Public sector banks finance to MSME

SELP Journal of Social Science July - September 2016
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Vol. VII, Issue. 29 ISSN : 0975-9999 (P), 2349-1655 (O)
97
PUBLIC SECTOR BANKS FINANCE TO MSME
Dr. C. Paramasivan
Assistant Professor of Commerce & Research supervisor,
Periyar E.V.R. College (Autonomous), Tiruchirappalli – 23
Ms. A. Jainambu Gani
Ph.D. Research Scholar - PartTime B Category, Department of Commerce
Research and Development Centre, Bharathiar University, Coimbatore
ABSTRACT
The banking system occupies an important place in a nation’s economy. A banking institution
is indispensable in a modern society. It plays a pivotal role in the economic development of a
country and forms the core of the money market in an advance country. With the effects of the
globalisation, banking sectors become highly competitive and technology based with
multidimensional products to the customers and public. Commercial banks particularly public
sectors banks are extremely responsible to the provide financial support to industrial sectors not
only for generate revenue but also for the development of industries in a particular region which
the banks is located. MSME needs liberal financial assistance from commercial banks to establish
and extent their business operation to meet the global competition.RBI has formulated several
policies regarding financing to priority sectors particularly in small industries in the country.
Naga Sridhar(2008), in his article “Steady Growth in Public Sector Banks” SME lending money
says that the small and medium enterprises (SMEs) are departing from their traditional strong
hold sectors and are venturing into new areas if the trends in SME lending by some banks in 2007
are any indication to go by. There has been greater interest float SMEs in relatively newer sectors
such as hospitality, hospitals and travel agencies in addition to the popular areas such as textiles,
fertilizers, gems and jewellery, according to bankers.
Introduction
Growth of industrial development in a country
depends on availability of infrastructural facilities
and credit facilities offered by the financial
institutions particularly commercial banks. The
Indian banking systemconsists of 26 public sector
banks, 25 private sector banks, 43 foreign banks,
56 regional rural banks, 1,589 urban cooperative
banks and 93,550 rural cooperative banks, in
addition to cooperative credit institutions. Public-
sector banks control nearly 80 percent of the
market, thereby leaving comparatively much
smaller shares for its private peers. Banks are also
encouraging their customers to manage their
finances using mobile phones. The value of
mobile banking transactions in December 2015
increased four times year-on-year and jumped by
46 per cent over the previous month to Rs 49,029
crore (US$ 7.34 billion), as per data fromthe RBI.
Well organised banking system and availability
of bank fiancé to industrial concern are very
essential in developing countries like India.
Smooth flow of bank finance leads to sustainable
growth of MSME in the place concerned. Bank
is considered as a prominent component of
financial system of the country which facilitates
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SELP Journal of Social Science
ISSN : 0975-9999 (P) 2349-1655 (O)
Impact Factor : 2.78(IRJIF), 2.5(JIF), 1.056(RIF), 0.60(QF)
Vol. VII, Issue. 29
July - September 2016

the flow of capital from surplus to the needy
concerns. If financial assistance to the small
industries is generously available, there will be
constant growth of industrial sectors.
Review of literature
Kamalakannan.R(1999), in his study on
“Financing of SSI in Kamarjar District” the main
objectives of the thesis are to analyze the financial
institutions provided by commercial banks, to find
out major problems faced by SSI, to offer
suggestions. He concludes that in the Indian
economy where population pressure is high,
resources abundant and capital scarce, SSI alone
offers proper solution for economic ills. Pre SSI
has a good export potential. The government of
India also has emphasized the importance of SSI
for achieving socio-economic objectives like
generating more employment, removing regional
disparities and reduction in economic
backwardness of the rural area. However the SSI
often suffers from resources own preventing
further investment. The development of SSI units
depends upon the availability of required finance
at reasonable cost at the right time.
Neelamegam.R (1981) in his study on “A
study of institutional finance to SSI with special
reference to Tamilnadu”.has concluded that the
suggestion is that there must be two separate
independent and autonomous apex Financial
institutions for large and medium SI and another
for SSI with their constituent institutions,
specialsing in clearly demarcated are of
operational in relation to the industrial sectors
they cover, to facilitate and assure adequate and
proper flow of institutional finance to industries
as whole and particularly to SSI.
