Sme Financing

CHAPTER - 1
INTRODUCTION
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1.1 INTRODUCTION TO SMEs
Small and Medium Enterprises (SMEs) have played a significant role world over in the
economic development of various countries. Over a period of time, it has been proved
that SMEs are dynamic, innovative and most importantly, the employer of first resort to
millions of people in the country. The sector is a breeding ground for entrepreneurship.
The importance of SME sector is well-recognized world over owing to its significant
contribution in achieving various socio-economic objectives, such as employment
generation, contribution to national output and exports, fostering new entrepreneurship
and to provide depth to the industrial base of the economy.
Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a
key source of economic growth, dynamism and flexibility in advanced industrialized
countries, as well as in emerging and developing economies. SMEs constitute the
dominant form of business organization, accounting for over 95% and up to 99% of
enterprises depending on the country. They are responsible for between 60-70% net job
creations in Developing countries. Small businesses are particularly important for
bringing innovative products or techniques to the market. Microsoft may be a software
giant today, but it started off in typical SME fashion, as a dream developed by a young
student with the help of family and friends. Only when Bill Gates and his colleagues had
a saleable product were they able to take it to the marketplace and look for investment
from more traditional sources. SMEs are vital for economic growth and development in
both industrialized and developing countries, by playing a key role in creating new
jobs. Financing is necessary to help them set up and expand their operations, develop
new products, and invest in new staff or production facilities. Many small businesses start
out as an idea from one or two people, who invest their own money and probably turn to
family and friends for financial help in return for a share in the business. But if
they are successful, there comes a time for all developing SMEs when they need new
investment to expand or innovate further. That is where they often run into
problems, because they find it much harder than larger businesses to obtain
financing from banks, capital markets or other suppliers of credit.
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Common Characteristics of SMEs
(a) Born out of individual initiatives & skills

SME startups tend to evolve along a single entrepreneur or a small group of
entrepreneurs; in many cases; leveraging on a skill set. There are other SMEs being set
up purely as a means of earning livelihood. These includes many trading and retail
establishments while most countries continue SMEs to manufacturing services, others
adopt a broader definition and include retailing as well.
(b) Greater operational flexibility

The direct involvement of owner(s), coupled with flat hierarchical structures and less
number of people ensure that there is greater operational flexibility. Decision making
such as changes in price mix or product mix in response to market conditions is faster.
(c) Low cost of production

SMEs have lower overheads. This translates to lower cost of production, least upto
limited volumes.
(d) High propensity to adopt technology

Traditionally SMEs have shown a propensity of being able to adopt and internalize the
technology being used by them.
(e) High capacity to innovate export:

SMEs skill in innovation, improvisation and reverse engineering are legendary. By being
able to meet niche requirements, they are also able to capture export markets where
volumes are not huge.
(f) High employment orientation:

SMEs are usually the prime drives of jobs, in some cases creating up to 80%. Jobs SMEs
tend to be labour intensive per se and are able to generate more jobs for every unit of
investment, compared to their bigger counterparts.
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(g) Reduction of regional imbalances
Unlike large industries where divisibility of operations is more difficult, SMEs enjoy the
flexibility of location. Thus, any country, SMEs can be found spread virtually right
across, even through some specific location s emerge as ‘clusters’.
SMEs in India
India has a vibrant SME sector that plays an important role in sustaining economic
growth, increasing trade, generating employment and creating new entrepreneurship in
India. In keeping in view its importance, the promotion and development of SMEs has
been an important plank in our policy for industrial development and a well-structured
programme of support has been pursued in successive five-year plans for. SMEs in India
have recorded a sustained growth during last five decades. The number of SMEs in India
is estimated to be around 13 million while the estimated employment provided by this
sector is over 31 million. The SME sector accounts for about 45 per cent of the
manufacturing output and over 40 per cent of the national exports of the country.
Figure 1.1
SMEs In India
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(http://www.dcmsme.gov.in/ssiindia/MSME_OVERVIEW09.pdf last accessed on 26
Nov, 2009)
India embarked on the path of opening up its economy and integrating it with the global
economy in 1991. The liberalization of economy, while offering tremendous
opportunities for the growth and development of Indian industry including SMEs, has
also thrown up new challenges in terms of fierce competition. The very rules which
provide increased access for our products in the global markets also put domestic
industry under increased competition from other countries. In today’s world, access on a
global basis to modern technology, capital resources and markets have become the most
critical determinants of international competitiveness.
Defining SMEs
In 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, small and medium
enterprises based on their investment in plant and machinery (for manufacturing
enterprises) or on equipments (in case of enterprises providing or rendering services).
The classification on basis of investment is as under:
Table 1.1
Classification Of Micro, Small And Medium Enterprises
Classification Investment Ceiling for Plant, Machinery or Equipments

Manufacturing Enterprises Service Enterprises
Micro Upto Rs.25 lakh Upto Rs.10 lakh
Small Above Rs.25 lakh & upto Rs.5 Above Rs.10 lakh & upto Rs.2
crore crore
Medium Above Rs.5 crore & upto Above Rs.2 crore & upto Rs.5
Rs.10 crore crore
Table 1.2
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Classification Of Micro, Small And Medium Enterprises Before 2nd October, 2006
Classification Investment Ceiling For Plant, Machinery Or Equipments*@

Manufacturing Enterprises Service Enterprises
Micro Upto Rs.25 lakh Upto Rs.10 lakh
Small Above Rs.25 lakh & upto Rs.1 Not defined

crore
Medium Not defined Not defined
(http://www.dcmsme.gov.in/ssiindia/MSME_OVERVIEW09.pdf last accessed on 26

Nov, 2009)
While calculating the investment in plant and machinery/equipment referred to above, the
original price thereof shall be taken into account, irrespective of whether the plant and
machinery/equipment are new or second hand. In case of imported machinery/equipment,
the following duty/charges/costs shall 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:;
• 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)
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• 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, fittings and other
items not directly related to the services rendered. Land and Building would also not be
included while computing the machinery/equipments cost.
SME would be meant to include Micro Small and Medium Enterprises (MSMEs). The
above definitions of Micro, Small and Medium Enterprises would be in place of the
existing definitions of Small & Medium Industries and 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
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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).
• 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 India

Making the best use of the material resources by employing higher order of skill and
artistic talents through traditional handicrafts, India has occupied a permanent place
of pride in the world before industrial resolution. However, the advent of modern large
scale mechanized industry, the imposition of restrictions on Indian trade by the British
rulers and deteriorating socio-economic conditions lead to the decline of Small Scale
Industry. But with the provisions of permanent place in the nation's policy of
economic development after the attainment of the Independence, it has staged a grand
recovery and is now well entrenched on the path of progress towards great expansion.
SME has emerged into prominent sector in Indian economy in general and industry in
particular. SSI sector in India has posted impressive growth in 1990's from 15% in
1991-92 to 55% in 2001-02.The growth in employment generation has been equally
impressive from 3% to 45% during the same period. Employment in SME touched 19
million, just behind agriculture. Share of SSI exports crosses 40% of total exports.
Growth by itself in SME sector is impressive enough indicating a positive
response to the Economic Reform process initiated in the country since 1991.
--- Development of infrastructure
--- Assured supply of Raw Materials
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--- 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 (Lakhs) Fixed Investment (Rs 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
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 accessed on 27 Nov,
2009)
Small and Medium Enterprises - Industrial policy:
The small and Medium industries have a specific role to play by the Industrial policy
1948 which stated that cottage and small scale industries are particularly suited for
better utilization of local resources and for the achievement of local self-
sufficiency in respect of certain type of essential goods. A Small and Medium
Industries Board was constituted in 1954 and a number of helping schemes such as
supply of machinery on hire purchase, liberal and wider grants.
The Government announced its second Industrial policy in 1956 which replaced the
Industrial policy resolution of 1948.While such measures continue to be taken wherever
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necessary, the aim of the state policy is to ensure that the decentralized sector acquires
sufficient vitality to be self supporting and its development is integrated with
that of large scale industry. Besides, the Government intended to strengthen the
existing arrangements to finance small scale units and make changes if necessary to ease
the credit problems of the sector. The system of reservation of items for exclusive
production by small scale units would continue in future.
The Industrial policy statement of 1985 was also accorded importance to small scale
sector and made some suitable policy changes. The definition of small scale unit was
revised to include all manufacturing units having investment in Plant and Machinery
unto Rs.35 Lakhs. In case of ancillary units, the investment ceiling was Rs.45 Lakhs.
In the policy statements of 1991, the state followed a policy of supporting

