Financing SMES

ISSUES AND PERSPECTIVES

21/5/2012

Study Of Financing SME.

at DENA BANK ,BHAYANDAR(EAST) Prepared for the Mumbai University in the partial fulfilment of the requirement for the award of the degree in

MASTERS OF MANAGEMENT STUDIES

Submitted By:
Name: RACHNA NAG Roll No.: 39 Year: 2011-13

Under the guidance of

Prof. Sulbha Rao Rani

SFIMAR

St Francis Institute Of Management And Research, Mt. Poinsur, S.V.P Road, Borivali (W) Mumbai.

Batch- 2010-2012

Declaration

I hereby declare that the following project report Study Of financing sme at Bhayandar (east) compiled by me under the guidance of Prof. Sulbha Rao Rane is an original work & the information submitted is true, appropriate and to the best of my knowledge.

SIGNED BY

COUNTER SIGNED BY

Rachna Nag.

Prof. Sulbha Rao Rane

ACKNOWLEDGEMENTSI take this opportunity to express my deep sense of gratitude to all those who have contributed significantly by sharing the knowledge and experience in completion of the project report.

I owe my sincere gratitude to Corporate Bridge, for providing me the opportunity to undergo two months summer training on the project titled Study of financing sme. experience in its corporate environment. It was a great learning

I am highly indebted to my project guide, Mr Manish , who gave us an insight in to the various aspects and her continuous guidance throughout the project.

I would like to extend my gratitude to my project guide Mrs. Sulbha Rao Rane, St. Francis Institute of Management & Research for his help during the completion of the project.

Special Thanks to Dr. Thomas Mathew, Director of St. Francis Institute of Management & Research. The successful completion of this training wouldnt have been possible without the co-operation and the coordination of many people who not only helped me whenever I got hindered in between but also kept my morale high. Such kind of cooperation extended by all has lead to fruitful completion of the training period.

It is my proud privilege to express my deep sense of appreciation & gratitude to my parents & friends for their support & co-operation in the course of the project.

Executive Summary
The project deals with the financing to SME and related issues and perspectives. It basically focus on status of financing to SMEs in India by banks, challenges faced while financing and opportunities of increasing the credit to SMEs. My base of project was Dena Bank, Bhayandar East branch. The branch has credit exposure of Rs. 6 Crores to SME segment. Out of this, about Rs 5 crore is financed to Laxmi Moulds Industries pvt ltd. So I did the case study on Laxmi Moulds Industries Pvt ltd. Apart from this I did a broad study of SME in our country. Detailed analysis of the is done for the understanding the financing of sme . All Possible factors have been analysed. In case of Laxmi mould

it is done by studying the reports and visiting the Laxmi Moulds situated in Bhayandar (east). Apart from this there are many other small and micro enterprises whom dena bank has provides loan such as PM industries (12 lakhs) and Vinayak chemicals(5 lakhs).Finally the findings of the research are listed and interpreted in this report. The issues and perpectives of financing sme have been mentioned and also the recommendations are made so as help for the boosting credit to micro, small and medium enterprises. .

BANKS FINANCING TO SMEs:-ISSUES AND PERSPECTIVES

CONTENTS:INTRODUCTION TO SMALL MEDIUM ENTERPRISE

9-10

SMALL AND MEDIUM ENTERPRISES (SMEs) IN INDIA 1 CHALLENGES FACED BY SMES 2 ROLE OF BANKS FOR DEVELOPING THE SME S SECTOR DENA BANK REVIEW OF LITERATURE OBJECTIVES OF PROJECT DEVELOPMENT OF PROJECT ISSUES and PERSPECTIVES
7

11-15

15-17

18-23

3 4 5 6 7

24-39 40-47 48 49 50-53

8 9 10 11 12 13 14 15

IMPORTANCE OF SMES RESEARCH METHODOLOGY COLLECTION OF DATA ANALYSIS OF DATA SUMMARY FINDINGS AND INTERPRETATIONS CONCLUSION RECOMMENDATIONS AND SCOPE FOR FUTURE ENHANCEMENT. BIBLIOGRAPHY

