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CHAPTER III

INTRODUCTION
In a labour abundant and capital scarce country like India, small-scale industries
occupy a significant position in the industrialization of the economy. Most small scale
industries have low capital intensity and high potential for employment generation. It
contributes to the socio-economic goals such as decentralization and dispersal of
manufacturing activities from the metropolitan to the non-metropolitan and rural areas,
reduction of regional economic imbalances within the country and the diffusion of
entrepreneurial skills as well as technology throughout the country.
Finance is a basic requirement for all kinds of business activities. It is the master key
which provides access to all other resources that are employed in the production and
marketing of goods and services. It guides and regulates investment decisions and
expenditure. However, efficient functioning of every business is dependent, not only on
the mere availability of finance, but also in the efficient utilization of finance.

POST LIBERALISATIION
The small scale industries in India have been experiencing a major turnaround in the
post liberalization period with the growth rate hovering at 15% which is much higher
than the large scale industries in the past twelve years, despite constraints like
infrastructure, finance, market trends and technology.
Recently, it has also ventured into servicing activities such as health care, educational,
transport, tourism and hospitality services In the light of the important role that small
scale units play for the development of entrepreneurs and entrepreneurship, it is rightly
referred to as the seedbed of entrepreneurship. Small scale industries have greatly
contributed for the growth of any economy in the world. Presently, the small scale sector
contributes to about 40% GDP of our country.

OPERATIONAL DEFINITION
An industrial undertaking in which the investment in fixed assets in plant and machinery,
whether held on ownership terms or by hire purchase, does not exceed Rs 100 lakhs as on
March 31, 2001 is to be treated as a small scale industrial unit.

TYPES OF SMALL SCALE INDUSTRIES


The small scale sector covers a wide range of industries which is categorized as the
following

Small scale industrial undertakings.


Ancillary industrial undertakings.
Export oriented units (EOU)
Tiny enterprises.
Small scale service enterprises (SSSE)
Small scale services business enterprises (SSBE)
Artisans, village and cottage industries.
Women entrepreneurs enterprise.

NEED FOR SMALL SCALE INDUSTRIES


Small scale enterprises have been given a significant position in the framework of Indian
planning for both economic and ideological reasons. Some of the important reasons for
the growth of small scale industries are

Elimination of economic backwardness of rural and underdeveloped regions.


Attainment of self-reliance.
Reduction of disparities in income, wealth and consumption.
Mobilization of resources of capital and skills and their optimum utilization.
Creation of greater employment opportunities and increased output.
Meeting a substantial part of the economys requirements for consumer goods.

CONTRIBUTION OF SMALL SCALE INDUSTRIES TO THE


ECONOMY:
The small scale sector is a major contributor to the industrial economy of the country. It

accounts for 95% of the countrys factory ownership, contributes nearly 45% of the total
industrial production and exports from this sector accounts for 45% of the total Indian
exports. Apart from direct exports, products of a large number of small scale enterprises
are also exported directly and indirectly through merchant exporters, export houses and
other channels.
In addition to providing direct and indirect employment opportunities, this sector is
engaged in providing technical, commercial training to a large segment of rural and
urban population who either cannot afford to seek higher education on pecuniary
grounds or because they cannot find a berth in a highly competitive employment
situation. It substantially draws its human resources from the weaker sections of the
society and is close enough to rural areas to appreciate and contribute to the needs of this
region. Most importantly it is a belief of entrepreneurial growth and its sustained
development.
Small scale sector plays an active role in providing considerable range of products and
services to the medium and large scale sectors. Over the years the small scale sector has
reasonably mastered the expertise to produce a large range of traditional and nontraditional finished goods in the form of consumables, consumer durables and industrial
products. Besides, the small scale industries have already established impressive records
of performance from the point of view of a progressive quantum of earnings and
introduction of additional product range. This sector isalso the core sector for artistic
products. Creativity and artistic excellence are the hallmark of small scale enterprises.

CHARACTERISTICS OF SMALL SCALE INDUSTRIES


The small industries are categorized in terms of finance, human resources, and marketing and
general management aspects to understand their characteristics:

Financial aspects
Capital investment is small.
The fixed assets form the biggest component of investment.
Most of the funds come from the entrepreneur's savings.
Financial discipline is very weak and rules and regulations are not adhered
The general tendency is to avoid paying taxes.

Human resource aspects


Most of the small scale industries have less than 10 employees.
Virtually all the firms are privately owned and are organized as sole proprietorship.
The employment is given mostly on suggestions of friends and relatives
There is no scope for trade union.
The average worker does not work full time in one activity over the entire year.