small enterprises in the country. Small and Medium enterprises account for 55% of
industrial production, 40% of exports and above 88% of manufacturing employment.
Hence, this sector is considered as dynamic and vibrant sector of the country. The
relative importance tends to vary inversely with the level of development and
their contribution. Small and Medium enterprises have emerged as the leaders in the
industrial sector. In recognition of their significance and stature, the then government
announced policy measures on August 6, 1991 for the first time in the post independence
period. This was to promote and strengthen small, tiny and village enterprises. This is
almost a U-turn in policy stimulants and structure of micro and small enterprises in the
country.
Role of SME sector in Nation Development
The Small and Medium sector plays an important role in the Indian economy in terms
of employment and growth has recorded a high rate of growth after independence. SMEs
play a vital role for the growth of Indian economy by contributing 45% of the industrial
output, 40% 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. As a
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result, SMEs are today exposed to greater opportunities for expansion and diversification
across the sectors.
Table 1.4
Data Of SMEs In India
Year Total SME Fixed Production Employment Export

Units Investment (Rs Crore) (lakh persons) (Rs. Crore)
(Lakhs) (Rs Crore)
1990-91 67.87 93555 63518 158.34 9664
1991-92 70.63 100351 73072 165.99 13883
1992-93 73.51 109623 85581 174.84 17784
1993-94 76.49 115795 98804 182.64 25307
1994-95 79.60 123790 122210 191.40 29068
1995-96 82.84 125750 148290 197.93 36470
1996-97 86.21 130560 168413 205.16 39248
1997-98 89.71 133242 189178 213.16 44442
1998-99 93.36 135482 212901 220.55 48979
1999-00 97.15 139982 234255 229.10 54200
2000-01 101.1 146845 261289 239.09 69797
2001-02 105.21 154349 282270 249.09 71244
2002-03 109.49 162317 311993 260.13 86013
2003-04 113.95 170219 351427 271.36 95510
(http://www.smechamberofindia.com/rol_of_sme_sector.aspx last accessed on 27 Nov,

2009)
The root cause for unemployment in India is the over growing population
which has outpaced the development of industry and agriculture. For a country like ours,
with limited financial resources and huge reservoir of human resources, Small and
Medium industry is the only means for solving the unemployment problem. Small and
Medium industry is providing employment at an increased rate which is evident from
the table above.
The Indian market is growing rapidly and Indian industry is making remarkable progress
in various Industries like Manufacturing, Precision Engineering, Food Processing,
Pharmaceuticals, Textile & Garments, Retail, IT, Agro and Service sectors. SMEs are
finding increasing opportunities to enhance their business activities in core sectors. The
good performance of the small scale units is evident from their number, production,
employment and foreign exchange earnings.
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Problems of SMEs
Despite its commendable contribution to the Nation's economy, SME Sector does not get
the required support from the concerned Government Departments, Banking Sector,
Financial Institutions and Corporate Sector, which is a handicap in becoming more
competitive in the National and International Markets and which needs to be taken up for
immediate and proper redressal. SME sector faces a number of problems - absence of
adequate and timely banking finance, limited knowledge and non-availability of suitable
technology, low production capacity, follow up with various agencies in solving regular
activities and lack of interaction with government 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 other problems faced by the
SME sector. The small and medium industrialists are generally poor and there are no
facilities for cheap credit. They fall into the clutches of money lender who charges very
high rates of interest, or else they borrow from the dealers of their goods, who exploit
them by completing them to sell their products at very low price. After the
nationalization of 14 major Indian Banks in July, 1969, the Commercial banks were
providing only a small proportion of SMEs financial requirements. Credit to the SME
sector continues to be non-commensurate with its contribution to the total industrial
output. As against the share of the village and SME at 40% in the industrial output, its
share in total credit to 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 satisfactory. There are no
quantity discounts, since they are purchased in small quantities and hence
charged, higher prices by suppliers. Difficulty is also experienced in procuring semi-
manufactured materials. Financial weakness stands in the way of securing raw materials
in bulk in a competitive market.
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c) Production problem of SMEs:
SME units suffer from inadequate work space, power, lighting and ventilation,
and safety measures etc. These short comings have tended to endanger the health of
workmen and have adversely affected the rate of production. Many units are
following primitive methods of production. Adoption of modern techniques is either
disliked by the entrepreneurs is not feasible. Wage rates and service conditions of
small industries are not attractive to skilled labor.
d) Technological problem of SMEs:

Today technology is changing at a very fast phase; it becomes difficult for SMEs to cope
up with changing technology. Technology up gradation and the frequent need to renew
the equipment has emerged as a big problem.
d) Marketing problem of SMEs: As marketing is not properly organized, the

helpless artisans are completely at the mercy of middle man. The potential demand for
their goods remains under developed. The SMEs have to face the competitions from large
scale units in marketing their products. It causes damage to the growth and stability of
SMEs. SMEs cannot 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 of entrepreneurial
ability to develop initiative and undertake risks in the unexplored industrial
fields. The in efficiency in management comes first among managerial problems.
The entrepreneurial ability of promoters of cottage industries and SMEs are
handicapped by technical know how in the areas of production, finance, accounting and
marketing management.
f) Sickness of SMEs:
A serious problem which is hampering small and medium sector has been sickness.
Many small units have fallen sick due to one problem or the other. Sickness is caused by
two sets of factors, Internal and external factors. From among the various internal
and external causes of sickness the important ones are bud management,
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high rate of capital gearing, inadequacy of finance, short of raw materials, outdated
plant and machinery, low labor productivity etc.
(http://www.smechamberofindia.com/challenges_to_sme_sector.aspx last accessed on 27
Nov, 2009)
Figure 1.2
Reasons For The Sickness Of SMEs
(http://milagrow.in/k-solutions/msme-planet/sickness-rehabilitation last accessed on 25

