They are operated mainly in Rural and Semi Urban areas.
15

16. PERFORMANCE AND CONTRIBUTION OF MSMES.
6000 products
MSMEs
31 Million
Employment
40% Exports
45% industrial
production
Creates
more than
1 Million
jobs
annually.
.
Contribution to
GDP set to expand
to 22% by 2015
from current 17%.
16

17. MSMES SHARE BY SECTOR
17
SOURCE: ANNUAL REPORT MSME, 2013-2014

18. GROWTH PERFORMANCE OF MSMES IN INDIA
18
SOURCE: ANNUAL REPORT MSME, 2013-2014

19. 19
SOURCE: ANNUAL REPORT MSME, 2013-2014

20. SOURCE: ANNUAL REPORT MSME, 2013-2014
20

21. 0
50000
100000
150000
200000
250000
300000
Production (Rs. '000 crores) at 1993-94 prices
Production (Rs. 000' crores) at 1993-94 prices
PRODUCTION
21

22. Rural
 Non-metallic products contributed 22.7% to employment generated in rural areas. Food Products accounted for
21.1%, Wood Products and Chemicals and chemical products shared between them 17.5%.
Urban
 As for urban areas, Food Products and Metal Products almost equally shared 22.8% of employment. Machinery
parts except electrical, Non-metallic mineral products, and Chemicals & chemical products between them
accounted for 26.2% of employment.
EMPLOYMENT DISTRIBUTION
22
SOURCE: ANNUAL REPORT MSME, 2013-2014

23. Tamil Nadu
(14.5%)
Maharashtra
(9.7%),
Uttar
Pradesh
(9.5%)
West
Bengal
(8.5%)
Gujarat
(7.6%)
Karnataka
(6.7%)
Punjab
(5.6%)
STATE-WISE EMPLOYMENT DISTRIBUTION
DATA REALISED BY SIDO
23

24. CONTRIBUTION OF MSME IN EXPORTS
MSME Sector plays a major role in India's present
export performance.
24

25.  This takes place through merchant exporters,
trading houses and export houses. They may
also be in the form of export orders from large
units or the production of parts and components
for use for finished exportable goods.
 The product groups where the MSME sector
dominates in exports, are sports goods,
readymade garments, woolen garments and
knitwear, plastic products, processed food and
leather products.
 MSME Sector contributes about 45%-50% of the
Indian Exports.
EXPORTS
Data realised by Commerce Ministry of India
25

26. S. NO PRODUCT GROUP MAIN DESTINATION
1 Readymade Garment USA, West Asia, North Africa
2 Sports Goods UK, USA, Germany
3 Spices East Asia, Union , North Africa
4 Leather &Leather Items Germany , UK, Italy, USA, France
5 Wool & Woolen Knitted Garment Europe, Bangladesh , Japan , Sri Lanka ,
Bhutan ,
6 Processed Food Items Europe, Bangladesh ,Japan, USA
7 Tobacco And Tobacco Items East Europe
8 Electronic Item And Computer Software USA , UK , Hong Kong, UAE, Japan
9 Cashew Item USA, UK, Japan, Netherlands
10 Marine Products UK, USA, Germany, Europe, Bangladesh
MAJOR EXPORT DESTINATION
26

27. RECENT TRENDS REGARDING MSMES
 The contribution of micro, small and medium enterprises (MSME) sector
to manufacturing output, employment and exports of the country is quite
significant.
 The MSME sector employs about 42 million persons in over 13 million
units throughout the country.
 There are more than 6000 products, ranging from traditional to high-
tech items, which are being manufactured by the MSMEs.
27

28.  Growth in GDP. MSME’s not only account for 80% of the total
number of Industrial Enterprises in the country but are also the
second largest employment providing sectors in the country after
agriculture.
 This sector is a growth-driver in the economy.
 40-50% of output/services originated from this sector.
 40% of Indian Exports are on account of MSMEs.
28

29. MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006
SALIENT FEATURES:
1. Industry replaced by enterprise which include service
enterprises also.
2. Constitution of MSME Board.
3. Simplification of registration procedure.
4. Progressive credit support.
29

30. INDUSTRIAL
POLICY
RESOLUTION
1948
INDUSTRIAL
POLICY
RESOLUTION
1956
INDUSTRIAL
POLICY
RESOLUTION
1977
INDUSTRIAL
POLICY
RESOLUTION
1991
INDUSTRIAL
POLICY
PACKAGE
FOR SSI
2001-02
INDUSTRIAL
POLICY ON
SSIS 2004-05
GOVERNMENT POLICIES FOR MSMES
30

31. ROLE OF GOVERNMENT IN PROMOTING MSMES
31

32. NATIONAL SMALL INDUSTRIES CORPORATION LTD.
(NSIC)
SMALL INDUSTRIES DEVELOPMENT ORGANIZATION
(SIDO)
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA
(SIDBI)
SMALL INDUSTRIES –SERVICE INSTITUTE (SISI)
SMALL INDUSTRIES DEVELOPMENT CORPORATION
(SIDC)
TECHNICAL CONSULTANC ORGANISATION (TCOs)
OTHER INSTITUTION ALSO HELP TO PROMOTE SSI
32

