Credit Flow

Credit is the prime input for sustained growth of small scale sector and its
availability continues to be a matter of concern. Credit provided for creation of
fixed assets like land, building, plant and machinery is called long term credit.
Credit provided for running the industry for its day to day requirement for
purchasing raw material and other inputs like electricity and water etc. and for
payment of wages and salaries is called short term credit or working capital.

Institutional Arrangement

Small Scale Industrial Sector is provided working capital by commercial banks

and in some cases by cooperative banks and regional rural banks. Term loans
are provided by State Financial Corporations (SFCs), Small Industries
Development Corporations (SIDCs), National Small Industries Corporation
(NSIC) and National Bank for Agriculture and Rural Development (NABARD).
Financial assistance from NSIC and to some extent from SIDCs is available in
the form of supply of machinery on hire purchase basis/deferred payment basis.
Small sized SSI and tiny units also get some term loans from commercial banks
alongwith working capital in the form of composite loans.

Refinance to these institutions is provided by the Small Industries Development

Bank of India (SIDBI). Such refinance comprises assistance provided to State
Financial Corporation Bills, Finance Scheme, Special Capital/Seed Capital
Scheme, new debt instruments and to National Small Industries Corporation.
Long term loan are provided to the smalls scale industrial units by SFCs mainly
through Single Window Scheme and National Equity Fund as also direct
assistance provided to State Financial Corporations in the form of refinance.
Some part of working capital for pre-operative expenses is also provided by State
Financial Corporations to Small Scale Industrial Units under the Single Window
Scheme.
Credit to SSI Sector from Public Sector Banks

The table below gives the positions with regard to flow of credit to SSI Sector:-

At the At the At the end At the At the end

end of end of of March end of of March
March March 1997 March 1999
1995 1996 1998
Net Bank 1,69,038 1,84,381 1,89,684, 2,18,219 2,46,203
Credit
Credit to SSI 25,843 29,485 31,542 38,109 42,674
No. of SSI 32.25 33.77 N.A. 29.64 N.A.
Accounts (in
lakhs)
SSI Credit as 15.29 15.99 16.6 17.5 17.33
percentage of
Net Bank
Credit

There is a marginal decline in share of credit to SSI sector as a percentage of net

bank credit.
Credit to Tiny Sector

The Table below gives the status of credit flow to tiny sector since 1995:-

At the end At the end At the end

At the end of
of March of March of March
March 1998
1995 1996 1997
Net Credit to Tiny
7734 8183 9515 10273.13
Sector
Tiny credit as
percentage of net 29.93 27.76 30.2 27.0
SSI credit
The advances outstanding against Tiny sector increased from Rs.9515 crores at
the end of March, 1997 to Rs. 10273 crores at the end of March, 1998. The
share of tiny sector in the advances to SSI sector has, however, decreased from
30.2% at the end of March 1997 to 27.0% at the end of March, 1998. As per RBI
guidelines, 40% priority sector lending going to SSI has to go to tiny units with
investment in plant and machinery below Rs. 5 lakhs and another 20% to tiny
units with investment in plant and machinery between Rs. 5 lakhs and Rs. 25
lakhs. Thus, against the target of 60% of SSI credit for tiny units, actual flow at
27% is very low.

Nayak Committee

Nayak Committee was set up by the Reserve Bank of India in December. Nayak
Committee, RBI issued a number of circulars advising the banks to grant working
capital to the extent of 20% of the projected annual turnover, timely disposal of
loan applications and setting up of specialized bank branches for SSI loaning in
areas of higher SSI concentration.

As a follow up of Nayak Committee recommendations, Finance Minister in the

Budget speech of 1995-96, announced a Seven Point Action Plan for improving
the flow of credit to small scale sector consisting of the following:

i) Time bound action for setting up specialized SSI branches in 85 identified

districts; at least 100 such dedicated branches to be opened before the need of
1995-96.

ii) Adequate delegation of powers at the branch and regional levels.

iii) Banks to conduct sample surveys of their performing SI accounts to find out
whether they are getting adequate credit.

iv) Steps to be taken to see as far as possible that composite loans (covering
both term loans and working capital) are sanctioned to SSI entrepreneurs.
v) Regular meetings by banks at zonal and regional levels with SSI
entrepreneurs.

vi) Need to sensitize bank mangers and reorient them regarding working of the
SSI sector. vii) Simplification of procedural formalities by banks for SSI
entrepreneurs.