Jan, 2010)
The above figure shows that finance has been the major reason for the sickness of SME
units. The other major reasons are ineffective management and technology upgradation
according to the latest technological changes.
Need of the hour
The need of the hour for Indian SMEs is to upgrade their technology, quality and adopt
modern management techniques to keep pace with the changes that are taking place in the
global market. Investment would be a prerequisite in these areas to bring about
transformation. The availability of adequate credit at affordable cost, thus, becomes
critical for Indian SMEs. SIDBI is the national level principal financial institution for
promotion, financing and development of SMEs.
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To empower the SME Sector to take its rightful place as the growth engine of Indian
economy, it is necessary to support the SMEs, educate and empower them to make
optimum utilization of the resources, both human and economic, to achieve success. The
SMEs need to be educated and informed of the latest developments taking place globally
and helped to acquire skills necessary to keep pace with the global developments.
SME Chamber of India has decided to start various activities to empower and educate the
SME Sector by organising various trade promotional activities in India and abroad. Also
provide assistance and support for the promotion of domestic business as well as export
promotion of the SME sector.
(http://www.smechamberofindia.com/need_of_hour.aspx last accessed on 27 Nov, 2009)
To encourage the growth of small scale industries in India, Government has reserved
certain products for manufacture in the small scale sector in areas where there is techno-
economic justification for such an approach. Large/Medium units can, however,
manufacture such reserved items provided they undertake to export 50% or more of their
production. As on 10 October 2008, following items are reserved for exclusive
manufacture by micro and small enterprise sector:
• Food and Allied Industries: Pickles & Chutneys, Bread, Mustard Oil (except
solvent extracted), Ground nut oil (except solvent extracted).
• Wood and Wood Products: Wooden furniture and fixtures
• Paper Products: Exercise books and registers
• Injection Moulding Thermo Plastic Product: PVC Pipes, including conduits
upto 110 mm dia, Fittings for PVC pipes
• Other Chemicals & Chemical Products: Wax candles, Laundry soap, Safety
matches, Fire works, Agarbatties
• Glass & Ceramics: Glass Bangles
• Mechanical Engg. Excluding Transport Equipment: Steel almirah, Rolling
shutters, Steel chairs – all types, Steel tables – all other types, Steel furniture – all other
types, Padlocks, Stainless steel utensils, Domestic utensils – Aluminium
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(http://www.iloveindia.com/finance/doing-business-in-india/small-scale-
industries.html last accessed on 8 feb, 2010)
SME Policy Initiatives in 2009

A continuous attention to ongoing schemes to assist MSME has demonstrated success in
several areas. However, the Ministry of MSME and other government departments
are still working hard to pull the sector out of the recession and overcome some inherent
problems. Several of the schemes started by the Ministry of Micro, Small and Medium
Enterprises (MSME) to promote the development of micro, small and medium enterprises
in the country saw success this year. Following are some progress areas in 2009 that have
made a positive impact on SMEs, especially during the painful process of recovering
from an economic recession.
Better Credit Flow: The ‘Policy Package for Stepping up Credit to Small and Medium
Enterprises (SME)’ was set up by the government in August 2005 for doubling the credit
flow to the MSME sector within a period of five years. Credit flow from Public Sector
Banks (PSBs) to this sector has increased from Rs.67, 634 crore at the end of March 2005
to Rs.1, 91,307 crore at the end of March 2009.
Skill Development on priority: Various measures like enhancing the training

capabilities of the Tool Rooms, MSME Development Institutes and other organizations
under the Ministry of MSME have helped to train nearly 2.61 lakh trainees during 2008-
09. The target set for 2009-10 is to train 3.2 lakh persons, with several programs
organised free of cost for the weaker sections of society.
Improving Competitiveness: Six out of the ten components under the National
Manufacturing Competitiveness Programme (NMCP) for MSMEs are now operational.
These are (i) Quality Management Systems and Quality Technology Tools, (ii) Building
awareness on Intellectual Property Rights, (iii)Support for Entrepreneurial and
Managerial Development of MSMEs, and (iv)Marketing support/assistance to MSMEs
(v)Lean Manufacturing Competitiveness Scheme and (vi) Mini Tool Room Scheme.
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Success of Credit Guarantee Scheme: MSMEs are often unable to provide collateral as
security to procure loans. The government’s credit guarantee scheme has been rather
successful because of timely interventions to make the scheme more attractive to lenders
and borrowers. For instance, the loan limit was enhanced from Rs.25 lakh to Rs.100 lakh,
the one-time guarantee fee was reduced from 2.5% to 1.5%, etc. Success can be gauged
from the data on increased coverage. From about 40,000 proposals received (for loans of
Rs.1000 crore) at the end of March 2004, more than 2.27 lakh proposals (for loans of
over Rs.8200 crore) at the end of November 2009.
Capital subsidy spreads coverage: Under the Credit Linked Capital Subsidy Scheme
for Micro and Small Enterprises (CLCSS), 15 per cent capital subsidy is provided on loan
amounts upto Rs. 100 lakh for technology upgradation. From the 47 products/sub-sectors
with nearly 1400 well-approved technologies/machines for subsidy under the scheme,
now 179 new technologies machines for pharma sectors have been added to this list.
Until October 2009, 7810 proposals of subsidy were approved and Rs. 338.68 crore was
released to the MSEs under the scheme.
Quality improvement on priority : The ISO-9000/ISO-14001/HACCP Certification

Reimbursement Scheme is an incentive scheme to upgrade technology and improve
quality that provides for one time reimbursement of charges for acquiring ISO-
9000/14001/HACCP (or its equivalent) certification to the extent of 75% of the cost
subject to a maximum of Rs. 75,000/- in total. Decentralised in 2007, the scheme saw
growing popularity in 2009, with about 690 units amounting to Rs. 2.88 crore being
reimbursed uptil November 2009 during 2009-10.
Employment Generation: The Prime Minister’s Employment Generation Programme

(PMEGP) was launched in August 2008 with a total plan outlay of Rs. 4735 crore
including Rs. 250 crore for backward and forward linkages. Around 38 lakh additional
employment opportunities in the terminal four years (2008-09 to 2011-12) of XI Plan are
expected.The program provides financial assistance to set up microenterprises costing
upto Rs.10 lakh in service sector and Rs. 25 lakh in manufacturing sector in the form of
subsidy upto 25 per cent of the project cost in rural areas and 15 per cent for urban areas.
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Until March 2009, 2,17,762 applications were received under PMEGP, of which 83,454
candidates were selected. About 36,444 projects were sanctioned financial assistance by
banks for generating an estimated 3.64 lakh additional employment. Loans were
disbursed in 25,507 cases by banks giving employment opportunities to about 2.55 lakh
persons until 31st August 2009. About 4.5 lakh additional employment will be generated
in2009-10.
(http://www.businessworld.in/bw/2010_01_04_SME_policy_initiatives_in_2009.html
last accessed on 9 feb, 2010)
SME Financing
SME Finance is the funding of small and medium sized enterprises and represents a
major function of the general business finance market – in which capital for firms of
types is supplied, acquired, and costed/priced. Capital is supplied through the business
finance market in the form of bank loans 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 discounting
Importance The economic and social importance of the small and medium
enterprise (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 best methods to serve this sector. There
have been numerous schemes and programmes in markedly
different economic environments. However, there are 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.
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There is also a more favorable environment now with the Govt. committed to give fillip
to this sector through infrastructure development; skill set development/entrepreneurship
development, technology up gradation etc. With the deregulation of the financial sector,
the general ability of the banks to service the credit requirements of the SME sector
depends on the underlying transaction costs, efficient recovery processes and available
security. There is an immediate need for the banks generally to focus on credit and
finance requirements of SMEs. Although the banks are allowed to fix 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 of credit to the SME sector from Rs.67,600
crore in 2004-05 to Rs.1,35,200 crore by 2009-10 i.e. within a period of 5 years. Also,
Credit risk in the SME sector is widely dispersed and Banks get better yield from SME
advances as against the traditional advances where the spread is getting gradually
reduced. The SME clientele base could also be utilized by the Branches to step-up “cross
selling” of various other products including technology-enabled products.
SME Financing Gap