Rajalakshmi.V(1992)in her study on “A study
of Institutional Finance to Marine Small Scale
Fishers in Chidambaram district, Tamilnadu”, has
concluded that among institutional borrowers,
borrowers from banks are more in numbers. This
may be due to very low disbursement of loans by
co-operative societies. The borrowers accept the
poor performance in repayment of loans. The
main reason being, the uncertain income they get
due to fluctuations in fish catching.
State bank of India(1991), was the first bank
as standing the bank credit problems of SSIs. It
has been reviewing its policies, and procedures
from time to time with a view to stimulating the
growth of SSI in the country.Anumber of reviews
have been undertaken in 1963 by a team headed
by R.K.Talwar. The team studied the problems
of SSI from the view point of finance. In 1970,
another committee was appointed under the
chairmanship of the H.E.Chatelier for the
improvement of the organisation and procedures
in financing the SSIs. In 1974 another committee
under the chairmanship of J.S.Varshney was set
up to study the problems of SSI with aggregate
borrowings in excess of Rs 2 Lakhs.
Geetha.K(1999), has said that the
lending
performance of public sector banks seems to be
inadequate in case of providing crop loans, minor
irrigation loans. The lack of personal involvement
of the individual office at various levels plays a
major role in affecting the lending operations.
Another reason while, advancing loans and
advances as that the formalities are more in public
sector banks than private sector. In order to
increase their lending efficiency proper attention
must be given to these aspects.
Thilakam.C(1996) in his study on “A Study
of Financing of select SSI by Commercial banks
in Tamilnadu”, has Studied the role of SSI in
Indian development, to study the role of
commercial banks in financing SSI units, to make
an indepth study of financing of SSI by select
commercial banks in Tamilnadu, to identify the
factors influencing bank finance to SSI units and
to study their relationship and to summarise the
findings and suggest measures.
Chandrasekeran.K1993), has concluded that
this study anyway helps the bank and the
borrowers to cross the hurdles in their mutual
interactions which will result in the development
of SSI in the area. The researcher was amply
rewarded.
Venkatachalam.T(2002), in his research work
could have revealed many more facts had the
adequate data been available. Commercial banks
should also own the responsibility of financing
98

adequate working capital. The need based
financing of working capital should be the
approach instead of reliance on security oriented
financing. Separate cash credit limits for Raw
material, SFG, Bills sent for collection has been
granted as per need of business. The commercial
banks out of their experience should help the
small entrepreneurs in estimating the working
capital needs of the unit.
Rajendran.N(1995),has saidin “Institutional
Assistance for the Development of SSI in
Tiruchirappalli District” that the main objectives
of the study are to study and evaluate the policies
and plans relating to the development of SSI, to
study and analyze the role of industrial promotion
institutions in the development of SSI, to
highlight the problem faced by the SSI in availing
the facilities from various institutions. He
concluded that for advancing loans, the collateral
security sought by the banks is also a major
problem.
Joseph Xavier.S(2000), in his “Study on the
Contribution of Commercial Banks to the
development of SSI in Tiruchirappalli district”
makes an attempt to assess the financial needs of
SSI, to identify different sources of finance to
SSI, to study the role of financial institutions in
providing financial assistance to the SSI, to
identify the problems of SSI in availing bank
finance and to suggest solutions to the problems
identified.
Manoharan.P(2000), in his research work
“SSI with special reference to bank financing in
Karur district”, says that the objectives are to
review the programmes both by government and
other institutions for the development of SSI, to
study the financial conditions of SSI, to identify
the causes of sickness among the SSI and to study
the role expectations, its fulfillment and failure.
Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006
The Government of India has enacted the
Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006 on June 16,
2006 which was notified on October 2, 2006.
With the enactment of MSMED Act 2006, the
paradigmshift that has taken place is the inclusion
of services sector in the definition of Micro, Small
and Medium Enterprises, apart from extending
the scope to Medium Enterprises.
Definition of Micro, Small and Medium
Enterprises:
The MSMED Act, 2006 defines the Micro,
Small and Medium Enterprises based (i) on the
investment in plant and machinery for those
engaged in manufacturing or production,
processing or preservation of goods and (ii) on
the investment in equipment for enterprises
engaged in providing or rendering of Services.
The investment in plant and machinery is the
original cost excluding land and building and
other items specified by the Ministry of Small
Scale Industries vide its notification no. S.O. 1722
(E) dated 05.10.2006.