54 55 55 55 56-60 61-64 65 65-67

16

68

INTRODUCTION -SMALL MEDIUM ENTERPRISE:Small and medium enterprise or small and medium-sized enterprise are companies whose personnel numbers fall below certain limits. In most economies, smaller enterprises outnumber large companies by a wide margin. SMEs are said to be responsible for driving innovation and competition in many economic sectors. Small and Medium Enterprises (SMEs) play a vital role for the growth of Indian economy by contributing 45% of industrial output, 40% of exports, employing 60 million people, create 1.3 million jobs every year and produce more than 8000 quality products for the Indian and international markets. SMEs Contribution towards GDP in 2011 was 17% which is expected to increase to 22% by 2012. There are approximately 30 million MSME Units in India and 12 million persons are expected to join the workforce in the next 3 years. SMEs are the fountain head of several innovations in manufacturing and service sectors, the major link in the supply chain to corporate and the PSUs. By promoting SMEs, the rural areas of India will be developed. ss SMEs are now exposed to greater opportunities than ever for expansion and diversification across the sectors. Indian market is growing rapidly and Indian entrepreneurs are making remarkable progress in various Industries like

Manufacturing, Precision Engineering Design, Food Processing, Pharmaceutical, Textile & Garments, Retail, IT and ITES, Agro and Service sector.

Definition of MSMEs in India:Manufacturing Enterprises Investment in Plant & Machinery Description Micro Enterprises Small Enterprises INR upto Rs. 25Lakhs USD($) upto $ 62,500

above Rs. 25 Lakhs & above $ 62,500 & upto $ upto Rs. 5 Crores 1.25 million

Medium Enterprises

above Rs. 5 Crores & up above $ 1.25 million & to Rs. 10 Crores upto $ 2.5 million

Service Enterprises Investment in Equipments Description Micro Enterprises Small Enterprises Medium Enterprises INR upto Rs. 10Lakhs above Rs. 10 Lakhs & upto Rs. 2 Crores above Rs. 2 Crores & upto Rs. 5 Crores USD($) upto $ 25,000 above $ 25,000 & upto $ 0.5 million above $ 0.5 million & upto $ 1.5 million

10

SMALL AND MEDIUM ENTERPRISES (SMEs) IN INDIA:With the advent of planned economy from 1951 and the subsequent industrial policy followed by Government of India, both planners and Government earmarked a special role for small-scale industries and medium scale industries in the Indian economy. Due protection was accorded to both sectors, and particularly for smallscale industries from 1951 to 1991, till the nation adopted a policy of liberalization and globalization. Certain products were reserved for small-scale units for a long time, though this list of products is decreasing due to change in industrial policies and climate.SMEs always represented the model of socio-economic policies of Government of India which emphasized judicious use of foreign exchange for import of capital goods and inputs; labour intensive mode of production; employment generation; nonconcentration of diffusion of economic power in the hands of few (as in the case of big houses); discouraging monopolistic practices of production and marketing; and final effective contribution to foreign exchange earning of the nation with low import-intensive operations. It was also coupled with the policy of de-concentration of industrial activities in few geographical centers. It can be observed that by and large, SMEs in India met the expectations of the Government in this respect. SMEs developed in a manner, which made it possible for them to achieve the following objectives: High contribution to domestic production Significant export earnings Low investment requirements Operational flexibility Location wise mobility Low intensive imports Capacities to develop appropriate indigenous technology Import substitution Contribution towards defense production Technology oriented industries Competitiveness in domestic and export markets

11

At the same time one has to understand the limitations of SMEs, which are Low Capital base Concentration of functions in one / two persons Inadequate exposure to international environment Inability to face impact of WTO regime Inadequate contribution towards R & D Lack of professionalism In spite of these limitations, the SMEs have made significant contribution towards technological development and exports. SMEs have been established in almost allmajor sectors in the Indian industry such as: Food Processing Agricultural Inputs Chemicals & Pharmaceuticals Engineering; Electricals; Electronics Electro-medical equipment Textiles and Garments Leather and leather goods Meat products Bio-engineering Sports goods products Computer Software, etc. As a result of globalization and liberalization, coupled with WTO regime, Indian SMEs have been passing through a transitional period. With slowing down of Economy in India and abroad, particularly USA and European Union and enhanced Competition from China and a few low cost centers of production from abroad many units have been facing a tough time. Those SMEs who have strong technological base, international business outlook, Competitive spirit and willingness to restructure them shall withstand the present challenges and come out with shining colours to make their own contribution to the Indian economy.