General management aspects


Very few units are organized industrial estates having good infrastructure facilities.
Located in rural and semi-urban areas.
Very few small scale industries have grown up to medium and large scale industries.

Training and development is not given importance.

Small industries are negligent about various types of pollutions.

Due to over dependency on large industries many small units suffer from lack of
workload.

OBJECTIVES OF SMALL SCALE INDUSTRIES


Create employment opportunities with low investments.
Eradicate unemployment problems.
Promote balanced regional development.
Equitable distribution of national income, wealth and consumption.
Ensure utilization of unexploited resources.
Improve the standard of living of the people.
To meet economy requirements for consumer goods.
Provide substitutes for various industrial products.
Improve the quality of industrial products manufactured in cottage industries.

Adopt latest technology aimed at producing quality products at lowest cost.

IMPORTANCE OF SMALL SCALE INDUSTRIES


Labour intensive and wide scope for employment of workers.

Flexibility ensures better innovation.

Capacity to adjust themselves with the changing environment.

Quick returns on the capital invested.


Social cost of developing small units especially handicrafts industry is low.

Combating poverty and unemployment.

Ensure balanced regional development.

ADVANTAGES OF SMALL SCALE INDUSTRIES

Small scale industries can be started as per convenience of the owner.


Locally available skilled and semi-skilled people can be appointed at short notice.
Some small scale industries do not require a high level of technology.
Small scales industries are labour intensive and do not require a large capital.
Small scale enterprises in developing countries help to create economic stability

Since employee recruitment is based on contracts, there is loyalty of employee


towards the organization and hence there will be no trade union activity.

The setting up of the unit and starting of production requires a small gestation period
of only 2 to 6 months and the layout can be designed as per convenience.
It is possible both to save and earn foreign exchange by producing and exporting

goods from local resources.


Small scale enterprises lead to equitable distribution of income.

ROLE OF SMALL SCALE AND COTTAGE INDUSTRIES IN


INDIAN ECONOMY
Share in industrial output.
Employment generation

Contribution to exports.
Optimization of capital.

Mobilization of local resources.


Equitable distribution of national income.
Consumer surplus.
Support to large industrial units.
Socio-economic development.
Cultural heritage

PROBLEMS FACED BY SMALL SCALE INDUSTRIES


Lack of finance and credit
Lack of raw material
Problem of inefficient labour
Lack of machinery-and equipment
Problem of marketing

Huge number bogus small firms

Unsuitable location:
Inadequate infrastructure
Poor project planning
Competition from large scale units
Lack of research and development

STEPS TAKEN BY THE GOVERNMENT TO SOLVE THE PROBLEMS


OF SMALLSCALE INDUSTRIES
Financial assistance
Marketing assistance
Technical assistance
Infrastructural facilities
Industrial estates
Allocation of raw materials and other equipments.

POLICY MEASURES OF THE GOVERNMENT FOR PROMOTING


SMALL SCALE INDUSTRIES
The Industrial Policy Resolution 1948
The Industrial Policy Statement 1948 had recognized and stated the specific role of cottage
and small scale industries which are particularly suited for better utilization of local resources
and achievement of local self-sufficiency in certain essential goods.

The Industrial Policy Statement 1956


This policy states that small scale industries provide immediate large scale employment, offer
a method of ensuring a more equitable distribution of national income and facilitate an
effective mobilization of resources of capital and skills which might otherwise remain
unutilized.

The Industrial Policy Statement 1977

This policy provided for a strengthened role for this sector by considerably expanding the list
ofproducts reserved for small scale industry. Itsmain objective was thatanything that can be
produced by small and cottage industries must be produced only by them.

The Industrial Policy Statement 1980


The industrial policy 1980 indicates the need for intensifying the development of small
industries through integrated industrial process and fostering complementary between large
and small sectors.

The Industrial Policy Statement 1985


Due to inflationary pressure in the economy, the Government had raised the investment ceiling
for small scale industries to Rs. 35 lakhs and for ancillary industries to Rs. 45 lakhs.

The Industrial Policy Statement 1990


The government had taken various measures to re orient industrial growth to serve the purpose
of employment generation dispersal of industry in the rural areas and to enhance the
contribution of small scale industries in exports.

Industrial Policy Statement 1991


Government announced this Industrial Policy, in 1991 with a view to build on gains already
made, correct the distortion or weakness that might have crept into the small scale sector to
maintain a sustained growth in the productivity and gainful employment and attain
international competitiveness.