The guidelines with regard to investment in
plant and machinery or equipment as defined in
the MSMED Act, 2006 are:
The investment in plant and machinery is the
original cost excluding land and building and
other items specified by the Ministry of Small
Scale Industries vide its notification. The
illustrative lists of enterprises that are engaged
in providing or rendering services are:
 Small road and water transport operators
(original investment in vehicles upto
Rs.200.00 lacs under Priority sector)
 Retail trade (with credit limits not exceeding
Rs.20.00 lakhs)
 Small business (whose original cost price of
the equipment used for the purpose of business
does not exceed Rs.20.00 lakhs
99

 Professional and self-employed persons
(whose borrowing limits do not exceed
Rs.10.00 lakhs of which not more than
Rs.2.00 lakhs should be for working capital
requirements except in case of professionally
qualified medical practitioners setting up of
practice in semi-urban and rural areas, the
borrowing limits should not exceed Rs.15.00
lakhs with a sub-ceiling of Rs.3 lakhs for
working capital requirements)
Performance and growth of MSME
Micro, Small and Medium Enterprise
(MSME’S) are recognized having enormous
potential for employment generation and wealth
creation in any economy in addition other
immeasurable virtues. Micro , Small and Medium
Enterprises play a vital role for the growth of
Indian economy by contributing 45 per cent of
the industrial output, 40 per cent of exports, 42
million in employment, create one million jobs
every year and produces more than 8000 quality
products for the Indian and international markets.
Meanwhile, according to the minister,
according to the Fourth All India Census of
Micro, Small & Medium Enterprises 2006-2007,
the total number of MSMEs in the country was
at 261.01 lakh. The share of registered MSMEs
is 5.94 per cent.
According to an estimate by the Central
Statistical Organisation, Ministry of Statistics and
Programme Implementation, the share of micro
and small enterprises (MSEs) in the country’s
gross domestic product (GDP) stood at 5.84 per
cent in 2004-05, 5.83 per cent in 2005-06, 7.20
per cent in 2006-07, 8 per cent in 2007-08 and
8.72 per cent in 2008-09.
Singh said the government monitors
employment generation in the MSME sector by
conducting the All India Census of MSMEs
periodically in the country. The latest Census
(Fourth Census) was conducted with 2006-07 as
the reference year.
Registered MSMEs, according to ‘Final
Results: Fourth All India Census of Micro, Small
& Medium Enterprises 2006-07: Registered
Sector’ created jobs for 9,309,000 people. The
unregistered sector, according to ‘Quick Results:
Fourth All India Census of Micro, Small &
Medium Enterprises 2006-2007’ created jobs for
502.57 lakh persons.
As per the Economic Survey 2010-11, total
employment in the organised sector of the
economy, as on March 31, 2007 stood at
27,276,000. The registration of MSMEs is a
necessary condition for availing of the benefits
of financial assistance schemes of the MSME
ministry. However, unregistered MSMEs are
eligible for availing of assistance from the
banking sector.
List of Government Loan Schemes for Small
Business in India
1. The Credit Guarantee Fund Scheme for
Micro and Small Enterprises
The Credit Guarantee Fund Scheme for Micro
and Small Enterprises (CGMSE) was launched
by the Government of India to provide collateral-
free credit to Indian MSMEs. Both the existing
and the new enterprises are eligible for the
scheme. The scheme provides credit facilities in
the formof termloans and working capital facility
of up to Rs. 100 lakh per borrowing unit. The
amount is contributed by the Government and
SIDBI in the ratio of 4:1, respectively. The
scheme also offers rehabilitation assistance to sick
units covered under the guarantee scheme.
Credit Link Capital Subsidy Scheme for
Technology Upgradation
Upgradation of the process as well as the
corresponding plant and machinery is important
to help SMEs reduce the cost of production and
remain price competitive in the global market.
To help SMEs flourish in international trade
markets, the Ministry of Small Scale Industries
(SSI) runs a scheme for technology upgradations
of Small Scale Industries. Known as the Credit
Linked Capital Subsidy Scheme (CLCSS), it aims
100

at facilitating technology upgradations by
providing an upfront capital subsidy of 15 per
cent (limited to maximum Rs.15 lakhs) to SSI
units for credit availed by them for the
modernisation of their plant and machinery.