A substantial portion of the SME sector may not have the security required for
conventional collateral based bank lending, nor high enough returns to attract formal
venture capitalists and other risk investors. In addition, markets may be characterized by
deficient information (limiting the effectiveness of financial statement-based lending and
credit scoring). This has led to claims of an "SME finance gap”. The SMEs that fall into
this category have been defined as Small Growing Businesses (SGBs) at a workshop in
Geneva in July 2008, hosted by The Network for Governance; Entrepreneurship &
Development (GE&D) There have been at least two distinctive approaches to try to
overcome the so-called SME finance gap. The first has been to broaden the collateral
based approach by encouraging bank lenders to finance SMEs with insufficient collateral.
This might be done through an external party providing the collateral or guarantees
required. Unfortunately, to the extent that the schemes concerned run counter to
basic free market principles they tend to be unsustainable. Thus, the second approach has
been to broaden the viability based approach. Since the viability based approach is
19
concerned with the business itself, the aim has been to provide better general business
development assistance to reduce risk 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 are as follows
Figure 1.3
Various ways of Financing SMEs
Problems of SMEs Financing
The main problem faced by SME’s when trying to obtain funding is that of uncertainty:
• SME’s rarely have a long history or successful track record that potential investors can
rely on in making an investment;
• Larger companies (particularly those quoted on a stock exchange) are required to

prepare and publish much more detailed financial information – which can actually assist
the finance-raising process;
20
• Banks are particularly nervous of smaller businesses due to a perception that they
represent a greater credit risk.
Because the information is not available in other ways, SME’s will have to provide it
when they seek finance. They will need to give a business plan, list of the company
assets, details of the experience of directors and managers and demonstrate how they can
give providers of finance some security for amounts provided. Prospective lenders –
usually banks – will then make a decision based on the information provided. The terms
of the loan (interest rate, term, security, and repayment details) will depend on the risk
involved and the lender will also want to monitor their investment. A common problem is
often that the banks will be unwilling to increase loan funding without an increase in the
security given (which the SME owners may be unable or unwilling to provide).A
particular problem of uncertainty relates to businesses with a low asset base. These are
companies without substantial tangible assets which can be use to provide security for
lenders. When an SME is not growing significantly, financing may not be a major
problem. However, the financing problem becomes very important when a company is
growing rapidly, for example when contemplating investment in capital equipment or an
acquisition. Few growing companies are able to finance their expansion plans from cash
flow alone. They will therefore need to 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 its
owners may not have the resources to acquire the company. They will need to raise
finance to achieve their objectives
(http://tutor2u.net/business/finance/finance_sources_smes.htm last accessed on 27 Nov,

2009)
1.2 ROLE OF PUBLIC SECTOR BANKS IN SME FINANCING

Banks are playing a major role in financing SMEs in India. Nearly 82% of the total SME
financing in year 2006-07 is through banks. And among them the major share is of public
sector banks i.e. 57%. Thus it is clear that the most common source of finance for SMEs
is Bank Financing. There is no. of banks that help in assisting the SMEs for financing.
21
The main channel used by the SMEs via Banks is Specialized loans by various
Banks. The Main reason for choosing bank loans by SMEs compared to other sources of
financing like venture capital, PE funding etc is that is only interest to be paid no stake
is to be diluted thus the whole command of the SME is with the owner only. There are
a number of Private as well as Public sector banks who 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_T
o_SMEs.html last accessed on 5 Jan, 2010)
The role of Banks, in general, has become very important in the above context The SME
sector’s demands were comprehensively taken care of by the 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,
22
• 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 Banks

The table below gives the status of credit flow to the micro and small enterprises
(SME) sector from the public sector banks since 2000:
Table 1.5
Credit to SME sector from Public Sector Banks
Year Net Bank Credit Credit to SMEs % of NBC

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 last accessed on 11 Jan,
2010)
Figure 1.5
Steps For SME Loans By Public Sector Banks
23
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.
The above figure shows the steps for availing finance through Public sector Banks
using loans. Here is the brief description of the above shown procedure:
• 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
24
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
• 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 of India
2) Allahabad Bank 8) Punjab National Bank
3) Oriental Bank of Commerce 9) IDBI Bank
4) Bank of Baroda 10) Indian Bank
5) Bank of India 11) Canada Bank
6) Punjab & Sind Bank 12) Corporation Bank
State Bank of India
State Bank of India has been playing a vital role in the development of small scale
industries since 1956.The Bank has financed over 8 lakhs SSI units in the country. It has
55 specialized SSI branches, 99 branches in industrial estates and more than 400 branches
with SIB divisions. The Bank finances for Small Business activities which are of special
significance to a large number of people as many of these activities can be started with
25
relatively lower 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
(http://www.sbi.co.in/user.htm last accessed on 27 Nov, 2009)
IDBI Bank
IDBI Bank has been actively engaged in providing a major thrust to financing of SMEs.
With a view to improving the credit delivery mechanism and shorten the Turn around
Time (TAT), IDBI Bank has developed a special business model to serve the SMEs in
India. The Bank has set up 24 City SME Centres (CSCs) across India in Mumbai, Delhi,
26
Kolkata, Chennai, Bangalore, Hyderabad, Pune to name a few. These CSCs are the
Bank's hubs while dedicated SME desks have been set up in several branches across these
cities. These branches serve as front offices for sales delivery and customer service.
IDBI Bank has a wide variety of products and services catering to the needs of different
segments within small business. Long years of experience in being the trusted partner of
large and mid corporates has translated into deeper understanding of needs of business
and industries. The Bank has parameterised products for transporters, dealers, traders,
and vendors. In addition, it has a separate Transaction Banking Group that has expertise
in products like cash management services, letter of credit, bank guarantees and treasury
products”
IDBI Bank provides following SME products:
• Sulabh Vyapar Loan
• Dealer Finance
• Funding Under CGFMSE
• Direct Credit Scheme-SIDBI
• Preferred Customer Scheme
• 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 Baroda
Bank of Baroda started its operation in the year 1908 in Baroda though its Corporate
Centre is in Mumbai now. Its mission is "to be a top ranking National Bank of
International Standards committed to augment stake holders' value through concern, care
and competence”. Bank of Baroda offers following SME products and services:
27
• 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

