Small Scale Industries (SSI) play a pivotal role in the employment generation and export promotion strategies, among others, of industrialization in many develop as well as developing countries including India. Considering their unique features, governments in both industrialized and developing countries provide a wide variety of programmes to assist small and medium scale enterprises.
The primary justifications for the special policy support to SSI are:
1. They have the capacity to produce a large number and variety of goods with relatively low investment, that they offer greater employment opportunities per unit of capital investment as compared to large enterprises and that the scope for organizing their growth on a decentralized pattern over a large area results in achieving distinct socio-economic advantages such as better and fuller utilization of untapped resources of capital and skill and more equitable distribution of national income.
2. It is appropriate, therefore, that each country should have developed its own strategy for the development of SSI and has offered liberal concessions and attractive incentives for entrepreneurship growth and SSI development.
SSI on the whole has bright prospects, but due to individual enterprise’s weakness in scale and limitations in personnel, information, management and especially financing, the development of these enterprises does not go smoothly (Wang, 2004). Particularly, improving the SSI entrepreneur’s access to financing services is justified on the ground that a robust industrial base contains a flourishing SSI sector and that increasing SSI access to services normally available to larger, established firms.
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II. Small Scale Industries
2.1Small Scale and Ancillary Industries
Small scale industrial units are those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) does not exceed Rs.1 crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery. In the case of ancillary units, the investment in plant and machinery (original cost) should also not exceed Rs. 1 crore to be classified under small-scale industry.
The investment limit of Rs. 1 crore for classification as SSI has been enhanced to Rs.5 crore in respect of certain specified items under hosiery, hand tools, drugs & pharmaceuticals, stationery items and sports goods by the Government of India.
2.2. Tiny Enterprises
The status of ‘Tiny Enterprises’ may be given to all small scale units whose investment in plant & machinery is up to Rs. 25 lac, irrespective of the location of the unit.
III. Small Scale Industries – Financing
Finance is a key input of production, distribution and development. During the pre-independence period, financial constraints had hampered the rapid growth of industries in the country. After the independence, the Government has built up a network of specialized financial institutions to provide financial assistance to all types of industries including small scale industries.
A growing economy needs the support of financial structure for the industrial development. In India, commercial banks have shouldered the special responsibilities for meeting the financial needs of the diverse sectors of the economy at various stages of development. They have evolved various modes and instruments of financing, designed various organization innovations, moved away from traditional commercial banking and stepped into development banks and responsive to socio-economic needs.
The commercial banks are now meeting the financial requirements of entrepreneurs.
For the medium to large term requirements, State Financial Corporation and other similar financing agencies step into their needs. An appropriate type of credit is granted for the construction of the factory building, purchase of plant and machinery, equipments and for working capital requirements. The loans are advanced for the expansion, renovation and modernization of plant and machinery. Bank and financial institutions provide export finance needed by small industries for letters of credit, issuance of guarantees, extension of pre-shipment and post shipment credit facilities.
3.1 Types of Industrial Finance:
Depending upon the nature of the activity, the entrepreneurs require 3 types of finances viz., short, medium term and long term finances.
Short Term Finance: This refers to the funds required for a period of less than one year, usually required to meet variables, seasonal or temporary working capital requirements. Banks provide short-term finance to meet these requirements. Other important sources of finances available are trade credit, installment credit and customer advances.
Medium term finance: The period of one year to five years may be regarded as a medium term. This is required for permanent working capital, small expansions, replacements, and modifications, etc. The fund could be raised by (1) issue of shares, (2) Issue of Debentures (3) Borrowing from banks and other financial institutions, (4) Ploughing back of profits from the existing concerns.
Long term finance: Long term period exceeds a period of 5 years. The finance is required for procuring fixed assets, for the establishment of a new business, substantial expansion of existing business, modernization, introduction of technology, etc. The fund could be raised by (1) issue of shares, (2) Issue of Debentures (3) Loans from financial institutions, (4) Ploughing back of profits from the existing concerns.