3. Small Industries Development Bank of
India (SIDBI)
Small Industries Development Bank of India
(SIDBI) started its small business funding
programs way back in 1990. Established by an
act of Parliament, SIDBI is now one of the most
illustrious names among the government financial
institutions. This loan has played an active role
in the promotion and development of the small
business industry. Various schemes provided by
SIDBI are enlisted below:
 Direct Assistance Scheme
 Indirect Assistance Scheme
 Promotional and Development Activities
 National Equity Fund, Scheme
 Technology Development and Modernization
Fund Scheme
 Single Window Scheme
 Mahila Udyam Nidhi (MUN)
 Scheme and Equipment Finance Scheme
 Integrated Development of Leather Sector
Scheme (IDLSS)
 FPTUFS – Scheme for Food Processing
Industries
4. National Small Industries Corporation
Limited (NSIC)
National Small Industries Corporation
Limited (NSIC) came into effect in the year 1999
with an objective of encouraging the small scale
industries in the country. The prime feature of
NSIC is to import machines on hire-purchase
terms. It lay emphasis on supplying and
distributing both indigenous and imported raw
material as well as on exporting the products of
small business units. Besides, it also creates
awareness of advancements occurring in the field
of small scale industries.
5. National Bank for Agriculture and Rural
Development (NABARD)
National Bank for Agriculture and Rural
Development or NABARD came into existence
mainly for promoting agriculture-based rural
business enterprises. NABARD mostly offers
financial assistance to small scale industries viz;
cottage and village industry.
6. Market Development Assistance Scheme for
MSMEs
To help Indian manufacturing SMEs gain
traction in the international markets, the Market
Development Assistance Scheme for MSMEs
offers funding for participation in international
trade fairs and exhibitions under MSME India
stall. It also offers funding for sector-specific
market studies by industry associations, export
promotion councils, and FIEO. This scheme
offers reimbursement of 75 per cent of a one-time
registration fee and 75 per cent of annual fees
(recurring) paid to GSI by SMEs for the first three
years for the bar code.
7. Technology and Quality Upgradation
Support to Micro, Small and Medium
Enterprises
This scheme aims at sensitizing the
manufacturing MSME sector to use energy
efficient technologies and manufacturing
processes in order to reduce production cost and
emissions of harmful gasses. The scheme also
aims to improve the product quality of MSMEs
to encourage them towards becoming globally
competitive. For this, the Government of India
provides financial support to the extent of 75 per
cent of the actual expenditure to help to
manufacture MSMEs buy energy efficient
technologies for production.
8. Mini Tools Room and Training Centre
Scheme
To assist state governments set up Mini Tool
Room and Training Centres, the Government of
India provides financial assistance in the form of
one-time grant-in-aid. The financial aid equals
101

to 90 per cent of the cost of machinery/equipment
(maximum to Rs. 9 crores) in case new Mini Tool
Room has to be created and 75 per cent of the
cost (maximum to Rs. 7.50 crore) in case an
existing room has to be upgraded. The main
objective of this scheme is to develop more tool
room facilities in order to provide technological
support to the MSMEs and training facility in tool
manufacturing and tool design to create a
workforce of skilled workers, supervisors,
engineers/designers, etc.
Bank credit to micro and small enterprises
Indian banking sectors play a vital role in the
field of socio economic development through its
conventional as well as pioneering services in the
modern periods with innovative banking models
like payments and small finance banks. The
central bank granted in-principle approval to 11
payments banks and 10 small finance banks in
FY 2015-16.RBI’s new measures may go a long
way in helping the restructuring of the domestic
banking industry. MSME needs liberal financial
assistance from commercial banks to establish
and extent their business operation to meet the
global competition.RBI has formulated several
policies regarding financing to priority sectors
particularly in small industries in the country.
Bank credit to the country’s micro, small and
medium enterprise (MSME) sector rose to 15.1
per cent of total bank credit at the end of March
2011 (provisional), from 13.4 per cent at the end
of March 2010. According to the Reserve Bank
of India (RBI), total outstanding credit to this
sector rose to Rs 3.76 lakh crore in March 2011,
from Rs 2.78 lakh crore a year earlier.RBI has
issued detailed guidelines to all scheduled
commercial banks on lending to MSMEs which,
among other things, provide for a time frame for
disposal of loan applications and dispensing with
the collateral requirements for MSEs.
According to the recommendations made by
a task force on MSMEs under the chairmanship
of the former principal secretary to the prime
minister, RBI was asked to advise banks to
achieve 20 per cent year-on-year growth in credit
to MSEs and 10 per cent annual growth in the
number of micro enterprise accounts.