Union Bank is committed to extend its best services to Micro, Small and Medium
enterprises and at a very competitive price. Union Bank of India has adopted a policy
package for stepping up credit to Small & Medium Enterprises.
Union Bank of India has adopted a policy package for stepping up credit to Small &
Medium Enterprises [SME] with the approval of the Board in its meeting held on 30th
September 2005 and subsequently following steps have 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 Bank
Canara Bank was founded by Shri Ammembal Subba Rao Pai, a great visionary and
philanthropist, in July 1906, at Mangalore, then a small port in Karnataka
28
The 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 force w.e.f. 2nd October,
2006.
LOAN PRODUCTS
Schemes 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 institutions
Schemes 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)
(http://www.canarabank.com/English/scripts/LoanProToMSMEnterprises.aspx last
accessed on 27 Nov, 2009)
29
CHAPTER 2
REVIEW
OF
LITERATURE
REVIEW OF LITERATURE
A review of literature is a critical analysis of a segment of a published body of
knowledge. Various studies on a number of issues concerning small and medium
30
enterprises had been conducted in foreign countries. However, in Indian context, the
number is quite few. A number of studies had been conducted related to SME Financing
schemes of Public sector banks. Due to shortage of time and inability to cover all these
past studies, some of these studies have been considered in this section that has provided
a base for this research.
Wtterwulghe and Jannsen (1997) conducted a research and analyzed the role of banks
in financing medium enterprises in Belgium. It shows that, like small firms, medium-
sized businesses have a preference for self-financing. As far as external funding is
concerned, debt is generally their main source. How ever, their low debt ratios indicate
that, as compared to the large firms, these enterprises take less recourse to banks and, as a
result, pay little attention to their financial function. The banker does not play an
important role as an adviser either, except when the firm decides to raise funds through
the stock market. The article calls for greater specialisation on the part of the banks so that
they can avoid conflicts of interest arising out of the mismatch between their service
priorities and the needs of their clientele
Kaura and Sharma (1999) made a research and analyzed the attitudes of the financial
institutions whether belong to Central Government or state Government or the
Governmental Agencies promoted for this purpose. In the wake of the MSME Act,
2006 passed in the interest of the small scale sector by the Government of India, the
attitude of the financial institutions towards SME sector is totally changing. New
innovations are being made for fulfilling the financial needs of SME units. The attitude of
the Employees of above said financial institutions is also changing.
Raju (2002) conducted a research by revisiting the Seoul and Bologna Charters on the
SMEs and clarifies that the SME definition centers round the small scale industries in the
absence of a clearly defined medium industry sector in India. A review of the policy,
laws and the regulatory and institutional framework has been done in sufficient detail with
a view to highlighting the fact that the SSIS in India require globally compatible
facilitation in order to be competitive both domestically and internationally. The author
31
maintains that easy and adequate institutional finance support is a necessary but not
sufficient condition for the growth of this dynamic and vibrant sector. He envisages a
clear role for the Small Industry Associations recognized on the basis of well-defined
criteria. He argues for a quick enactment of a comprehensive enabling law for the sector
and for restructuring the office of the DC-SSI, to attain the envisaged competitiveness
Nambiar (2007) conducted a research on financing for the priority sectors that paved the
way for thinking strategy for financing of small scale and medium scale industries by the
bank officers. The government of India through its industrial policy clearly stated
that the commercial banks should give priority treatment to the SMEs. The nature
of the banking officials was also discussed in the article. But that is not sufficient to
promote the SME sector because the sector was totally neglected for the last
several decades due to invention of the MNCs. By enacting the MSME act, 2006, the
government of India clearly indicated the signal to the banking people to provide the
credit facilities to the SMEs.
Raju (2008) conducted a study and analyzed that SMEs form the backbone of the Indian
manufacturing sector and have become engine of economic growth in India. It is
estimated that SMEs account for almost 90% of industrial units in India and 40% of
value addition in the manufacturing sector. This paper closely analyses the growth and
development of the Indian mall scale sector from opening of the economy in 1991. Third
part looks into the present scenario of SMEs and the problems they phases like lending,
marketing, license raj issues in detail. The Micro, Small and Medium Enterprises Act,
2006 is intended to boost the sector. The provisions of the Act are examined closely. The
final part provides some future policy framework for the sustainability of the sector.
Rani and Rao (2008) conducted a research that Small and Medium Enterprise sector is a
vibrant and dynamic one, and an engine of growth for the present millennium. Financing
of Micro and Small Enterprises (MSEs), which is part of the SME sector, has been given
special attention by banks and financial institutions, and is included in priority sector
lending. In spite of the special efforts, only 14.3% of registered small enterprises have
32
availed institutional credit, as per the 3rd All India Census of Small Scale Industries of
2001-02. From 2000 to 2004, institutional credit for MSEs has shown disturbing trends,
despite the high level of liquidity in the banking system and the initiatives taken by the
Union Government and Reserve Bank of India (RBI). This paper examines the recent
trends in credit flow to MSEs, in particular, and medium enterprises, in a limited way,
from commercial banks and the Small Industries Development Bank of India (SIDBI),
and outlines the recommendations of A S Ganguly Working Group and Internal Group
chaired by C S Murthy. The Union Finance Ministry's directive to public sector banks is
to double the credit flow to SMEs during the five-year period 2005-10. The year, 2005-06
has shown good progress in this direction. The task is to be pursued vigorously in the
next four years, of which 2006-07 has been completed with encouraging performance.
Innovative approaches and directions for the future are presented in the paper. SMEs
need special treatment through devising special instruments of credit for strengthening
their competitiveness.
Torre et al (2008) made a research and investigated the conventional wisdom in

academic and policy circles argues that, while large and foreign banks are generally not
interested in serving SMEs , small and niche banks have an advantage in doing so
because they can overcome SME opaqueness through relationship lending. This paper
shows that there is a gap between this view and what banks actually do. Banks perceive
SMEs as a core and strategic business and seem well positioned to expand their links
with SMEs. The recent intensification of bank involvement with SMEs in various
emerging markets documented in this paper is neither led by small or niche banks nor
highly dependent on relationship lending. Rather, all types of banks are catering to
SMEs and larger, multiple-service banks have in fact a comparative advantage in offering
a wide range of products and services on a large scale, through the use of new
technologies, business models, and risk management systems.
Mercieca et al (2009) conducted a research and analyzed that how the concentration and
competition in the European banking sector affects lending relationships between small
and medium sized enterprises (SMEs) and their banks. Recent empirical evidence
33
suggests that concentration and competition capture different characteristics of banking
systems. Using a unique dataset on SMEs for selected European regions, we empirically
investigate the impact of increasing concentration and competition on the number of
lending relationships maintained by SMEs. They find that competition has a positive
effect on the number of lending relationships, weak evidence that concentration reduces
the number of banking relationships and weak persistent evidence that they tend to offset
each other.
Popli and Rao (2009) made a research that in banking sector, the quality of customer
service plays an important role, particularly in the context of growing competition and
sustained business growth. The study is an attempt to ascertain the service quality
provided by Public Sector Banks to Small & Medium Enterprises which play a key role
in India’s economy. The major findings of the study have been that 1. Modernization and
Communication affect the services to a large extent and there is a need of training to the
staff for improvement of service to the SMEs customers; 2. The service quality of private
banks is superior to that of Public sector banks; 3. Majority of the respondents revealed
that the credit flow to SMEs sector is not sufficient and the Government will have to
initiate necessary steps for making the required funds available easily on convenient
terms; 4. Majority of the respondents feel that the policies for SME Sector of other
countries are far better from the policies of India; 5. Delay in loan application processing
due to unhelpful nature of the staff members, as claimed by the majority of the
respondents. The banks usually provide finance against security and as high as 86% of
the respondents are of the view that the banks ask for collateral security/guarantee from a
third party even where the project has been assessed as viable and primary security is
adequate.
Popli and Rao (2009) conducted a study and analyzed that Small and Medium
Enterprises have been globally recognized as vital components of a domestic economy
and major contributors to employment generation in a country, regardless of global
barriers. SMEs form the lifeblood of any vibrant economy. In an emerging economy
like India, SMEs have a significant socio-economic role to ensure overall development of
34
the nation. Electronic Sector is an upcoming sector in India. The Indian Electronic
Industry is undergoing transformation due to the new economic policy and business
environment in the post WTO regime. This paper examines the problems, strategies for
investments, competences development, technological up gradation, quality
improvement, Govt. Policies, Equity participation by MNCs and overall improvement of
this sector in the post WTO regime. The study has been done by using data acquired from
an extensive survey of Indian SMEs in the Textile Sector and from the experienced
Bankers/ Officials/Policy makers of Govt. of India. The key findings of the study are that
lack of quality consciousness, growth conducive environment, inadequate government
support and difficulties in raising funds from market. Further, the study highlights the
need to upgrade technology in the Indian Electronic SME Sector and also develop a
strong and supportive Financial System.
The perusal of literature reveals that Small and Medium enterprises face a lot of
problems, and inadequate financing is the major one. A rich literature house has been
developed over time, mostly in foreign countries, with regard to SME funding. A very
few studies has been conducted in India regarding the effectiveness of SME financing
schemes of the public sector banks. That is why a need was felt to conduct a study in
Indian context and that too in case of SME financing schemes of public sector banks and
their usage that has not been extensively researched.
35
CHAPTER-3
NEED, SCOPE AND
OBJECTIVES OF
THE STUDY
NEED, SCOPE AND OBJECTIVES OF THE STUDY
3.1 Need of the study
36
The researches that were conducted in past by the various professionals are in foreign
context and not in Indian context. Study relating to SMEs, their problems and source of
financing has been done but regarding the SME financing schemes of public sector banks
has not been done. This gap has been 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 SME
financing schemes of public sector banks was taken care of.
3.2 Scope of the study
The scope of this study was limited to Ludhiana city only.
3.3 Objectives of the study
Objectives are the guiding lights of a study. The present study was undertaken 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.
.
37
CHAPTER - 4
RESEARCH
METHODOLOGY
RESEARCH METHODOLOGY
Research 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
38
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 of knowledge making for
its advancement. The purpose of Research is to discover answers to the Questions
through the application of scientific procedures. Our project has a specified framework
for collecting data in an effective manner. Such framework is called “Research Design”.
The research 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 DESIGN