3.2 Means of finance: Credit Flow
Credit is the prime input for sustained growth of small scale sector and its availability continues to be a matter of concern. Credit provided for creation of fixed assets like land, building, plant and machinery is called long term credit. Credit provided for running the industry for its day to day requirement for purchasing raw material and other inputs like electricity and water etc. and for payment of wages and salaries is called short term credit or working capital.
Small Scale Industrial Sector is provided working capital by commercial banks and in some cases by cooperative banks and regional rural banks. Term loans are provided by State Financial Corporations (SFCs), Small Industries Development Corporations (SIDCs), National Small Industries Corporation (NSIC) and National Bank for Agriculture and Rural Development (NABARD). Financial assistance from NSIC and to some extent from SIDCs is available in the form of supply of machinery on hire purchase basis/deferred payment basis. Small sized SSI and tiny units also get some term loans from commercial banks alongwith working capital in the form of composite loans.
Refinance to these institutions is provided by the Small Industries Development Bank of India (SIDBI). Such refinance comprises assistance provided to State Financial Corporation Bills, Finance Scheme, Special Capital/Seed Capital Scheme, new debt instruments and to National Small Industries Corporation. Long term loan are provided to the smalls scale industrial units by SFCs mainly through Single Window Scheme and National Equity Fund as also direct assistance provided to State Financial Corporations in the form of refinance. Some part of working capital for pre-operative expenses is also provided by State Financial Corporations to Small Scale Industrial Units under the Single Window Scheme.
3.2.1 Credit to SSI Sector from Public Sector Banks
The table below gives the positions with regard to flow of credit to SSI Sector:-
At the end of March 2005
At the end of March 2006
At the end of March 2007
At the end of March 2008
At the end of March 2009
Net Bank Credit
Credit to SSI
No. of SSI Accounts (in lakhs)
SSI Credit as percentage of Net Bank Credit
There is a marginal decline in share of credit to SSI sector as a percentage of net bank credit.
3.2.2 Credit to Tiny Sector
The Table below gives the status of credit flow to tiny sector since 1995:-
At the end of March 1995
At the end of March 1996
At the end of March 1997
At the end of March 1998
Net Credit to Tiny Sector
Tiny credit as percentage of net SSI credit
The advances outstanding against Tiny sector increased from Rs.9515 crores at the end of March, 1997 to Rs. 10273 crores at the end of March, 1998. The share of tiny sector in the advances to SSI sector has, however, decreased from 30.2% at the end of March 1997 to 27.0% at the end of March, 1998. As per RBI guidelines, 40% priority sector lending going to SSI has to go to tiny units with investment in plant and machinery below Rs. 5 lakhs and another 20% to tiny units with investment in plant and machinery between Rs. 5 lakhs and Rs. 25 lakhs. Thus, against the target of 60% of SSI credit for tiny units, actual flow at 27% is very low.
3.2.3 Nayak Committee
Nayak Committee was set up by the Reserve Bank of India in December. Nayak Committee, RBI issued a number of circulars advising the banks to grant working capital to the extent of 20% of the projected annual turnover, timely disposal of loan applications and setting up of specialized bank branches for SSI loaning in areas of higher SSI concentration.
As a follow up of Nayak Committee recommendations, Finance Minister in the Budget speech of 1995-96, announced a Seven Point Action Plan for improving the flow of credit to small scale sector consisting of the following:
i) Time bound action for setting up specialized SSI branches in 85 identified districts; at least 100 such dedicated branches to be opened before the need of 1995-96.
ii) Adequate delegation of powers at the branch and regional levels.
iii) Banks to conduct sample surveys of their performing SI accounts to find out whether they are getting adequate credit.
iv) Steps to be taken to see as far as possible that composite loans (covering both term loans and working capital) are sanctioned to SSI entrepreneurs.
v) Regular meetings by banks at zonal and regional levels with SSI entrepreneurs.
vi) Need to sensitize bank mangers and reorient them regarding working of the SSI sector. vii) Simplification of procedural formalities by banks for SSI entrepreneurs.
