Naman Project

STUDY ON BANKING PATTERN AND NEEDS
OF SMES
A minor Project Report
Project submitted to Delhi College of Advance Studies,

in partial fulfillment of the requirements
for BBA (Banking & Insurance) semester III Programme of
G.G.S.Indraprastha University,Delhi.
Submitted by
Naman Thakur
(BBA Banking & Insurance semester III)
Enrl no.:
DELHI COLLEGE OF ADVANCE STUDIES

GGS IP UNIVERSITY
SHANKAR GARDEN, VIKAS PURI,
NEW DELHI- 110018
1
DECLARATION
I hereby declare that the minor project report,entitled “Study on

Banking Pattern and Needs os SMES”, is based on my original study and
has not been submitted earlier for any degree or diploma of any
institution/university.
The work of other author(s), wherever used, has been acknowledged

at appropriate place(s).
NAMAN THAKUR
Enrol. No.:
Countersigned:
Name of Supervisor:
Designation
2
PREFACE and ACKNOWLEDGEMENT
Its my proud privilege to release the feeling of my gratitude to several

presons who helped me directly or indirectly to conduct this project work.i
express my heartfull indebtness and owe a deep sense of gratitude to my
teacher an my faculty guide Prof. for their sincere guidance and inspiration
in completing this project.
I am extremely thankful to the Director, Dean, Chairman and

faculties of the Delhi College Of Advanced Studies for their coordination
and cooperation.
I am also extremely thankful to all those persons who have

positively helped me and all my friends who have more or less contributed
to the preparation of this project report. I will be always indebted to them.
Thanking You
3
CONTENTS
Introduction
Review of Literature 36-42
Objectives & Scope of Project 43-44
Methodology 45-48
Limitations 49
Analysis and Interpretation 50-72
Conclusion 73-77
Bibliography 77-79
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INTRODUCTION
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
5
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.
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.
6
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.
(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
7
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.
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.
8
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 Service Enterprises
Enterprises
Micro Upto Rs.25 lakh Upto Rs.10 lakh
Small Above Rs.25 lakh & upto Above Rs.10 lakh & upto
Rs.5 crore Rs.2 crore
Medium Above Rs.5 crore & upto Above Rs.2 crore & upto
Rs.10 crore Rs.5 crore
Table 1.2
Classification Of Micro, Small And Medium Enterprises Before 2nd
October, 2006
9
Classification Investment Ceiling For Plant, Machinery Or
Equipments*@
Manufacturing Service Enterprises
Enterprises
Micro Upto Rs.25 lakh Upto Rs.10 lakh
Small Above Rs.25 lakh & upto Not defined

Rs.1 crore
Medium Not defined Not defined
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;
10
• 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)
• 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
11
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 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.
12
• 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.
13
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
--- 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 Fixed Investment (Rs

(Lakhs) 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
14
(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 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.
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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.
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.
16
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.
17
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:
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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, high rate of capital
gearing, inadequacy of finance, short of raw materials, outdated plant and
machinery, low labor productivity etc.
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.
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
19
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.
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
20
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,
21
the second approach has been to broaden the viability based approach. Since
the viability based approach is 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
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;
• 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
22
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
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. 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
23
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_Credi
t_Access_To_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:-
24
• Provision of timely and adequate credit to the SMEs,
• 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 to SMEs % of NBC

Credit
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)
25
Figure 1.5
Steps For SME Loans By Public Sector Banks
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
26
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 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:
27
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 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
28
• 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, 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
29
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
30
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:
• 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
31
• 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
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)
32
• 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)
REVIEW OF LITERATURE
33
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 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
34
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 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
35
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 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
36
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.
37
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 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
38
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 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.
39
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 s
chemes 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.
40
SCOPE AND OBJECTIVES OF THE STUDY
3.1 Need of the study
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.
3.3Objectives 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.
41
• 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.
42
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 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.
43
• 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.
• 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.
44
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.
45
• 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.
LIMITATIONS OF THE STUDY
46
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.
47
ANALYSIS AND INTERPETATION
1. Demographic Profile of Respondents.
Table 5.1
Demographic Features
Demographics No. Of %Age Of

Respondents 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
48
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?
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 46 16
institutions
Equity finance 12 4
49
Bank financing 75 27
Venture capital 14 5
Hire purchase and 24 9
leasing
Business angel 29 10
financing
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
50
multiple sources for 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.
51
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
Obstacles In The Growth Of Enterprise
Obstacles Rank Rank Rank Rank Rank Weighte