Sampling can be defined as the section of some part of an aggregate or totality on the
basis of which judgment or an inference about aggregate or totality is made. The
sampling design helps in decision making in the following areas: -
4.2.1 Universe of the study-The universe comprises of two parts as theoretical universe
and accessible universe
• Theoretical universe- It includes all the SMEs throughout the universe.
39
• Accessible universe- It includes the SMEs in Ludhiana city.
4.2.2 Sample Frame-Sample frame was Small and Medium enterprises all over India.
4.2.3 Sample Unit- Sampling unit is the basic unit containing the elements of the
universe to be sampled. The sampling unit of the present study was SMEs located in
Ludhiana city in Punjab.
4.2.4 Sample Size- Sample size is the number of elements to be included in a study.
Keeping in mind all the constraints 100 respondents were selected.
4.2.5 Sampling Techniques- The sampling techniques used were convenience technique
and simple random sampling technique.
4.3 DATA COLLECTION AND ANALYSIS
4.3.1 Data Collection: Information has been collected from both Primary and 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 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 tools were used:
Tools of Analysis: -
• Summated Score: This tool was used for the analysis of questions based on
Likert scale.
40
• 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.
4.4 LIMITATIONS OF THE STUDY
Due to constraints of time and resources, the study is likely to suffer from certain
limitations. Some of these are mentioned here under so that the findings of the study may
be understood in a proper perspective.
The limitations of the study are:
• 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.
41
CHAPTER-V
DATA ANALYSIS AND

INTERPRETATION
DATA ANALYSIS AND INTERPETATION
42
1. Demographic Profile of Respondents.
Table 5.1
Demographic Features
Demographics No. Of Respondents %Age Of
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
Total 100 100
Business
Hosiery 100 100
Other 0 0
Total 100 100
Analysis and Interpretation:

It had been analyzed from the table that 73% of the respondents were the owner, 19%
were co-partners and 6% were at some other designation.100% of the respondents were
from the Ludhiana city. 95% of the respondents were male and only 5% were female. All
the respondents i.e. 100% were from 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 were from hosiery business.
2. What are the sources of finance used by your enterprise?
43
Table 5.2
To Know The Sources Of Finance Used By SMEs
Sources of Finance No. Of Respondents %Age Of Respondents
Owners Financing 80 29
Private financial institutions 46 16
Equity finance 12 4
Bank financing 75 27
Venture capital 14 5
Hire purchase and leasing 24 9
Business angel financing 29 10
Total 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 a multiple-choice
question. From the survey it was found that respondents use multiple sources for
44
financing their enterprises. The figure shows that 29% respondents rely on their own
funds for financing SMEs.28% respondents use bank financing and 16% take credit from
private financial institutions. Equity finance and venture capital are the least used.
3. Rank the obstacles that are faced by your enterprise in its growth from 1 to 5; 1
being the biggest obstacle.
Table 5.3
45
Obstacles In The Growth Of Enterprise
Obstacles Rank1 Rank2 Rank3 Rank4 Rank5 Weighted

Average
Score
The frequent need to 12 19 28 24 17 315
renew the equipment
Instability of demand for 7 16 16 28 33 364
product or service
Obtaining adequate 40 27 17 8 8 217
financing
Low profitability of the 11 12 21 29 27 349
sector
Taxation levels 30 26 18 11 15 255
Analysis and Interpretation: -
In this above table weighted average score method is used where 1 rank is given 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 their growth are being
ranked. The obstacle of obtaining adequate finance is ranked first with summated score of
217. Second rank is given to the taxation levels charged by the government and third rank
to the frequent need to renew the equipment. The Fourth rank is given to the low
profitability of the sector and fifth to the instability of demand of product or service.
From the above table it can be concluded that obtaining adequate finance is 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.
4. Have you ever raised finance from public sector banks?
Table 5.4
To Know Whether SMEs Raise Finance From Public sector Banks
46
Raised Finance No. Of Respondents %Age Of Respondents
Yes 100 100
No 0 0
Total 100 100
Figure 5.2
To Know Whether SMEs Raise Finance From Public sector Banks
No. Of Respondents
0%
Yes
No
100%

The above figure shows that 100% of the respondents have raised finance from the public
sector banks .This shows that public sector banks are the most popular source of SME
financing. The reason is low rates of interest which gives them capital at low cost. The
service fees and bank charges are also 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
47
Type of Loan No. Of Respondents %Age Of Respondents
Sulabh Vyapar loan 67 28
Transport loan 25 10
Paryatan plus loan 56 23
Open term loan 38 16
Working capital loan 54 23
Total 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 a multiple-choice
question The above graph shows that 28% of the respondents have taken Sulabh Vyapar
loan.23% of the respondents have taken Paryatan plus and working capital loan. So
Sulabh Vyapar loan is the most popular scheme of public sector banks for financing
SMEs.
6. For what purpose, your enterprise has taken loan?

Table 5.6
Purpose Of Taking Loan
48
Purpose Of Taking Loan No. Of Respondents %Age Of Respondents
Real estate acquisition to 40 15
house the business
To increase the production 63 24
Construction, renovation or 33 12
leasehold improvements
For the flooring of inventory 71 27
and for working capital
For modernization and 58 22
upgradation of technology
Total 265 100
Figure 5.4
Purpose Of Taking Loan
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
technology

question.27% of respondents have taken loan for the flooring of inventory and working
capital and 24% to increase the size of production. Most of the firms are taking loans for
fulfilling their frequent needs for the capital. For technological upgradation and
modernization, 22% of the respondents have taken loan showing that SMEs require
capital to upgrade 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 the most important
and 5 being the least important.
Table 5.7
49
Benefits Of SME Financing Schemes
Benefits Rank1 Rank2 Rank3 Rank4 Rank5 Weighted

Average
Score
Better Service 8 12 12 30 38 378
Single Window 8 12 22 30 28 358
Dispensation
Attractive financing 40 28 20 4 8 212
conditions
Easy access 4 12 32 30 22 354
Low rates of Interest 40 36 14 6 4 198
In this above table weighted average score method was used where 1 rank is the most
important rank and 5 is the least important rank.
As in the above table various benefits of SME financing schemes were being ranked. The
benefit ranked first with summated score of 198 was low rates of interest. This shows that
public sector banks financing schemes provide finance at cheap rates. Second rank is with
summated score of 212 was given to the attractive financing conditions of these schemes.
The schemes are 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 Single window
dispensation and fifth to Better service, being least preferred by the respondents. This
shows that respondents were not satisfied by the service provided by these banks.
From the above table it can be concluded that Low rates of interest was most preferred of
all other benefits. Attractive financing conditions and easy access were next in the
preference order. Single window dispensation was the next preferred benefit. Better
service was the least preferred benefit by the respondents.
8. What were the problems faced by your enterprise in raising finance from public
sector banks?
Table 5.8
50
Problems Faced By SMEs In Raising Finance
Problems Faced No. Of Respondents %Age Of Respondents
Insufficient collateral 68 22
Poor documentation 39 13
Delay in the sanction of loan 80 26
Cost involved is high 25 8
Biasness 76 25
High rate of interest 20 6
Total 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 interest