3.2.4 Steps taken by Reserve Bank of India to improve credit flow to SSI sector
a) The Government had raised the investment limit for SSIs from Rs.60 lakhs to Rs.300 lakhs and for tiny units from Rs.5 lakhs to Rs.25 lakhs. In order to ensure that credit is available to all segments of tiny sector. RBI has issued instructions that out of the funds normally available to SSI sector, 40% be given to units with investment in plant and machinery up to Rs. 5 lakhs; 20% for units with investment between Rs. 5 lakhs to Rs.25 lakhs and remaining 40% for other units.
b) Public sector banks have been advised to operationalise more specialised SSI branches at centres where there is a potential for financing many SSI borrowers. As on March 1998, 370 specialised SSI branches are working in the country.
c) To extend ‘Single Window Scheme’ of SIDBI to all districts to meet the financial requirements (both term loan & working capital) of SSIs.
d) With a view to moderating the cost of credit to SSI units, banks are advised to accord SSI units with a good track record the benefits of lower spread over the Prime Lending Rate.
e) In order to take expeditious decision on credit proposals of SSI units, banks have been advised to delegate enhanced powers to the branch managers of the specialised SSI branch so that most of the credit proposals are decided at the branch level.
Credit to SSIs is monitored periodically by Reserve Bank of India, Department of SSI & ARI, National Advisory Committee of SIDBI, State Level Bankers Committee and District Level Coordination Committees of the Bank.
3.2.6 Fresh initiatives announced in the Budget of 2008-2009
In this budget speech the Finance Minister has announced the following measures for improving credit supply to SSI sector
a) A new credit insurance scheme launched.
Inability to provide adequate security to banks and low recovery are often sighted as major constraint in flow of investment credit of SSI units. The problem is more acute for export oriented and tiny sector enterprises. To alleviate this problem, the Finance Minister announced that a new credit insurance scheme will be launched.
b) Composite Loan Scheme Limit Enhanced to Rs. 5 Lakhs
The composite loan scheme of SIDBI and commercial banks is designed to case operational difficulties of the small borrowers by presiding term loan and working capital through a single window. The limit for composite loans currently at Rs. 2 lakhs has been enhanced to Rs. 5 lakhs.
c) Working Capital Limit Enhanced to Rs. 5 Crores
For SSI units the working capital limit is determined by the banks on the basis of simple calculation of 20% of their annual turnover. The turnover limit for this purpose has been enhanced from Rs. 4 Crore to Rs. 5 Crore.
d) Credit Delivery to Tiny Sector
To increase the outreach of banks to the tiny sector, leading by banks to Non-Banking Financial Companies (NBFCs) or other financial intermediaries for purposes of on-lending to the tiny sector is being included within the definition of priority sector for bank lending.
3.2.7 High level committee for credit (Kapur committee)
In December, 1997, Reserve Bank of India has appointed a One-Man Committee under the Chairmanship of Shri S.L. Kapur, former Secretary (SSI), Government of India, to suggest measures for improving the delivery system and simplification of procedures for credit to small scale industrial sector. The Committee has submitted its report to RBI on 30th June, 1998. Some of the major recommendations of the Committee are:-
i) Special treatment to smaller among small industries
ii) Enhancement in the quantum of composite loans
iii) Removal of procedural difficulties in the path of SSI advances
iv) Sorting out issues relating to mortgages of land including removal of stamp duty and permitting equitable mortgages
v) Allowing access to low-cost funds to Small Industries Development Bank of India (SIDBI) for refinancing SSI loans
vi) Non-obtaining of collaterals for loans up to Rs.2 lakhs;
vii) Setting up of a collateral reserve fund to provide support to first party guarantees;
viii) Setting up of a Small Industries Infrastructure Development Fund for developing industrial areas in/around metropolitan and urban areas;
ix) Change in the definition of sick SSI units;
x) Giving statutory powers to State Level Inter-Institutional (SLIIC);
xi) Setting up of a separate guarantee organisation and opening of 1,000 additional specialised branches; and
xii)Enhancement of SIDBI’s role and status to match with that of National Bank for Agriculture and Rural Development (NABARD).
Kapur Committee has made 126 recommendations out of which RBI has already accepted 40 recommendations for implementation.