Comprehensive Policy 2000


A comprehensive policy for the small scale industry was announced by the Prime Minister on
August 30, 2000. The main elements of this policy were

Conducting the third census of small-scale industries.


Raising the exemption for excise duty limit from Rs. 50 lakhs to 1 crore.
Providing credit linked capital subsidy of 12 percent against loans for technology.
Raising the limit of investment in industry related service and business enterprises form
Rs. 5lakhs to Rs. 10 lakhs.

Raising the limit of composite loans from Rs. 10 lakhs to Rs. 25 lakhs.

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FINANCIAL ASSISTANCE TO SMALL SCALE INDUSTRY


Finance is one of the most important prerequisites to start an enterprise. In fact, it is the
availability of finance that brings an entrepreneur to bring together land, labour machinery and
raw material to produce goods. Financing a small scale industry is a critical element for its success
in the business. Instances are galore to cite that many enterprises though potentially successful,
failed because they were undercapitalized. Therefore, every enterprise should clearly plan its
future financial requirements in its very beginning itself.

NEED FOR FINANCIAL ASSISTANCE

The dimension of finance has undergone phenomenal transformation during the last few
decades. Until the recent past business finance was considered as an economic activity,
concerned with procurement of funds for business.
Small Scale Industries normally suffer from capital inadequacy, working capital
requirements, capital needs for implementing technological changes, expansion and
diversification besides there is a competition from large scale industries, inability to keep the
cost low, poor marketing opportunity all lead to financial crisis. Hence, there is a need for
financial assistance to be provided to small scale industries.

CHARACTERISTICS OF SMALL BUSINESS FINANCE


High proportion of working funds: due to labor intensive technology a large proportion of

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total funds are required in the form of liquid assets.


High gearing: Generally the owner funds of the small scale enterprise are
Limited. They have to depend to a great extent on borrowing of funds.
Personal control: The entrepreneur wants to retain control of the enterprise therefore he
is averse to the sources of funds whereby his control is diluted.
Low credit standing: The credit worthiness of small entrepreneur is generally low.

TYPES OF INDUSTRIAL FINANCE


Short Term Finance
Short term finance is usually required to meet variable, seasonal or temporary working capital
requirements. Borrowings from banks are a very important source of short term finance. Other
important sources of short term finance are trade credit, installment credit and customer advances.

Medium Term Finance


The period between one to five years duration is considered for medium term finance which is
usually required for permanent working capital, small expansions, replacement, modifications etc.

Long Term Finance


The period exceeding 5 years is considered for long term finance which is required for procuring
fixed assets, for the establishment of a new business, substantial expansion of existing business,
modernization etc.

SOURCES OF FINANCE FOR SMALL SCALE SECTOR


The various sources from which small scale industry can raise funds are categorized under the
following

INTERNAL

Paid up capital
Ordinary shares
Preference shares
Deferred shares
Forfeited shares

Reserves

Provisions

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EXTERNAL

Borrowings from banks.

Lending institutions like IDBI, IFCI, SIDBI, and KSFC.


Government and other agencies.

Sundry creditors.

Miscellaneous.

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ROLE OF FINANCIAL INSTITUTIONS


Financial institutions play a vital role in providing assistance to small scale industries in all its
stages of development. Any industry will have teething problems and uncertain situations during
its initial stages of development but with the support of institutional assistance such industries can
overcome their problems. Therefore, in order to facilitate the development and growth of the small
scale sector, the Central and state governments have established an elaborate institutional
framework in the country.

IMPORTANT FINANCIAL INSTITUTIONS

Industrial Development Bank Of India


Industrial Finance Corporation Of India
Industrial Credit And Investment Corporation Of India
Industrial Reconstruction Bank Of India
Life Insurance Corporation Of India
Unit Trust Of India
State Financial Corporations
State Industrial Development Corporations
Small Industries Development Bank Of India
Export-Import Bank Of India
Commercial Banks
Karnataka State Small Industries Development Corporation Ltd.
Karnataka State Industrial Investment Development Corporation

KARNATAKA STATE FINANCIAL CORPORATION

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INTRODUCTION
The Karnataka State Financial Corporation is a state level Institution established by the State
Government in 1959 under the State Financial Corporation Act 1951 to mainly to meet the long
term financial needs of small and medium enterprises in the state of Karnataka. It has assisted over
1,69,244 units amounting to nearly Rs 13,811 crores over the last 56 years in the state of
Karnataka.
Today, while the state economy is making rapid strides in the global market, Karnataka State
Financial Corporation is moving in tandem as a pioneering and responsive financial institution, it
is fine tuned to fulfil the plans and aspirations of the entrepreneurs by extending all possible
financial assistance. It has contributed significantly for the growth of small scale sectors, backward
area development and promotion of first generation entrepreneurs. Its achievements in these areas
are unparalleled.

