The Advantages and

Disadvantages of Small Scale

Production
There are many kinds of merits and demerits of the small scale
production, such as:

(a) Advantages of Small Scale Production:

The following are the merits of small scale production:

1. Close Supervision:
The small producer can himself supervise the minutest details of the business.
Nobody is allowed to spoil machinery or waste materials. The masters eye is
everywhere. There can be no fraud or idleness. He will exercise utmost
economy to achieve the aim of maximum profits.

2. Nature of Demand:
The small producer has an advantage over the large producer, when the
demand is either small or is constantly changing. He has thus a sphere of his
own where he has an advantage over the large scale producer.

3. More Employment:
In the face of large scale unemployment existing in the country, the
development of cottage and small scale industries is of great help to create
more employment opportunities. Small scale production is more labourintensive i.e., there is more use of labour than machinery. Thus, many

unemployed persons are employed in the newly developed small scale

industries.

4. Need of small Capital:

The small scale production can be started with small capital. Where there is
shortage of capital, the small scale industries are of great advantage for the
development of industries.

5. Direct Relation between the Workers and the Employers:

In small scale production less workers are employed. Therefore, a close
relationship exists between the employer and the workers. Because of this
close relationship, the employer can look after the well-being of his employees
and employees, too, consider their work as their own and the work goes on
smoothly without any disputes between the two parties.

6. Direct Relation between the Customers and the Producers:

The small scale producers generally cater to the local demand. Hence, they
remain in touch with their customers. A small producer personally knows his
customers. Therefore, he can produce goods according to the taste and
fashion of each individual customer.

7. Easy Management:
The management of small business is easy and economical. Simple accounts
and a few persons can manage the job well.

8. Freedom of Work:

There is complete freedom of work in a small business organisation. Workers

are more or less self-sufficient. They are not dependent on the capitalists and
carry on their jobs freely.

9. External Economies:
The small scale production secures all kinds of external economies, which are
available to large units also. These economies are: better transport, electricity,
and communication facilities; banking and insurance services; technical
workers, etc.

10. No Evils of Large Scale Production:

The small scale production cannot fall victim to the evils of the large scale
production i.e., evils of the factory system, overcrowding, etc.

11. Other Advantages:

In the small scale production, there are some important advantages over the
large scale production:
(i) Whenever demand changes, the supply can be adjusted accordingly.
(ii) There are less possibilities of strike and lockouts and no moral degradation
of the workers is feared.
(iii) There are no dangers of monopolistic institutions.

Disadvantages of Small Scale Production:

The following are the demerits of small scale production:

1. High Cost of Production:

The cost of production per unit increases because there is a high cost of
labour, a very little scope for division of labour and lesser use of machinery.

2. Wastage of By-products:
In the small scale production, it is not possible to make economic use of the
by-products, as in the large scale production. By-products of the small
producers generally go waste.

3. Less Use of Machines:

In the small scale production, there is less scope for the use of machines. As
a result, these firms cannot take advantages of the use of the machinery.

4. Lack of Division of Labour:

In the small scale industries, the size of production is small, and there is lack
of division of labour and less profits to the entrepreneurs.

5. Difficulty in Getting Loans:

It cannot enjoy the financial economies. Funds are either not available and if
available, they have to pay higher rate of interest.

6. Difficult to Face Economic Crisis:

Because of the limited resources and financial weakness, the small scale
producers cannot face economic crisis. The producers do not have the
capacity to bear losses for long. In fact, under a small economic crisis, many
small factories are closed down.

7. Costly Raw Materials:

In the small scale production, raw materials are purchased in small quantities
which are available to the small producer at higher prices.

8. Lack of Standardised Goods:

The quality of goods is not standardised or upto the mark in the small scale
production. It is difficult to sell goods because of their low standard and inferior
quality.

9. Old Techniques:
In the small scale industries, the production is undertaken with the help of old
techniques or old and obsolete machines. It is not within their capacity to bear
the risk of installing new machinery.

10. Lack of Research:

The small scale industries have limited means at their disposal. They cannot
spend much on research in the field of science and technology. In this way,
the small scale industries are a hurdle in the way of technical research and,
industrial development.

11. Difficult to Face Competition with Large Scale Producers:

If some large scale producers enter the market, the small producers find it
difficult to compete with them. The small producers perish at the hands of the
large scale producers.

Lending money to the public

Lending money is one of the two major activities of any
Bank. Banks accept deposit from public for safe-keeping
and pay interest to them. They then lend this money to
earn interest on this money. In a way, the Banks act as
intermediaries between the people who have the money
to lend and those who have the need for money to carry
out business transactions. The difference between the
rate at which the interest is paid on deposits and is
charged on loans, is called the "spread".
Banks lend money in various forms and they lend for
practically every activity. Let us first look at the lending
activity from the point of view of security. Loans are
given against or in exchange of the ownership (physical
or constructive) of various type of tangible items. Some
of the securities against which the Banks lend are :
1. Commodities
2. Debts
3. Financial Instruments
4. Real Estate
5. Automobiles
6. Consumer durable goods
7. Documents of title

Apart from the above categories, the Banks also lend to

people on the basis of their perceived personal worth.

Such loans are called clean and the Banks are

understandably cagey about extending such loans. The
credit card arms of the various Banks, however, fill up
this void.
Cash credit Account
This account is the primary method in which Banks lend
money against the security of commodities and debt. It
runs like a current account except that the money that
can be withdrawn from this account is not restricted to
the amount deposited in the account. Instead, the
account holder is permitted to withdraw a certain sum
called "limit" or "credit facility" in excess of the amount
deposited in the account.
Cash Credits are, in theory, payable on demand. These
are, therefore, counter part of demand deposits of the
Bank.
Overdraft
The word overdraft means the act of overdrawing from a
Bank account. In other words, the account holder
withdraws more money from a Bank Account than has
been deposited in it.
How does this account then differ from a Cash
Credit Account?
The difference is very subtle and relates to the operation
of the account. In the case of Cash Credit, a proper limit
is sanctioned which normally is a certain percentage of
the value of the commodities/debts pledged by the
account holder with the Bank. Overdraft, on the other
hand, is allowed against a host of other securities
including financial instruments like shares, units of
mutual funds, surrender value of LIC policy and
debentures etc. Some overdrafts are even granted

against the perceived "worth" of an individual. Such

overdrafts are called clean overdrafts.
Bill Discounting
Bill discounting is a major activity with some of the
smaller Banks. Under this type of lending, Bank takes
the bill drawn by borrower on his(borrower's) customer
and pay him immediately deducting some amount as
discount/commission. The Bank then presents the Bill to
the borrower's customer on the due date of the Bill and
collect the total amount. If the bill is delayed, the
borrower or his customer pay the Bank a pre-determined
interest depending upon the terms of transaction.
Term Loan
Term Loans are the counter parts of Fixed Deposits in the
Bank. Banks lend money in this mode when the
repayment is sought to be made in fixed, pre-determined
installments. This type of loan is normally given to the
borrowers for acquiring long term assets i.e. assets
which will benefit the borrower over a long period
(exceeding at least one year). Purchases of plant and
machinery, constructing building for factory, setting up
new projects fall in this category. Financing for purchase
of automobiles, consumer durables, real estate and
creation of infra structure also falls in this category.
Classification of loans
Another way to classify the loans is through the activity
being financed. Viewed from this angle, bank loans are
bifurcated into :
Priority sector lending
Commercial lending