33. GANGULY COMMITTEE
The “Ganguly Committee’ has thoroughly examined the issues
confronting SMEs and suggested the following:
 Institutional Finance should be made available on suitable
terms.
 SIDBI/Banks to promote national level MSME
development fund.
 SIDBI to provide technical support.
 To promote a specific SME Rating Agency to provide
comfort to the banks financing SMES.
 Setting up of Micro Finance Intermediaries to accelerate
the growth of MSMEs. 33

34. 34

35. 35

36.  Loans upto Rs.10 lakh extended to units in the MSE sector.
(WITHOUT TAKING ANY COLLATERAL SECURITY)
 Banks may, on the basis of good track record and financial position of
the MSE units, increase the limit of dispensation of collateral requirement
for loans up to Rs.25 lakh (with the approval of the appropriate authority).
 Public sector banks have been advised to open at least one specialised
branch in each district.
STEP TAKEN BY COMMERCIAL BANKS TO
IMPROVE THE FLOW OF CREDIT TO SMALL
BUSINESSES

37.  RBI issued detailed Guidelines to
Scheduled Commercial Bank for
timely assistance to Potentially
Viable MSME Units at Reduced
Rate in 2002.
 RBI advised Soft Loan Assistance
to Women Entrepreneurs besides
Usual Term Loan in MSME to
promote Women Entrepreneurs.
CONTD..
37

38. SCHEME OF SMALL ENTERPRISES FINANCIAL CENTERS (SEFCS):
 As per announcement made by the Governor in the Annual Policy
Statement 2005‐06, a scheme for strategic alliance between branches of
banks and SIDBI located in clusters, named as “Small Enterprises
Financial Centres” has been formulated in consultation with the Ministry
of SSI and Banking Division, Ministry of Finance, Government of
India, SIDBI, IBA and select banks and circulated to all scheduled
commercial banks on May 20, 2005 for implementation. SIDBI has so far
executed MoU with 15 banks
(Bank of India, UCO Bank, YES Bank, Bank of Baroda, Oriental Bank of Commerce,
Punjab National Bank, Dena Bank, Andhra Bank, Indian Bank, Corporation Bank,
IDBI Bank, Indian Overseas Bank, Union Bank of India, State Bank of India and
Federal Bank). 38

39. PNB SCHEMES FOR MSME’S
 MSEs credit growth through financial inclusion by way of collateral free and without third party
guarantee lending
 As per RBI mandatory guidelines, loans upto Rs.10 lakh to Micro and Small Enterprises, which are
eligible for coverage under Credit Guarantee Scheme, are to be considered on merits without accepting
any collateral security / third party guarantee and all such cases must be got covered under guarantee
scheme of CGTMSE.
 Further, as per Banks guidelines, MSE proposals up to Rs.100 lakh, which are eligible under Credit
Guarantee Scheme, are to be sanctioned by the competent authority without taking any collateral
security/third party guarantee.
 Disposal of Loan Applications within the prescribed time limit is to be ensured as under:
1. Upto Rs. 2 lakh 2 Weeks
2. Above Rs.2 lakh & upto Rs.50 lakh 4 weeks
3. Above Rs.50 lakh & upto Rs.100 lakh 5-6 weeks
4. Above Rs.100 lakh & upto Rs.100 crore 6-7 weeks
5. Above Rs.100 crore 8-9 weeks
39

40. CONTD..
 Sufficient Loaning Powers have been vested to ensure faster
disposal of MSMEs loan applications: i) Branch Managers have
been vested with higher powers to directly dispose of proposals at
branch level for financing Micro Enterprises
(manufacturing/service).
 At present there is a system of online filing of loan applications
by MSEs on Bank’s website. The Bank is providing 20%
concession in processing/upfront fee, in case such applications
received online.
 Special concession to Women owned enterprises have been
extended in margin requirement and interest rates, irrespective to
the amount of loan. 40

41. The Bank has approved Credit Rating
agencies like SMERA, CRISIL, ICRA,
ONICRA and BRICKWORK for rating of the
MSME units and is extending interest
concession of 0.50% for first two rating
grades and 0.25% to third rating grade only.
41
PNB: MSMEs and Credit Rating

42. PARAMETERS CONSIDERED BY BANKS WHILE LENDING TO MSMES
 The following parameters are used in various connotations by banks/FI
for their lending decisions:
1. Prospects: This refers to both the Industry and Firm analysis in terms of
growth prospects, financial stability, threat perceptions and the like.
2. Purpose: The need and form of Loan.
3. Payment: The possibility of repayment.
4. Person: The will and ability of a person to repay.
5. Protection: The type of security provided to the lender, its value and ease of
liquidation.
 Applying the same parameters, without factoring their uniqueness, has
resulted in a skewed Net Bank Credit to the MSMEs sector:
42