question. The most common problem faced by SMEs in raising finance is the delay made
in sanctioning the loan with 26%.The public sector bank employees work very slowly
and usually an application takes a lot of time for approval.25% respondents say biasness
was one another problem faced by them.22% respondents find the inability to provide
sufficient collateral as a problem.
9. What are the most common reasons given to your enterprise by the public sector
bank for rejecting an application for Loan?
Table 5.9
51
Reasons For Rejecting An Application For Loan
Reasons No.Of %Age Of
Respondents Respondents
The management team is too inexperienced 28 11
The application did not meet the criteria 43 17
The application was not correctly completed 24 9
Poor credit history 48 19
The enterprise could not provide enough 60 23
guarantees
Not a profitable venture 54 21
Total 257 100
Figure 5.6
Reasons For Rejecting An Application For Loan
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%

question. The above figure shows that 23% respondents says that the most common
reason given by the banks for rejecting an application is that they could not provide
enough guarantees.21 % says that banks reject an application because they believe that it
is not a profitable venture.19% says an application got rejected because of poor credit
history as banks lie on the past performance of enterprises before granting any loan.
10. What factors demotivate you in applying for finance from these schemes of
public sector banks?
Table 5.10
52
Factors that Demotivate In Applying for Finance
Factors that Demotivate No. Of %Age Of
We were turned down before 40 24
Procedure to obtain this type of financing is too 25 15
complicated
The process is lengthy 62 38
Too much of documentation is required 38 23
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
required

question. The above figure shows that 38% respondents says that the factor that
demotivates them for applying for finance from these schemes is the lengthy process
involved.24% respondents says that they were turned down before.23% respondents says
that they do not apply for loan from these schemes as too much of documentation is
required.
11. Are the Private sector banks SME financing schemes are better than SME
financing schemes of public sector banks?
Table 5.11
53
Whether Private Sector Banks Schemes Are Better Than Public Sector Banks
Schemes
Private Sector Bank No. Of Respondents %Age Of Respondents
Schemes Are Better
Yes 64 64
No 36 36
Total 100 100
Figure5.8
Whether Private Sector Banks Schemes Are Better Than Public Sector Banks
Schemes
No.Of Respondents
36%
Yes
No
64%

The above figure shows that 64% of respondents think that private sector banks schemes
of financing are better than that of public sector banks financing schemes and only 34%
think that public sector banks schemes of financing are better than that of private sector
banks. The private sector banks use latest technology and provide better service.
Moreover, the time involved for obtaining loan is also comparatively less. But private
banks charge heavy rates of interest and charge heavy service fees.
54
12. Please indicate your level of satisfaction with various aspects of obtaining
finance from these public sector banks. Kindly rate them on 5-point scale basis; 5
being strongly satisfied and 1 being strongly dissatisfied
Table 5.12
Satisfaction Regarding Various Aspects Of Obtaining Finance From Public sector
Bank Schemes
Various Strongly Satisfie Neutral Dissatisfie Strongly Summated
Aspects Satisfie d d Dissatisfie Score
d 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) Interest 24 71 2 3 0 184
rate
11.4) Service 15 48 24 12 1 236
fees
11.5) Time to 6 8 10 34 42 398
obtain approval
11.6) Guarantees 0 16 21 36 27 374
required by the
institution
11.7) Behavior 10 22 12 30 26 340
of the bank staff
Number of respondents -100

Maximum Score - 500
Minimum Score - 100
As from the above table no. 5.11 comparison was done between maximum score and
Summated score. Maximum score is the score, which represents the dissatisfaction level
among the respondents. So, information related to the level of satisfaction or least
satisfaction to various factors influencing the satisfaction level of respondents was
interpreted in following manner-:
55
It was clear that respondents were satisfied with the ‘Rate of Interest’ as this aspect lies
between strongly agreed and agreed with summated score of 184. So the respondents
were satisfied with this aspect. The factor “amount granted by the bank relative to the
amount requested lies between agree and neutral 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 neutral but are more close to
agreed level. So the respondents were satisfied with these aspects.
The other three factors ‘behavior of the bank staff’, guarantees required by the institution
and the time to obtain the approval are between the neutral and dissatisfied. Respondents
were not very satisfied with these aspects.
13. Apart from such schemes, what initiatives government can take for improving
SME business in India?
56
Table 5.13
Initiatives For Improvement
Various Initiatives No. Of %Age Of
Decrease the amount of taxes 35 28
Support innovative technological companies 26 21
Guidance for upgrading skills & knowledge of 15 12
entrepreneurs
Assistance and support for revival of sick 29 23
units
Introduce a Single Window concept for 20 16
helping SMEs
Total 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 SMEs
question. The above graph shows that the 28% of respondents believe that there is need
for guidance for upgrading skills and knowledge of entrepreneurs,23% respondents
believe that assistance and support should be provided for the revival of sick units as
57
number of sick SME units are increasing at a rapid ratew..21% of the respondents believe
government should support innovative technological companies. Moreover government
can introduce a single window concept for helping SMEs and can provide guidance for
upgrading skills and knowledge of entrepreneurs.
58
CHAPTER-VI
FINDINGS OF THE
STUDY
FINDINGS OF THE STUDY
59
After undertaking the study, the following findings were made about the usage 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.
• 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
60
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.
• 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 introduce a single window concept for helping SMEs and can
provide guidance for upgrading skills and knowledge of entrepreneurs.
61
CHAPTER – 7
CONCLUSION
AND
RECOMMENDATIONS
62
CONCLUSION OF THE STUDY
Over a period of time, it has been proved that SMEs are dynamic, innovative and most
importantly, the employer of first resort to millions of people in the country India has a
vibrant SME sector that plays an important role in sustaining economic growth,
increasing trade, generating employment and creating new entrepreneurship in India. But
the SME sector faces a lot of obstacles in obtaining adequate finance. Government of
India has started a number of SME financing schemes in its public sector banks .These
public sector banks are playing a major role in the development of SME sector in India.
But due to few obstacles, these schemes are not as effective as they should be. The
review of researches has showed that SME sector plays an important role in the economic
development of a country but obtaining adequate finance has emerged as a major
problem faced by SMEs. The need, scope and objectives of the study provided the
framework for further research. The basic purpose of conducting the study was to study
the usage of SME financing schemes of the public sector banks. The data was collected
from SME units. Various tools of data analysis and interpretation were used for carrying
out the research. The major findings of the study were that bank financing is the most
popular source for financing SMEs in India. The SME financing schemes provide credit
to this sector at low rates of interest and at attractive conditions but the procedure
involved is lengthy. Moreover, too much of documentation is required .Insufficient
collateral and biasness are also the major problems. 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. 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
process followed in sanctioning the loan and documentation required is
cumbersome; hence it is suggested to make the process easier.
63
RECOMMENDATIONS
After carrying on the study, the following recommendations have been made: -
• 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 (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.
64
• 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 sector Banks ratings an easy access
to the financial information of SMEs that highlight the unit's 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.
65
REFERENCES
66
REFERENCES
Kaura, M.V. and Sharma, G.L. (1999). Financing Small Industries – Institution Should
Change Their Attitudes, Procedures. Journal of Industry and Trade, 34(3).
Kothari, C.R. (1995). Research Methodology. Edition 2005. New Delhi: Tata McGraw
Hill.
Mercieca, S. and Scheack, C. (2009). Bank Market Structure, Competition And SME
Financing Relationships In European Regions. Journal of Financial Services Research,
36(2-3), 137-155.
Nambiar, P.C.D. (2007). Financing For Priority Sectors. S.B.I Monthly Review, 6(8).
Popli, G.S. and Rao, D.N. (2009). An Empirical Study Of Smes In Electronics Industry
In India: Retrospect & Prospects In Post WTO Era. Global Business Review, 3(2).
Popli, G.S.and Rao, D.N. (2009). Service Quality Provided By Public Sector Banks 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 For Attention.
Global Business Review, 3(2), 351-367.
Raju, B.Y. (2008) .Small And Medium Enterprises (Smes) In India: Past, Present And
Future. PHDCCI Working Paper, 10.
Rani and Rao, D.N. (2008). Financing Small enterprises: Recent Trends. ICFAI Journal
of Entrepreneurship Development, 5(1), 6-22.
Torre et al (2008). Bank Involvement With Smes: Beyond Relationship Lending .World
Bank Policy Research Working Paper Series, 1(7).
67
Wtterwulghe and Janssen (2005) .The Role Of The Banker In Financing Medium Sized
Firms In Belgium: Lender Or Advisor. Journal of Entreneurship, 6(1), 75-85.
68
ANNEXURES
69
QUESTIONNAIRE
I, Aditi Jain of MBA of Apeejay Institute of Management is conducting a research on ‘Usage