3.2.8 Amendment of interest on delayed payment act
To tackle the problem of settlement of dues of SSI units by large companies. Interest on Delayed Payment Act has been amended. The following amendments ahve been made in the Act.
a) The payment has to be made within 120 days to the SSI supplier from the date of acceptance of the goods by the buyer.
b) Interest on delayed payment has been revised from 5% above the floor rate to one and half time the prime lending rate charged by SBI.
c) Mechanism has been prescribed for settling disputes by Industry Facilitation Councils to be set up by State Governments through notification.
3.3 Small Industries Development Bank of India (SIDBI)
SIDBI was set up by an Act of Parliament, as an apex institution for promotion, financing and development of industries in small scale sector and for coordinating the functions of other institutions engaged in similar activities. It commenced operations on April 2, 1990. SIDBI extends direct/indirect financial assistance to SSIs, assisting the entire spectrum of small and tiny sector industries on All India basis.
The range of assistance comprising financing, extension support and promotional, are made available through appropriate schemes of direct and indirect assistance for the following purposes:-
· Setting up of new projects
· Expansion, diversification, modernisation, technology upgradation, quality improvement, rehabilitation of existing units
· Strengthening of marketing capabilities of SSI units.
· Development of infrastructure for SSIs and
· Export promotion.
3.3.1 Direct Assistance Schemes
SIDBI directly assists SSIs under Project Finance Scheme, Equipment Finance Scheme, Marketing Scheme, Vendor Development Scheme, Infrastructural Development Scheme, ISO-9000, Technology Development & Modernisation Fund, Venture Capital Scheme, assistance for leasing to NBFCs, SFCs, SIDCs and resource support to institutions involved in the development and financing of small scale sector.
These Schemes are mainly targeted at addressing some of the major problems of SSIs in areas such as high tech project, marketing, infrastructural development, delayed realisation of bills, obsolescence of technology, quality improvement, export financing and venture capital assistance.
3.3.2 Indirect Assistance Schemes
Under its indirect schemes, SIDBI extends refinance of loans to small scale sector by Primary Lending Institutions (PLIs) viz. SFCs, SIDCs and Banks. At present, such refinance assistance is extended to 892 PLIs and these PLIs extend credit through a net work of more than 65,000 branches all over the country.
All the Schemes of SIDBI both direct and indirect assistance are in operation in all the States of the country through 39 regional/branch offices of SIDBI.
3.3.3 Promotional and Development Activities
SIDBI is actively involved in promoting tiny and small scale industries by means of its promotional and developmental activities through suitable professional agencies for organising Entrepreneurship Development Programmes, Technology Upgradation & Modernisation Programmes, Micro Credit Schemes and assistance under Mahila Vikas Nidhi to bring about economic empowerment of women specially the rural poor by providing them avenues for training and employment opportunities.
SIDBI’s assistance to:
(i) Tiny Units – about 89.2 per cent of the number of projects assisted under Refinance Scheme during 2006-07 were tiny, receiving assistance upto Rs. 5 lakh per project. The sanctions for such projects accounted for 39.6% of the total amount of sanctions in 2006-07 as against 36.0% during the previous year.
(ii) Women entrepreneurs – under various schemes assistance amounting to Rs. 19.07 crores was given to 1067 women entrepreneurs during 2006-07.
(iii) Backward areas – during 2006-07, projects enanating from backward areas received assistance to the tune of Rs. 775 crores of sanction which accounted for 37% of total assistance under Refinance Scheme of SIDBI.
3.3.5 Measures to simplify Rules/Regulations
– To fill the gaps in the existing structure of credit delivery mechanism to the small scale sector, Small Industries Development Bank of India (SIDBI) keeps on effecting simplification of procedures, liberalisation of new schemes and introduction of new schemes.
– Endeavour of SIDBI is to ensure that no worthwhile proposal is denied credit for want of funds.
– Norms laid down by Reserve Bank of India and Government of India are followed by SIDBI for granting assistance to SSI units.
(i) Enhancement in the ceiling on loan amount of the Composite Loan Scheme to Rs. 2 lakh from the earlier ceiling of Rs. 50,000/- to ensure timely availability of term loan and working capital to the small units. The scheme was also liberalised to include units in all areas other than metropolitan areas.