12

What Constitutes the SME Sector? :It is rather difficult to define precisely as to what constitutes the SME sector, as It covers a wide spectrum of activities ranging from manufacturing to trade to services. It involves different types of organizations with varying constitutions like proprietary concerns, partnership firms, private limited companies, public limited companies. S Regulations/ Govt. Policy guidelines varies from activity to activity. It overlaps with the presently defined Priority Sector In the given scenario, it can be broadly said that the SME segment would include the following-

Individuals

Individuals as Businessmen Professionals

Partnership & Family owned business

Small & Medium Sized Companies

Larger Corporate

Corporate Giants/ PSUs

13

WHY FINANCING SME ISS SO IMPORTANT? :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. This financing gap is all the more important in a fast-changing knowledge-based economy because of the speed of innovation. Innovative SMEs with high growth potential, many of them in high-technology sectors, have played a pivotal role in raising productivity and maintaining competitiveness in recent years. But innovative products and services, however great their potential, need investment to flourish. If SMEs cannot find the financing they need, brilliant ideas may fall by the wayside and this represents a loss in potential growth for the economy. The bagless vacuum cleaner and the wind-up radio or flashlight which need no batteries are now common household items, but nearly failed to see the light of day because their inventors could not find financial backing to transform their ideas into production. Already, differences are emerging between countries in terms of how easy it is for innovative SMEs to grow and develop.

14

Vital Role Played by SMEs in Economic Development: Largest employment provider (direct/ indirect). Fastest to adopt changes/ innovations. Makes use of the domestic resources for global benefits. Contributes to more than 1/3 of exports. Contributes to more than 1/3 of industrial output.

Challenges Faced by the SME Sector / Drawbacks of SMEs:Despite its commendable contribution to the Nation's economy, SME Sector does not get the required support from the concerned Government Departments, Banks, Financial Institutions and Corporate, which is a handicap in becoming more competitive in the National and International Market. SMEs faces a number of problems - absence of adequate and timely banking finance, limited capital and knowledge, non-availability of suitable technology, low production capacity, ineffective marketing strategy, identification of new markets, constraints on modernization & expansions, non availability of highly skilled labor at affordable cost, follow up with various government agencies to resolve problems etc.

15

The challenges for SMES sector are mentioned followingNon-availability of adequate capital for investment. Difficulties in accessing the capital market. Inadequate institutional framework for assistance. Lack of technological advancement/ updating. Reluctance to change the way of functioning especially in family run concerns. Lack of opportunities to attract foreign capital. Impact of / Threat posed by WTO. Terms dictated by the large Corporate on whom the SMEs depend.

SME Financing a Win-Win Situation for Banks: Better spreads on interest/ bundling of services for enhanced yield in relationship. Risk wide-spread. Banks are now better equipped to handle the varied needs of the SME sector due to better technology and Risk Management. Vast Scope for spin off of ancillary business. Less Complexity in extending Finance. All branches can handle the business - Limited specialization involved.

16

MEs are not a Homogeneous Group Require Different Products/ Services:-

Traders (Wholesale & Retail)

Manufacturers

Services

Small Owners
Examples Mom & Pop Stores Small Producers Cash 'n' Carry

Retail Merchants
Examples Convenience Stores

Wholesale Traders
Examples ExportImporters Wholesalers

Manufacturers

Service Providers

Examples Examples Light Industries Agencies Processing Consulting Companies Services Personal Services Restaurants Travel & Tourism