Steps taken by Reserve Bank of India to improve credit flow to SSI sector

a) The Government had raised the investment limit for SSIs from Rs.60 lakhs to
Rs.300 lakhs and for tiny units from Rs.5 lakhs to Rs.25 lakhs. In order to ensure
that credit is available to all segments of tiny sector. RBI has issued instructions
that out of the funds normally available to SSI sector, 40% be given to units with
investment in plant and machinery up to Rs. 5 lakhs; 20% for units with
investment between Rs. 5 lakhs to Rs.25 lakhs and remaining 40% for other
units.

b) Public sector banks have been advised to operationalise more specialised SSI
branches at centres where there is a potential for financing many SSI borrowers.
As on March 1998, 370 specialised SSI branches are working in the country.

c) To extend 'Single Window Scheme' of SIDBI to all districts to meet the

financial requirements (both term loan & working capital) of SSIs.

d) With a view to moderating the cost of credit to SSI units, banks are advised to
accord SSI units with a good track record the benefits of lower spread over the
Prime Lending Rate.

e) In order to take expeditious decision on credit proposals of SSI units, banks

have been advised to delegate enhanced powers to the branch managers of the
specialised SSI branch so that most of the credit proposals are decided at the
branch level.
Monitoring

Credit to SSIs is monitored periodically by Reserve Bank of India, Department of

SSI & ARI, National Advisory Committee of SIDBI, State Level Bankers
Committee and District Level Coordination Committees of the Bank.

Fresh initiatives announced in the Budget of 1999-2000

In this budget speech the Finance Minister has announced the following
measures for improving credit supply to SSI sector

a) A new credit insurance scheme launched.

Inability to provide adequate security to banks and low recovery are often sighted
as major constraint in flow of investment credit of SSI units. The problem is more
acute for export oriented and tiny sector enterprises. To alleviate this problem,
the Finance Minister announced that a new credit insurance scheme will be
launched.

b) Composite Loan Scheme Limit Enhanced to Rs. 5 Lakhs

The composite loan scheme of SIDBI and commercial banks is designed to case
operational difficulties of the small borrowers by presiding term loan and working
capital through a single window. The limit for composite loans currently at Rs. 2
lakhs has been enhanced to Rs. 5 lakhs.

c) Working Capital Limit Enhanced to Rs. 5 Crores

For SSI units the working capital limit is determined by the banks on the basis of
simple calculation of 20% of their annual turnover. The turnover limit for this
purpose has been enhanced from Rs. 4 Crore to Rs. 5 Crore.
d) Credit Delivery to Tiny Sector

To increase the outreach of banks to the tiny sector, leading by banks to Non-
Banking Financial Companies (NBFCs) or other financial intermediaries for
purposes of on-lending to the tiny sector is being included within the definition of
priority sector for bank lending.

High level committee for credit (Kapur committee)

In December, 1997, Reserve Bank of India has appointed a One-Man Committee

under the Chairmanship of Shri S.L. Kapur, former Secretary (SSI), Government
of India, to suggest measures for improving the delivery system and simplification
of procedures for credit to small scale industrial sector. The Committee has
submitted its report to RBI on 30th June, 1998. Some of the major
recommendations of the Committee are:-

i) Special treatment to smaller among small industries;

ii) Enhancement in the quantum of composite loans;

iii) Removal of procedural difficulties in the path of SSI advances;

iv) Sorting out issues relating to mortgages of land including removal of stamp
duty and permitting equitable mortgages;

v) Allowing access to low-cost funds to Small Industries Development Bank of

India (SIDBI) for refinancing SSI loans
vi) Non-obtaining of collaterals for loans up to Rs.2 lakhs;
vii) Setting up of a collateral reserve fund to provide support to first party
guarantees;
viii) Setting up of a Small Industries Infrastructure Development Fund for
developing industrial areas in/around metropolitan and urban areas;

ix) Change in the definition of sick SSI units;

x) Giving statutory powers to State Level Inter-Institutional (SLIIC);

xi) Setting up of a separate guarantee organisation and opening of 1,000

additional specialised branches; and

xii) Enhancement of SIDBI's role and status to match with that of National Bank
for Agriculture and Rural Development (NABARD).

Kapur Committee has made 126 recommendations out of which RBI has already
accepted 40 recommendations for implementation.

Amendment of interest on delayed payment act

To tackle the problem of settlement of dues of SSI units by large companies.

Interest on Delayed Payment Act has been amended. The following amendments
ahve been made in the Act.

a) The payment has to be made within 120 days to the SSI supplier from the date
of acceptance of the goods by the buyer.

b) Interest on delayed payment has been revised from 5% above the floor rate to
one and half time the prime lending rate charged by SBI.

c) Mechanism has been prescribed for settling disputes by Industry Facilitation

Councils to be set up by State Governments through notification.