(ii) Scope of Technology Development & Modernisation Fund Scheme and Refinance Scheme for Technology Development & Modernisation has been expanded to cover non-exporting SSIs/ancillary units graduating out of SSI sector for assistance under the scheme.
(iii) Scope of Single Window Scheme has been enlarged to cover modernisation, technology upgradation in addition to new SSI units. Project outlay under the scheme has been gradually raised from s. 30 lakhs to Rs. 100 lakhs. Simultaneously, the sub-limits for working capital and term loan components has been done away with.
3.3.6 Main Schemes of SIDBI
A brief summary of the Schemes available with SIDBI. More details are available under the Section Policies & Schemes.
National Equity Fund Scheme which provides equity support to small entrepreneurs setting up projects in Tiny Sector.
Technology Development & Modernisation Fund Scheme for providing finance to existing SSI units for technology upgradation/modernisation.
Single Window Scheme to provide both term loan for fixed assets and loan for working capital capital through the same agency.
Composite Loan Scheme for equipment and/or working capital and also for worksheds to artisans, village and cottage industries in Tiny Sector.
Mahila Udyam Nidhi (MUN) Scheme provides equity support to women entrepreneurs for setting up projects in Tiny Sector.
Scheme for financing activities: Relating to marketing of SSI products which provides assistance for undertaking various marketing related activities such as marketing research, R&D, product upgradation, participation in trade fairs and exhibitions, advertising branding, establishing distribution networks including show room, retail outlet, wears-housing facility, etc.
Equipment Finance Scheme for acquisition of machinery/equipment including Diesel Generator Sets which are not related to any specific project.
Venture Capital Scheme to encourage SSI ventures/sub- contracting units to acquire capital equipment, as also requisite technology for building up of export capabilities/import substitution including cost of total quality management and acquisition of ISO-9000 certification and for expansion of capacity.
ISO 9000 Scheme to meet the expenses on consultancy, documentation, audit, certification fee, equipment and calibrating instruments required for obtaining ISO 9000 certification.
Micro Credit Scheme to meet the requirement of well managed Voluntary Agencies that are in existence for at least 5 years; have a good track record and have established network and experience in small savings-cum-credit programmes with Self Help Groups (SHGs) individuals.
ü To enhance the export capabilities of SSI units.
ü Scheme for Marketing Assistance.
ü Infrastructure Development Scheme.
ü Scheme for acquisition of ISO 9000 certification.
ü Factoring Services and
ü Bills Re-discounting Scheme against inland supply bills of SSIs.
Technology Development & Modernisation Fund
SIDBI has set up Technology Development & Modernisation Fund (TDMF) scheme for direct assistance of small sale industries to encourage existing industrial units in the sector, to modernise their production facilities and adopt improved and updated technology so as to strengthen their export capabilities. Assistance under the scheme is available for meeting the expenditure on purchase of capital equipment acquisition of technical know-how, upgradation of process technology and products with thrust on quality improvement, improvement in packaging and cost of TQM and acquisition of ISO-9000 series certification.
SIDBI in July 1996 had permitted SFCs and promotional banks to grant loans for modernisation projects costing upto Rs. 50 lakhs. The Coverage of the TDMF scheme has been enlarged w.e.f. 1.9.1997. Non-exporting units and units which are graduating out of SSI sector are now eligible to avail assistance under this scheme.
National Equity Fund
National Equity Fund (NEF) under Small Industries Development Bank of India (SIDBI) provides equity type assistance to SSI units, tiny units at one per cent service charges. The scope of this scheme was widened in 1995-96 to cover all areas excepting Metropolitan areas, raising the limit of loan from Rs. 1.5 lakhs to Rs. 2.5 lakhs and covering both existing as well as new units:
(a) The following are eligible for assistance under the scheme:-
i. New projects in tiny and small scale sectors for manufacture, preservation or processing of goods irrespective of the location (except for the units in Metropolitan areas).
ii. Existing tiny and small scale industrial units and service enterprises as mentioned above (including those which have availed of NEF assistance earlier), undertaking expansion, modernisation, technology upgradation and diversification irrespective of location (except in Metropolitan areas).
iii. Sick units in the tiny and small scale sectors including service enterprises as mentioned above, which are considered potentially viable, irrespective of the location of the units (except for the units in Metropolitan areas).
iv. All industrial activities and service activities (except Road Transport Operators).