of SME financing schemes of the Public sector banks’. So, we request you to spare a few
minutes from your busy schedule and fill this form. We assure you that the information provided
by you will be kept confidential.
DEMOGRAPHICS:
Name ………………………………..
Designation ……………………………….
Name of the company ……………………………….
Location ……………………………….
Questions
Q1. What are the sources of finance used by your enterprise?
a) Owners financing
b) Private financial institutions
c) Equity finance
d) Bank financing
e) Venture capital
f) Hire purchase and leasing
g) Business angel financing
Q2.Rank the obstacles that are faced by your enterprise in its growth from 1 to 5; 1 being
the biggest
a) The frequent need to renew the equipment

b) Instability of demand for product or service
c) Obtaining adequate financing
d) Low profitability of the sector
e) Taxation levels
Q3. Have you ever raised finance from public sector banks?
a) Yes b) No
70
Q4. What type of loan is taken by you?
a) Sulabh Vyapar loan d) Open term loan
b) Transport Loan e) Working capital loan
c) Paryatan plus Loan
Q5 For what purpose, your enterprise has taken loan?

a) Real estate acquisition to house the business
b) Increase the production
c) Construction, renovation or leasehold improvements

d) For flooring of inventory and working capital
e) For modernization and upgradation of technology
Q6.Rank the benefits of these schemes on the scale of 1-5; 1 being the most important:
6.1) Better service 6.4) Attractive financing conditions
6.2) Single window dispensation 6.5) Low rates of interest
6.3) Easy access
Q7. What were the problems faced by your enterprise in raising finance from public sector
banks?
a) Insufficient collateral d) Cost involved is high
b) Poor documentation e) Biasness
c) Delay in the sanction of loan f) High rate of interest
Q8. What are the most common reasons given to your enterprise by the public sector bank
for rejecting an application for Loan?
a) The management team is too inexperienced
b) The application did not meet the criteria
c) The application was not correctly completed
d) Poor credit history
e) The enterprise could not provide enough guarantees
71
f) Not a profitable venture
Q 9.What factors demotivate you in applying for finance from the SME financing schemes
of the public sector banks?
a.) We were turned down before
b.) Procedure to obtain this type of financing is too complicated
c.) The process is lengthy
d.) Too much of documentation is required
Q.10 Are these private sector bank schemes are better than public sector bank schemes?
a) Yes b) No
Q11. Please indicate your level of satisfaction with various aspects of obtaining finance
from these public sector banks. Kindly rate them on 5-point scale basis; 5 being strongly
satisfied and 1 being strongly dissatisfied:
Strongly Satisfied Neutral Dissatisfied Strongly
Satisfied Dissatisfied
12.1) The amount granted by the bank
relative to the amount requested
12.2) The simplicity of the application
form
12.3) Interest rate
12.4) Service fees
12.5) Time to obtain approval
12.6) Guarantees required by the
institution
12.7) Behavior of the bank staff
Q12. Apart from such schemes, what initiatives government can take for improving SME
business in India?
a) Decrease the amount of taxes
b) Support innovative technological companies
c) Guidance for upgrading skills & knowledge of entrepreneurs
d) Assistance and support for revival of sick units
e) Introduce a Single Window concept for helping SMEs
72
Thank you for the co-operation
73

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CHAPTER - 1

(a) Born out of individual initiatives & skills

(b) Greater operational flexibility

(c) Low cost of production

(d) High propensity to adopt technology

(e) High capacity to innovate export:

(f) High employment orientation:

Classification Investment Ceiling for Plant, Machinery or Equipments

Classification Investment Ceiling For Plant, Machinery Or Equipments*@

Small Above Rs.25 lakh & upto Rs.1 Not defined

(http://www.dcmsme.gov.in/ssiindia/MSME_OVERVIEW09.pdf last accessed on 26

• Import Duty (not to include miscellaneous expenses such as transportation from

• Micro Enterprises would include Tiny Industries also.

(http://www.bankofindia.com/smepol.aspx last accessed on 26 Nov, 2009)

Development of SMEs In India

Year Total SME Units (Lakhs) Fixed Investment (Rs Crores)

In the policy statements of 1991, the state followed a policy of supporting

Role of SME sector in Nation Development

Year Total SME Fixed Production Employment Export

(http://www.smechamberofindia.com/rol_of_sme_sector.aspx last accessed on 27 Nov,

a) Financial problems of SMEs:

b) Raw Material problem of SMEs:

d) Technological problem of SMEs:

d) Marketing problem of SMEs: As marketing is not properly organized, the

e) Managerial problem of SMEs:

(http://milagrow.in/k-solutions/msme-planet/sickness-rehabilitation last accessed on 25

Need of the hour

SME Policy Initiatives in 2009

Skill Development on priority: Various measures like enhancing the training

Quality improvement on priority : The ISO-9000/ISO-14001/HACCP Certification

Employment Generation: The Prime Minister’s Employment Generation Programme

 Collateral based lending offered by traditional banks and finance companies is

SME Financing Gap

(http://en.wikipedia.org/wiki/SME_finance last accessed on 27 nov, 2009)

Various ways of Financing SMEs

Problems of SMEs Financing

• Larger companies (particularly those quoted on a stock exchange) are required to

(http://tutor2u.net/business/finance/finance_sources_smes.htm last accessed on 27 Nov,

1.2 ROLE OF PUBLIC SECTOR BANKS IN SME FINANCING

• Single Window dispensation,

Credit to SME sector from Public Sector Banks

Year Net Bank Credit Credit to SMEs % of NBC

. 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

Estimating the amount of loan to be sanctioned and forwarding the

If the loan is been sanctioned by the central authority then

• And finally after the verification by sanctioning authority, the disbursement of

• This whole procedure right from application to disbursement of loan

1) State bank of India and its subsidiaries 7) Central Bank of India

2) Allahabad Bank 8) Punjab National Bank

3) Oriental Bank of Commerce 9) IDBI Bank

4) Bank of Baroda 10) Indian Bank

5) Bank of India 11) Canada Bank

6) Punjab & Sind Bank 12) Corporation Bank

State Bank of India

• Commodity Packed Warehouse Receipt Financing

(http://www.sbi.co.in/user.htm last accessed on 27 Nov, 2009)

(http://www.idbi.com/sme/ last accessed on 27 Nov, 2009)

Union Bank of India

Torre et al (2008) made a research and investigated the conventional wisdom in

NEED, SCOPE AND OBJECTIVES OF THE STUDY

3.1 Need of the study