17

Approach has to be different from Corporate Clients:-

18

Role of Banks for Developing the SME s Sector :Should come out of the Asset based lending mind set. Cash Flow/ Collateral based lending models to be devised. Line of credit approach to be popularized. Simplified assessment/ appraisal models to be introduced (like 20% of the turnover as working capital limits/ 75% of the project cost as Term Loan/ etc.). Flexibility in lending policies- rigidities to be removed. Customized products including Factoring/ Forfeiting services, leasing facilities to be introduced. If necessary Special Purpose Vehicle to be promoted. Simplified Credit Rating modules to be introduced. Advisory Desks to be opened. Serve as a link between SMEs and Large Corporate through Channel Financing/ Vendor Chain Financing

19

NPAs Need to be Managed aggressively:-

20

Institutional Framework - From Protective to Promotional: Formation of Credit Rating Agencies exclusively for SMEs. The ambit of Credit Guarantee Fund Trust for SSIs to be extended to cover the SME sector also. Mandated flow of information between Banks. CIBIL to act as Nodal Point. Special insurance products especially Keyman Insurance policies / Receivables insurance/ etc. Suitable framework for making available Venture Capital Funds. Creation of Data Bank (preferably by SIDBI) for authenticated information on different segments of the SME sector. Technology Bank to be established to impart the latest technology (Technological Bureau for Small Enterprises established in 1995 may be revived for this purpose). Involving NGOs, who have successful record in micro management for development of the tiny sector within SME. Introduction of tax/ other incentives. Framework for flow of FDI for SMEs to be in place. Encouraging other Intermediaries like NBFCs, etc

21

Cluster Approach: Cluster approach may be beneficial as Separate packages/ services can be developed for each cluster. Products/ services so developed imply that better yields can be realized. Authentic statistical/ market data for different units under the cluster can be collected which would help in formalizing location specific Risk Management framework for the industry

Focused Cluster Approach Beneficial:Growth & Profitability

Banks should develop packages suitable for different segments of customers

Risk Management
There are no standard ways of managing the risk in SME bank needs to know the customers personally By focussing on a number of customers of one type in a cluster, the bank develops the insights by which a "good" customer can be differentiated from a "bad" customer

Products and services designed to serve needs better implies that better premiums can be charged

Banks can fortify their positions and This allows banks to manage the grow the business by knowing the credit risk of lending to SME customers well

22

Expectations from SME Entrepreneurs: Professionalism in Management Transparency in Financial data. Better usage of technology. Flexible mindset to adapt to changing environments. Quality consciousness to suit global Standards.

SUMMARISING SME IN BRIEF: SME sector is the back bone of the economy especially in a developing country. What is required is the coming together of the Govt. Agencies, Regulators and Financing Agencies. Banks have to view lending to the SMEs as a profitable avenue rather than an avenue for forced lending. The paradigm shift in the lending operations of the Bank to SME sector is to be discerned and managed pragmatically/ proactively.

23

DENA BANK:HISTORY:Dena Bank, in July 1969 along with 13 other major banks was nationalized and is now a Public Sector Bank constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, in addition to the business of banking, the Bank can undertake other business as specified in Section 6 of the Banking Regulations Act, 1949.

Dena Bank was founded on 26th May, 1938 by the family of Devkaran Nanjee under the name Devkaran Nanjee Banking Company Ltd It became a Public Ltd. Company in December 1939 and later the name was changed to Dena Bank Ltd. In July 1969 Dena Bank Ltd. along with 13 other major banks was nationalized and is now a Public Sector Bank constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, in addition to the business of banking, the Bank can undertake other business as specified in Section 6 of the Banking Regulations Act, 1949.

Milestones

One among six Public Sector Banks selected by the World Bank for sanctioning a loan of Rs.72.3 crores for augmentation of Tier-II Capital under Financial Sector Developmental project in the year 1995. One among the few Banks to receive the World Bank loan for technological up gradation and training. Launched a Bond Issue of Rs.92.13 crores in November 1996. Maiden Public Issue of Rs.180 Crores in November 1996. Introduced Tele banking facility of selected metropolitan centers.
24

Dena Bank has been the first Bank to introduce:

Minor Savings Scheme. Credit card in rural India known as "DENA KRISHI SAKH PATRA" (DKSP). Drive-in ATM counters of Juhu, Mumbai. Smart card at selected branches in Mumbai. Customer rating system for rating the Bank Services

Mission:DENA BANK will provide its Customers - premier financial services of great value, Staff - positive work environment and opportunity for growth and achievement, Shareholders - superior financial returns, Community - economic growth

Vision: DENA BANK will emerge as the most preferred Bank of customer choice in its area of operations, by its reputation and performance.