(b) Project cost (including margin money for working capital) should not exceed Rs. 10 lakhs in the case of new projects in the case of existing units and service enterprises, the outlay on expansion/modernisation/technology upgradation or diversification or rehabilitation should not exceed Rs. 10 lakh per project.
(c) There is no change in the existing level of promoters’ contribution at 10% of the project cost. However, the ceiling on soft loan assistance under the Scheme has been enhanced from the present level of 15% lakh per project to 25% of the project cost subject to a maximum of Rs. 2.5 lakh per project.
3.4 State Financial Corporations (SFCs)
In pursuance of the SFCs Act, 1951, SFCs were set up mainly to finance small and medium scale units. Their area of operation is generally restricted to the concerned States. SFCs also assist small scale units for their modernisation and technology upgradation programmes by providing soft loans, restructuring the sick small scale units through rehabilitation schemes and through equity type assistance under SIDBI’s seed capital scheme.
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At present, there are 18 SFCs (including TIIC which was set up as a company) in existence for more than 40 years and operate as Regional Development Banks. The SFCs have played an important role in the evolution and growth of small and medium scale industries in their respective states. They provide financial assistance to industrial units by way of term loans, direct subscription to equity, guarantees, etc. Over the years SFCs have expanded their activities and coverage of assistance.
One-Man Committee set up by RBI under the Chairmanship of former Secretary, SSI&ARI, to look into various problems regarding credit flow to SSI sector and support appropriate measures for their redressal has given the following recommendations in its report submitted to RBI which are being processed by them:-
– Restructuring of weaker SFCs by the Government.
– Funds for lending under Single Window Scheme by SFCs should be placed by SIDBI with the SFCs in adequate measures.
– Each SFC should get into an MOU with one or two Public Sector banks and participate in joint lending in which both term loan and working capital is provided jointly. For example, 80 per cent of the term loan could be given by SFC and 20 per cent by bank. In case of working capital which may be sanctioned at the same time as term loan, the proportion could be reversed, i.e., 80 per cent by bank and 20 per cent by SFC. However, the working capital account be managed and supervised by the bank through its specialised SSI branches.
– SIDBI should sign MOUs with the State Governments to provide some assistance to SFC prior to the approval of assistance packages by the Government of India/SIDBI.
– The staff of SFCs has to be adequately trained and SIDBI may be asked to make arrangements for this purpose.
3.5 National Small Industries Corporation (NSIC)
3.5.1 Bill Financing
Bills drawn by small scale units for the supplies made to the reputed and well established enterprises and duly accepted by them will be financed / discounted by NSIC for a maximum period of 90 days.
3.5.2 Working Capital Finance
Finance for augmenting working capital of viable and well managed units, on selective basis in case of emergent requirements, to enable them to payoff their purchases of consumable stores and spares and production related overheads particularly electricity bills, statutory dues, etc.
3.5.3 Export Development Finance
Finance for export development to export oriented units for meeting their emergent requirements. Pre and post shipment finance shall also be provided to such units at usual terms & conditions.
3.5.4 Equipment Leasing Scheme
The object of the Leasing Scheme is to assist SSI Units to procure industrial equipment for modernisation, expansion and diversification of their industries.
Exclusively for existing & financially viable SSI units including ancillary units, duly registered as SSI units with the Directorate of Industries.
Ø 100% financing at very liberal terms with easy repayment schedule.
Ø Simple formalities and speedy sanction.
Ø Single window system for imported equipment. The Corporation undertakes to complete formalities like procuring import licence, opening of Letter of Credit etc.
Ø Tax rebate on full 5 year lease rental.
VI. Documentation for Loan Application
1. Balance Sheet and Profit Loss Statement for last three consecutive years of firms held by promoters.
2. Income Tax Assessment Certificates of Partners/Directors
3. Proof of Possession of Land/Building
4. Architects estimate for construction cost
5. Partnership deed/Memorandum and Articles of Associations of Company.
6. Project Report
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