43.  Of the Rs. 477,899 crore Net Bank Credit, only 11.1%
was available to the MSME sector.
 The lending, based on category of the borrowers as
opposed to a fair and systematic credit appraisal system
has led to the longevity of the informal sector despite its
atrocious lending rates and recovery mechanisms.
 Organizational structure of MSMEs also play a critical
role in Banks decision of lending to MSMEs.
43

44. 44
SOURCE: ANNUAL REPORT MSME, 2013-2014

45. SOURCES OF FINANCE FOR MSMES
45

46. FACTORS AFFECTING MSMES
 Accessing adequate and timely financing on
competitive terms, particularly longer tenure loans.
 Factors that include policy, legal/regulatory framework
(in terms of recovery, bankruptcy and contract
enforcement), institutional weaknesses (absence of
good credit appraisal and risk management/ monitoring
tools), and lack of reliable credit information on MSMEs.
46

47. CONTD.
 It has become difficult for lenders to be able to assess risk premiums
properly, creating differences in the perceived versus real risk profiles of SMEs.
 Access to skilled manpower, R&D facilities and marketing channels is limited.
 Availability of finance at cheaper rates and good management and accounting
practices, and access to modern technology.
 Bribery, corruption, red tapism.
47

48. EMPLOYMENT
GENERATION
MEETS THE
DEMAND OF THE
MARKET
SHARE IN
NATIONAL
INCOME
SOCIAL
ADVANTAGES
MAKE USE OF
INDUSTRIAL
WASTE
REDUCES
REGIONAL
DISPARITY
EXPORT
PROMOTION
MOBILIZATION
OF LOCAL
RESOURCES
Advantages Of
MSME
ADVANTAGES OF Establishing MSME
48

49. PROBLEMS FACED BY MSME IN INDIA
INTERNAL
PROBLEMS
FAULTY
PLANNING
POOR PROJECT
IMPLEMENTATION
POOR
MANAGEMENT
INADEQUATE
FINANCE
PROBLEMS
LABOUR
PROBLEMS
EXTERNAL
PROBLEMS
LOCATION
POWER
PROBLEMS
INPUT
MARKET
PROBLEMS
GOVT. POLICY
49

50. Comparative Analysis with Europe MSME’s Sector
50

51. 51
Europe’s MSME’s structure
23 million
MSME’s
• 57% sole
proprietorship
80% Private
sector
employment
Source: 2008/09 European commission

52. 52
Source: 2008/09 European commission
Europe
Italy
&
Greece
o Italy and Greece – Highest MSME’s, Employees and Micro
enterprise.

53. 53
Positive Points of Europe MSME’s structure
o Business friendly environment
o European Commission categories MSME’s in (2005) (for simplify
administrative and management)
- Staff headcount
- Turnover and/or balance sheet
o Europe Commission made Small Business Act, 2008.
- In which all Europe countries became member and promote MSME’s sector
in structure format and develop MSME friendly environment. It is the first
comprehensive EU SME policy framework, including legislative proposals,
which aims to:
• Facilitate MSMEs access to funding
• Help MSMEs to get most out of the EUs Single Market
• Create an entrepreneurial environment.

54. 54
The Portal gathers all information the EU provides on for MSMEs, ranging
from practical advice to policy issues.
EU Small Business Portal

55. 55
This site helps MSMEs to apply for finance supported by
European Union.
Access to Finance

56. 56
Apart from above, other European Commission support to MSME’s sector
are…
o Simplified financial and administrative procedure
o Promote Education and Business Environment
o Government policy support
o Simplify communication, creating awareness and improve
information structure.

57. 57
European Commission Target 2007 to 2013
The structural
funds 2007/13
• Around 27 billion
Euros support
• Promote
technological
support and
innovations.
Launched JEREMIE
(Joint European
Regional
Development Fund)
• MSME access finance
through financial
instruments
• Equity, Debt, Quasi
equity and Technology
transfer fund
European
Globalisation Fund
(EGF)
• Utilize at the time
Economic crisis.

58. 58
What should India adopt from the Europian
MSME’s industry?
1. Increase utilization of installed capacity
2. Increase information, orientation and facilities
3. Specialized training for administrative, local,
national and world market, research and
development, innovation and education
4. Improve
- Management
- Accounting
- Consulting and supporting services
- Primary and industrial education level
5. Improve quality of input-output by using more
innovative and economic tools in all the level
CONCLUSION

59. 59
6. Create awareness about global trade laws
7. Subsidies import and export policy of SME’s
9. Government should reserve rural market for SME’s
and protect them from competition by big industrial
houses
10. Facilitate by credit instruments support and
lowering down rates for start ups and at the time of
economic crisis.

60. Seed Bed refers to preparing the soil
for sowing of seeds for a good crop.
As it provides conducive conditions
for the Development And Growth of
Entrepreneurs.
E.G:-Amul, Saras,
Himalaya.Pvt.Ltd
SMALL BUSINESS AS A SEED BED OF LARGE BUSINESS
60

61.  To sum up we can say that MSME
serves as a seed bed of
entrepreneurship as it provides
conducive conditions for the
development and growth of
entrepreneurs.
 Small enterprises require low
investment and simple technology
and use local resources to meet
local demands through personal
contacts. 61

62. 62