25

Logo:-

The logo of Dena Bank depicts Goddess Lakshmi, the Goddess of Wealth, according to Hindu mythology. It was the desire of the founding fathers of the Bank that the Bank should be a symbol of prosperity for all its clients, and the logo represents this promise. The contemporary 'D' in the logo reflects the dynamism, dedication and the drive towards customer satisfaction

26

Board of directors:-

Smt. Nupur Mitra Chairperson & Mg.Director

Shri A.k. Dutt executive director

Shri I. M. Almidia Offc. Employee Dir.

Shri Rohit M. Desai Shareholder Director

Shri J. Balasubrmanian Director

Shri N.S. Viswnathan RBI Nominee Director

Shri Pritam Singh Shareholder Director

Shri Rakesh Goel Director

Shri sanjeev Jindal govt. Nominee Director

Shri S.P. Sherma Workman employee Dir. 27

Shri Mukesh Mohan Shareholder Director

General Managers:-

Shri M K Jain Chief General Manager (Mumbai operations)

Shri S. K. Jain General Manager (Accounts, Treasury Operations, International Banking & Precious Metals)

Shri R. K. Gupta General Manager (Priority Sector & RRB)

Shri S. R. Bansal General Manager (North India Operations)

Shri S K Sharma General Manager (HRM)

Shri M. K. Sharma General Manager (MSME, Retail, Publicity & Board

Shri Ramesh Singh Bora General Manager Chief Vigilance Officer

Shri Suresh. N. Patel General Manager (Gujarat operations)

Shri B. M. Nanda General Manager (IT & FI)

Shri M K Bhatia General Manager (Credit)

Shri J K singh Kharb General Manager (East India Operations

Shri N Rama Rao General Manager (RML) & CPIO

28

Shri Nirmal Joshi General Manager (On deputation as CVO of State Bank of Bikaner & Jaipur)

Shri A C Katial General Manager (Corporate Planning & Resource Mobilisation)

DENA BANK provides advances under this scheme for small entrepreneurs:1-Central Processing Centers:Dena Bank has opened 12 Central Processing Centers (CPCs) for SMEs at following Regional Offices: Ahmedabad NewDelhi Kolkata Rajkot Pune Mumbai Suburb Chennai Nashik Surat Gandhinagar Bhuj Mumbai City

29

2 .Specialized SSI Branches:With the objective of focused attention on providing credit to SSI sector, Dena Bank has designated following 68 Branches as Specialized SSI Branches. The Specialized Branches also provide normal Banking services to our customers. Sr. No. Branches GUJARAT 1 Ahmedabad Navrangpura 2 Ahmedabad Vatva 3 Gandhinagar Himmatnagar 4 Mehsana Highway Road 5 Mehsana Harij 6 Mehsana Radhanpur 7 Mehsana Kadi 8 Mehsana Vijapur 9 Rajkot Para Bazar, Rajkot 10 Rajkot Manavdar 11 Rajkot Nehru Gate, Morabi Dhebharbhai Road, 12 Rajkot Rajkot Bhagwat Bazar, 13 Rajkot Gondal Racecourse Road, 14 Rajkot Rajkot 15 Bhavnagar Khargate 16 Surat Saharagate 17 Surat Vapi 18 Surat Parle Point, Surat 19 Vadodara Makarpura 20 Vadodara Dahod 21 Vadodara GIDC Ankleshwar 22 Bhuj Gandhidham
30