1 2 3 4 5 d
Average
Score
The frequent need to 12 19 28 24 17 315
renew the equipment
Instability of demand 7 16 16 28 33 364
for product or service
Obtaining adequate 40 27 17 8 8 217
financing
Low profitability of 11 12 21 29 27 349
the 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
52
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
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
53
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
54
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.
55
6. For what purpose, your enterprise has taken loan?
Table 5.6
Purpose Of Taking Loan
Purpose Of Taking No. Of Respondents %Age Of

Loan Respondents
Real estate acquisition to 40 15
house the business
To increase the 63 24
production
Construction, renovation 33 12
or leasehold
improvements
For the flooring of 71 27
inventory and for working
capital
For modernization and 58 22
upgradation of technology
Total 265 100
Figure 5.4
Purpose Of Taking Loan
56
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

multiple-choice 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
Benefits Of SME Financing Schemes
Benefits Rank Rank Rank Rank Rank Weighted

1 2 3 4 5 Average
Score
Better Service 8 12 12 30 38 378
Single Window 8 12 22 30 28 358
Dispensation
57
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.
58
8. What were the problems faced by your enterprise in raising finance
from public sector banks?
Table 5.8
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
59
multiple-choice 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
Reasons For Rejecting An Application For Loan
Reasons No.Of %Age Of

The management team is too 28 11
inexperienced
The application did not meet the criteria 43 17
The application was not correctly 24 9
completed
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
60
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%

multiple-choice 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
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 25 15
is too complicated
The process is lengthy 62 38
Too much of documentation is required 38 23
61
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

multiple-choice 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
Whether Private Sector Banks Schemes Are Better Than Public Sector
Banks Schemes
62
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.
63
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 Satisfied Neutral Dissatisfie Strongly Summated

Aspects Satisfied d Dissatisfie Score
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) 24 71 2 3 0 184
Interest
rate
11.4) 15 48 24 12 1 236
Service
fees
11.5) Time 6 8 10 34 42 398
to obtain
approval
11.6) 0 16 21 36 27 374
Guarantees
required
by the
institution
64
11.7) 10 22 12 30 26 340
Behavior
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-:
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.
65
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?
Table 5.13
Initiatives For Improvement
Various Initiatives No. Of %Age Of

Decrease the amount of taxes 35 28
Support innovative technological 26 21
66
companies
Guidance for upgrading skills & 15 12
knowledge of entrepreneurs
Assistance and support for revival of 29 23
sick 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

multiple-choice 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 number of sick
67
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.
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.
68
• 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 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
69
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.
70
CONCLUSION AND RECOMMENDATIONS
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,
71
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.
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
72
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.
• 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.
73
• 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.
74
• 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.
BIBLIOGRAPHY
75
Kaura, M.V. and Sharma, G.L. (1999). Financing Small Industries –
Institution Should Change Their Attitudes, Procedures. Journal of Industry
and Trade, 34(3).
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).
76
77
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STUDY ON BANKING PATTERN AND NEEDS

A minor Project Report

Project submitted to Delhi College of Advance Studies,

DELHI COLLEGE OF ADVANCE STUDIES

I hereby declare that the minor project report,entitled “Study on

The work of other author(s), wherever used, has been acknowledged

Its my proud privilege to release the feeling of my gratitude to several

I am extremely thankful to the Director, Dean, Chairman and

I am also extremely thankful to all those persons who have

Small and medium-sized enterprises (SMEs) are the backbone of all

Common Characteristics of SMEs

(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:

(g) Reduction of regional imbalances

India embarked on the path of opening up its economy and integrating it

Classification Investment Ceiling for Plant, Machinery or

Small Above Rs.25 lakh & upto Not defined

While calculating the investment in plant and machinery/equipment referred

• Import Duty (not to include miscellaneous expenses such as

In case of Service Enterprises, the original cost to exclude furniture, fittings

• Micro Enterprises would include Tiny Industries also.

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

Development of SMEs In India

Year Total SME Units Fixed Investment (Rs

The Government announced its second Industrial policy in 1956 which

The Industrial policy statement of 1985 was also accorded importance to

Despite its commendable contribution to the Nation's economy, SME Sector

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

e) Managerial problem of SMEs:

 Collateral based lending offered by traditional banks and finance

SME Financing Gap

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

Problems of SMEs Financing

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

• Banks are particularly nervous of smaller businesses due to a perception

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 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

• After they are satisfied they send the file of necessary

• And finally after the verification by sanctioning authority, the

• This whole procedure right from application to disbursement of

2) Allahabad Bank 8) Punjab National

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

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)