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Karnataka State Financial Corporation as an ISO 9001:2000 certified organization is proud to


have played a major role in the industrial development of the state. It also has assisted many
industries that are internationally recognized like INFOSYS, BIOCON etc.

ORIGIN OF THE INDUSTRY


After independence the Indian government realized the importance of industrialization in the
economic growth of the country but during that time one major constraint for the development of
industries was finance. Hence, the government took several steps to fill this vacuum and create a
number of national and state level financial institutions.
Government passed industrial policy to demarcate production under public sector, private sector,
co-operative and small-scale sector as well as large scale, medium scale and small-scale units.

EVOLUTION
A well-organized financial institution is most essential for the purpose of promoting the
economy of a region. The development banks like SIDBI, IFCI, and ICICI functioning at the
national level provided their assistance mainly for large-scale industries. There was a huge
requirement for financial institutions to assist the small scale, cottage and tiny industries at the
state level. Hence, the central government passed the State Financial Corporation Act in 1951 as
a result of which the Karnataka state financial corporation was established in 1959 for
promoting industrial activities and to develop balanced industrial growth in the state, giving
special attention to small-scale industries

OBJECTIVES
To provide financial assistance in the form of term loans to small scale industries in
Karnataka.
To provide quality financial and related services on a continuous basis.
To continually upgrade its products and services.
To encourage the dispersal of industries in backward areas, to maintain balanced regional
growth of the industries.
To develop data bank on industrial information.
To provide equipment leasing, working capital and assistance to research and development
activities.
To identify the entrepreneurs throughout the state.
To conduct district level industrial seminars.
To conduct special survey for industrial information.
To provide enterprise development programs to women, engineering students, technical,
professional and agriculturists.

MISSION STATEMENT

KSFC is committed to nurture, develop and service the Small and Medium scale sector through
need based products and services.

MANAGEMENT
The management of Karnataka state financial corporation is carried out by the Board of directors
consisting of 12 directors, out of which 4 directors are nominated by the state government, 1 by the
RBI, 2 by the SIDBI, and 4 as per the SFC Act 1951. The Chairman is appointed by the state
government who is assisted by a Managing director and Executive Committee

AREAS OF OPERATION:
Karnataka state financial corporation services the nook and comer of Karnataka with its extensive
network of 7 zonal office, 3 super A grade branch offices, 12 A grade branches and 14 B grade
branch offices with an empowered and decentralized administrative system. It is the only term
lending financial institution in the state of Karnataka with such a widespread network.

The area of operation covers the entire state of Karnataka. It has its branches in all the district
headquarters. The industrial units which are to be established within the state are only eligible for
assistance. The branch officers of the corporation are delegates with powers of sanctioning
disbursement requirements of financial assistance up to Rs.50 lakhs which is handled by the
concerned branch office itself. If the requirement of loan is more than Rs.50 lakh, entrepreneurs
will have to approach the head office.

COMPETITORS OF KSFC IN KARNATAKA


Small Industry Service Institution [SISI].
Karnataka State Small Industrial Development Corporation Ltd [KSIIDC].
Khadi and Village Industrial Board [KVIC].
Commercial Banks.
Co-operative Banks.

Foreign Lending.

LIST OF SOURCES OF FUNDS FOR KSFC

Enhancement of Share Capital.


Line of credit from IDBI or SIDBI Lines of credit from Banks.
Seeded capital and other agency funding.
Margin money from state level corporations.

Income from interest and other activities.

ACHEIVEMENTS OF KSFC

Recommendation by IDBI as one of the best SFC of the country.


Computerization of head office for better customer services.
Introduction of equipment lease finance, hire purchase assistance, merchant banking

facilities and corporate loan for meeting all requirements of entrepreneurs.


Establishment of women entrepreneurs guidance and escort services of women

entrepreneurs.
Introduction of 21 types of loan schemes for extending assistance to all sections of the
society.

FINANCIAL SERVICES
As per the State financial corporation Act, the following activities are eligible for financial
assistance.

Manufacture, preservation or processing of goods.


Mining or development of mines.
Hotel Industry.
Acquisition of transport vehicles [passengers / goods]
Generation or distribution of electricity or any other form of power.
Maintenance, repair, testing or servicing of machinery and vehicles.
Assembling, repair or packing any article with the aid of machinery.