Region

MAHARASHTRA Mumbai 23 City Mumbai 24 City Mumbai 25 City Mumbai 26 City Mumbai 27 City Mumbai 28 Suburb Mumbai 29 Suburb 30 Thane 31 Thane 32 Thane 33 Pune 34 Pune 35 Pune 36 Pune 37 Pune 38 Pune 39 Nashik 40 Nashik 41 Nashik MMO New Marine Lines Sun Mill Compound Nagdevi Street Khodadad Circle, Dadar Andheri West Mulund (West) Thane Vashi Sector 6 Bhiwandi Bhosari Indl. Estate Deccan Gymkhana Pimpri Chinchwad Ichalkaranji Latur Kolhapur Navipeth, Jalgaon Bhadrakali, Nashik Dharampeth, Nagpur Rest of India Peenya Indl. Estate J.C.Road, Bangalore Jigani, Bangalore Alwarpet T. Nagar Coimbatore Salem Siyaganj, Indore Jabalpur
31

42 43 44 45 46 47 48 49 50

Bangalore Bangalore Bangalore Chennai Chennai Chennai Chennai Bhopal Bhopal

51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68

Bhopal Kolkata Kolkata Kolkata Lucknow lucknow New Delhi New Delhi New Delhi New Delhi New Delhi New Delhi Raipur Raipur Raipur Raipur Raipur Raipur

M.P.Nagar Jamshedpur Park Street, Kolkata Manikthala Kanpur Noida Gurgaon Ambawadi, Jaipur Rajendra Place Bhilwara MRC Ludhiana Faridabad Indl. Estate, Raipur Khursipar Jawahar Nagar, Raipur Mahasamund Tilda Power House, Bhillai

32

3. Dena Rural Internet Kiosk Finance Scheme:1) Area of operation of the Scheme

To begin with, the scheme will be operative in the States of Gujarat and Maharashtra where our bank is having the largest network of branches, covering 500 villages / taluka centres which will be identified in collaboration with M/s. n-Logue Communications (P) Ltd. Branches to finance within a radius of 25 K.Ms. The population of the village where the rural kiosk is proposed should be minimum 2000 and only one kiosk should be financed in a village to ensure financial viability. The Branch Manager should get himself / herself satisfied about the financial viability of the kiosk at the proposed centre

(2) Eligibility:
a. The applicant (Kiosk Operator) should be minimum 10th class passed having flair / interest to undertake the business of running and managing rural kiosk. b. The applicant should be duly identified by the company and willing to undergo intensive training programmer to be conducted by M/s n-logue Communications Pvt. Ltd. c. The applicant should not be a defaulter to any Bank / Financial Institution. d. The applicant should be above 18 years of age and not exceeding 45 years

(3 ) Project Cost :
The total investment will be approximately Rs. 59,407/- (Say Rs. Fifty nine Thousand Four Hundred Seven only) for purchase of a PC with color monitor and other hardware, software and other services provided by M/s n-Logue Communications Pvt. Ltd. No commission is payable by the Bank to M/s n-Logue Communications Pvt. Ltd. for services / role to be played in the implementation of

(4).Quantum of loan:
(a) Under the tie-up arrangement with n-Logue the loan amount is restricted upto maximum limit of Rs. 50,000/- (Rupees Fifty Thousands Only). (b) Wherever subsidy is available under KVIC margin money scheme, the quantum of the loan may be reduced accordingly.
33

(5) Margin: 10% or the gap between project cost and Rs. 50,000/- whichever is higher. (6) Rate of Interest:
The loans under the scheme will carry rate of interest @ BPLR + Tenor Premium - 2.25% (Currently 9.0 % per annum) or such rate as may be charged from time to time as per Banks discretion / RBI directives.

(7) Security:
a. Hypothecation of the Kiosk Kit and other movables to be financed under the scheme. b. Branches should not demand any Collateral Security. c. Branches should obtain Post dated cheques for the loan amount.

(8) Disbursement of Loan:

The entire loan amount along with the margin, contributed by the borrower to be paid through Demand Draft directly to the supplier i.e. M/s n-Logue Communications Pvt. Ltd.

(9) Repayment Period:

The loan is to be repaid in five years including moratorium of 6 months. The interest portion accruing on the loan amount for the period of first three months is to be capitalized and interest portion for 4th, 5th and 6th months to be serviced during the moratorium period loan amount and the capitalized interest to be recovered in 54 EMIs.