Table 1 Performance of public sector banks
(Amount in ‘ million)
Source: Reserve Bank of India
The above table indicates that the performance
of public sector banks in India during the year
2008-09 to 2012-13. Numbers of banks have been
decreased from 27 to 26 and number of branches
has been increased to 75779 in the year 2012-13.
Number of employees rose to 801659 and
Business per employee recorded with 127.47.
As regards the business performance, Capital
and Reserve & Surplus amounted to Rs. 4086022
million, deposits amounted to Rs. 57456972
million, investment amounted to Rs. 17591058
million and advances amounted to Rs. 44727740
million.
As regards the earnings and expenditure of
public sector in 2012-13, Interest Income
amounted to Rs. 5548765 million, other income
amounted to Rs. 567812 million, Interest
expended amounted to Rs. 3879290 million and
Operating expenses amounted to Rs. 1018122
million. Return on Equity is recorded with 13.24
per cent, CRAR is 12.38 per cent and Net NPA
ratio is 2.02.
102

Table 2 Bank credit to Micro and Small
Enterprises
Source: Reserve Bank of India
To ensure that sufficient credit is available to
micro enterprises within the MSE sector,
according to the RBI’s guidelines to banks, 60
per cent of MSE advances should go to micro
enterprises, according to Union Minister for
MSMEs Virbhadra Singh, who was replying to a
question in the Lok Sabha recently. Banks have
been advised that the allocation of 60 per cent of
MSE advances to micro enterprises is to be
achieved in stages — 50 per cent was the target
for the year 2010-11, 55 per cent in 2011-12 and
60 per cent in 2012-13.
Conclusion
Commercial banks particularly public sectors
banks are extremely responsible to the provide
financial support to industrial sectors not only to
generate revenue but also for the development of
industries in a particular region in which the
banks is located. Development of industries helps
generate more employment opportunities as well
as promote the economic growth of the particular
region. One of the major bottlenecks to the growth
of SMEs in India is access to finance. Banks are
the dominant channel for funding SMEs and in
this paper, we survey some of the major issues in
the financing of SMEs in the Indian context.
While banks in India are not provided with a
specific target for lending to SMEs, the bank
loans given to the micro and small enterprises
are part of the priority sector lending. Indian
banks are required to achieve a target of 40 per
cent of adjusted net bank credit to the priority
sector, while foreign banks have a target of 32
per cent exposure to the priority sector (Reserve
Bank of India, 2009). Therefore, there is a need
of more industrial development with the help of
available infrastructure and resources. Success of
industries depends on availability of finance and
its management. There is a need of financial
support from banks is one of the powerful
instruments to sustain the industries.
References
1. Chandrasekeran (1993), “Financing of SSI by
SBI siruthazhil branch Salem” M.Phil
Dissertation , Madras University, Madras,p.138.
2. Geetha.K(1999), Lending performance of
Commercial banks in Salem District,p.135.
3. Joseph Xavier.S (2000), “A study on the
contribution of commercial banks to the
development of SSI in Tiruchirappalli district”,
Ph.D Dissertation, BharthidasanUniversity,
Tirucherappalli, p.198.
4. Kamalakannan. R (1999), “Financing of SSI in
Kamarjar District”, Ph.D. Dissertation,
MaduriKamarajUniversity,p.209.
5. Manoharan.P (2000), “A study on SSI with
special reference tofinancing in Karur district”,
Ph.D Dissertation ,Bharthidasan University,
6. Naga Sridhar (2008), article on “Steadygrowth
in public sector banks” Business line 1/January,
p.8.
7. Neelamegam.R(1981), “A studyof institutional
finance to SSI with special reference to
Tamilnadu”, Ph.D. Dissertation , Madurai
Kamaraj University, p.238.
8. Rajalakshmi. V (1992), “Astudy of institutional
finance to Marine small scale fishers in
Chidambaram district Tamilnadu”, Ph.D,
Dissertation ,MaduraiKamarajUniversity,
p.256.
9. Rajendran.N (1995), “Institutional Assistance
for the development of SSI in Tiruchirappalli”,
Ph.D Dissertation ,Bharthidasan University,
10. Ramakrishnan.P (1975), “Newentrepreneurship
in SSI in Delhi”, Economic and
Scientific research foundation, Delhi , p.36.
11. SBI Monthly Review May (1991), p.225.
103

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