Setting up or development of an industrial area or industrial estate.

Providing weigh bridge facilities

Providing engineering, technical, financial management, marketing or other services


Providing medical, health or other allied services.
Providing software services relating to information technology, telecommunication etc.
Development of tourism related facilities including counseling services to the tourists.
Construction activity.
Providing commercial complex facilities and community centers.
Floriculture.
Tissue culture, fish culture, poultry farming, breeding and hatcheries.
Service Industry
Research and development activities
Setting up of medical stores [only fixed assets are eligible for financing.
Setting up of vocational training center for imparting technical knowledge to entrepreneurs.
Setting up of entertainment industry including production of films.

Such other activities approved by SIDBI from time to time.

FUNCTIONAL DEPARTMENTS OF KSFC


Entrepreneur guidance cell.
Credit department.
Treasury department.

Internal audit department.


Legal department.
Recovery department.
Business development and credit research development.
Personnel department.
Hire purchase and financial services department.
Management information systems department.
Public grievance cell.
Sick units monitoring department.

Asset reconstruction department.


Women entrepreneur guidance cell.
Accounts department.

PROJECTS PREFERRED BY KSFC


It gives preference to those projects which are

Promoted by technician entrepreneurs.

Located in growth centers and developing areas of the state.

Promoted

by

entrepreneurs

belonging

to

scheduled

caste

tribe, backward class entrepreneurs and other weaker sections of society.

Projects which are having high employment.

Capable of utilization of local resources.

In tune with the declared national, priorities.

DOCUMENTS REQUIRED
Bio-Data and net worth of major promoters.
List of share holding pattern.
Location and land details.
List of indigenous plant and machinery.
Profitability statement.

and

scheduled

Working capital estimate.


Debt services coverage ratio.
Cash flow estimate.
Assumptions to profitability.
Break even analysis.
Internal rate of return.
Market report.

PROCEDURE FOR AVAILING LOAN ASSISTANCE FROM KSFC


The entrepreneurs requiring financial assistance from KSFC should follow the following procedure
Meet the assistant general managers (EG) cell, head office of the branch manager and discuss
about their projects. The entrepreneurs have to submit a brief project report, details on
constitution of the unit, bio-date and net worth of the promoters, location proposed for the unit,
extent of term loan required at the time of visit.
The entrepreneurs are required to attend the screening committed on advice from the EG
department or branch manager at the branch office to get primary clearance for their projects
and to obtain loan application forms and check list.
The filled in loan application forms have to be submitted i n duplicate along with enclosures as
per check list and- handed over at the EG department at the head office/branch manager as the
case may be and obtain acknowledgement. The entrepreneurs are required to pay loan
application processing fee by cash, cheque or DD and obtain receipt.

SCHEMES OFFERED FOR FINANCIAL ASSISTANCE BY KSFC

National equity fund scheme.


Technology development & modernization.
Acquisition of ISO 9000 series certificate.
Technology up gradation for textile. industry - A
Technology up gradation for textile industry-B
Assistance for marketing related activities.

Assistance for marketing enterprises.

Financing existing assets and enterprises.

Interest subsidy scheme of government of Karnataka.


Credit linked capital subsidy scheme.
Assistance to entertainment industry.
Assistance to commercial complexes.

Assistance to Construction Activity.

Corporate Loan Scheme.

Hire Purchase.
Hire Purchase Scheme.
Non-Convertible Debentures.

General Scheme.

Factoring Scheme.
Foreign Letter of Credit [FLC] Scheme.
Rental Discounting Scheme.

Insurance.

CHAPTER IV

CONCLUSION

Finance is the lifeblood of any business activity. Small scale industries require credit support
not only for establishing the enterprise and operational requirements but also for
diversification, modernization of facilities, capacity expansion etc. In respect of the small
scale industries, the problem of credit becomes more critical if any episodic event occurs
such as a large order, rejection of consignment, delay in payment etc.

Hence timely financial assistance is a pre-requisite for accelerating the development of small
scale industries. In order to provide financial assistance to the small scale industrialists many
financial institutions have come forward among which Karnataka state financial corporation
has played a significant role by framing its policies in such a way that all the small scale
industrialists who are in need of financial assistance are provided with their requirements.

Therefore, since 56 years of its inception, it has significantly contributed for the growth of
small scale industries and development of backward areas in the state by extending financial
assistance to cottage industries, artisans, scheduled caste and scheduled tribe entrepreneurs
and other economically weaker sections of the society in the state of Karnataka.

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