(10) Nature of facility: Term Loan. (11) Profitability:

I. Branches should finance only one KIOSK in one village. ii. Depending upon the size of the village population, branches should get satisfied about the viability of the KIOSK.

34

(12) Insurance:
The asset acquired with Bank finance to be fully covered under insurance with banks clause.

(13) Sanctioning:
The loan under the scheme will be sanctioned by the delegates as per Discretionary Powers vested under the head Term Commitments.

(14) Classification:
Loans sanctioned under the scheme would be classified as SSSBE (Small Scale Service and Business Enterprises) under SSI segment within the priority sector. Product Code 97927) the loan will be covered under CGTSI

15) Other terms and conditions: Documents / Papers to be obtained for scrutiny
i. Kiosk Operator Application form. ii. Proof of education: The Mark Sheet of 10th std. or any higher education certificate duly verified with the original. iii. Proof of residence: Ration Card, Passport, VAO certificate, voter list. iv. Quotation: n-Logue quotes on letter head. v. Identification proof :Passport size photo - 3 numbers vi. Post Dated Cheques (PDC): The Branch to obtain Post Dated Cheques. vii. Usual documents of the bank to be executed by the borrower. viii. M/s n-Logue will submit a letter of undertaking in prescribed format. ix. Prospective borrowers will submit their undertaking - cum - authority letter in prescribed format. x. M/s n-Logue company must submit a letter confirming to the Branch to the effect that it has ensured that all necessary clearances and statutory permissions have been obtained for setting up the rural Kiosks under this scheme. A copy of such clearances / permission duly authenticated will be kept on record.
35

4. Products & Services:Dena Bank offers a variety of Products and Services to meet all the needs of SSI Customers. Bank has designated 61 Branches as SSI Branches. The Branches also provide normal Banking Services to our Customers.

5. Interest Rates on SSI:The current interest rates are as under: S. Size of Loan No 1 Upto Rs. 50,000 Above Rs. 50,000 & 2 upto Rs. 2.00 lakhs Above Rs. 2.00 lakh 3 and upto Rs. 5.00 lakh Above Rs. 5.00 lakh 4 and upto Rs. 10.00 lakh Above Rs. 10.00 5 lakh Rate of Interest BPLR -- 2.50% BPLR -- 1.50% BPLR

BPLR The rates of interest on loans/Advances classified under SSI sector are to be based on credit rating, however maximum rate will be BPLR + 2%

Tenure premium of 0.50% is to be added to BPLR in case of loans for a tenor of more than 3 years.

36

6. Charter for SME:-

Acknowledgement for receipt of loan application which are complete in all respect Term loan for disposal of loan application: a. Up to 2, 00,000 /- _ 2 week. b. Up to 5, 00,000/_ 4 week . c. Over rupees /_ within responsible time frame No collateral security for advance Up to Rs 1,000,000. For advanced section upto a limit of Rs 100 lack without collateral security/third party guarantee, guarantee is available under credit guarantee scheme for SME I e.credit guarantee trust fund scheme for macro & small enterprise (CGTMC).for obtain of guarantee, a guarantee fee 1.5 % of credit facility section or period of 5 years and annual service fee @ 0.75% of sanctioned amount as on 31 March every year is payable. 50% guarantee under this scheme is borne by bank. Composite loan limit for SME units is enhanced up to Rs _1 crores. Loan quantum: working capital finance: minimum 20% of project annual sales turn over (Nayak committee norms) Margin (stake of borrower) Up to Rs _25,000/-: NIL Over Rs _25,000/ -: 15 to 25% (depending upon purpose & quantum of advances ) Under Dena shakt scheme for financing to women entrepreneur: interest rebate of 25% is available. Under dena shakti scheme- scheme for financing to women entrepreneur- interest rebate of 0.25% available Ddena Lagu Udyami Credit Card (DLUCC) / Dena Artisans Credit Card (DACC): A simplified credit delivery system for small borrower Artisan. Simple application form as per S.l. kapoor committee recommendation introduced. The MSME concession of 1% in respect of Eacro Ent. &0.50% in respect of small & medium Ent for new as well as existing borrower having credit facility up to Rs 10.00cr is given on merits

37

8. SME Debt Restructuring Policy:-(Abridged version based on the guidelines issued by RBI vides their cir. No. DBOD. BP.BC No.34 /21.04.132/ 2005-06 dtd.08.09.2005. )

ELIGIBILITY:
Only SMEs - viable or potentially viable. Willful default, fraud and malfeasance will not be eligible. [ old cases where borrower is in a position to rectify willful default may be approved by Board only] Accounts classified by bank as Loss Assets will not be eligible.

VIABILITY CRITERIA:
Only viable units to be considered. The unit should become viable in 7 years and the repayment period for restructured debt should not exceed 10 years.

ASSET CLASSIFICATION:
During the specified one year period, the asset classification status of rescheduled accounts will not deteriorate if satisfactory performance of the account is demonstrated during the period. In case the performance is not satisfactory then the asset classification will automatically slip back to the pre-restructuring stage.

UPGRADATION OF RESTRUCTURED ACCOUNT

The restructured accounts would be eligible to be upgraded to the standard category after a specified period i.e. one year after the date when first payment of interest or of principal, whichever is earlier, falls due under the rescheduled terms, subject to satisfactory performance during the period.

38

ADDITIONAL FINANCE:
Additional finance may be treated as standard asset in all accounts up to a period of one year after the date when first payment of interest or of principal, whichever is earlier. Time frame It is to be ensured that working out of the restructuring package and implementation of the same should be done within a maximum period of 60 days from date of receipt of request. Authority to amend / review the policy: Board of Directors or any other committee of Directors authorised by the Board of Directors in its behalf shall be the competent authority to revise or amend or modify this policy at any time

*******

39

Review of literature:The development literature focuses a good deal of attention on issues faced by SME in accessing finance. Traditionally, the focus is on obstacles created by commercial banks or equity funds, or on imperfections in the broader institutional environment. However, SME also make decisions about financing and display attitudes that have an important bearing on financing decisions. Therefore, constraints may also appear on the demand side of the financing marketplace. The economics literature on enterprise financing has identified three main obstacles that may prevent SME from obtaining adequate financing. These obstacles are as follows: The existence of marked informational asymmetries between small businesses and lenders, or outside investors; the intrinsic higher risk associated with small scale activities. The existence of sizeable transactions costs in handling SME financing. A fourth problem very often cited in the literature (and loudly lamented by small entrepreneurs) is the lack of collateral that typically characterizes SME. In developing countries, these problems are often exacerbated by institutional factors. These aspects are briefly dealt with below.

Informational Asymmetries
Informational asymmetries are always present in enterprise financing transactions. Entrepreneurs typically possess privileged information on their businesses that cannot be easily accessedor cannot be accessed at allby prospective lenders or outside investors. This leads to two problems. First, the lender/investor may not be able to differentiate adequately between high quality and low quality companies and projects. In that case, price variables (i.e. interest rates) may not work well as a screening device, because high interests may lead to an excessively risky portfolio (the adverse selection problem). Second, once the lenders/investors have supplied the funding, they may not be able to assess whether the enterprise is utilizing the funds in an appropriate way (the moral hazard problem). To mitigate these problems, bankers and outside

40

Investors may adopt precautionary measures, such as requiring that financing be collateralized. Ultimately, they may simply turn down the request for financing (credit rationing). Informational asymmetries tend to pose more severe problems for SME, than for larger business. The information that SME can realistically provide to external financiers (in the form of financial accounts, business plans, feasibility studies, etc.) often lacks detail and rigor. This problem is often aggravated by the low level of education of small entrepreneurs, who may not be in the position to adequately articulate their case. This problem is particularly acute in developing countries. The information supplied to bankers and outside investors by family-owned SME is often not fully accurate and realistic, and opaque behavior may prevail. Under these conditions, outside financiers tend to adopt a very cautious attitude towards SME, and either reduce the amount of financing sought or refuse it altogether.

Risk Profile Another approach ascribes the difficulties faced by SME in accessing finance to their higher risk profile. Suppliers of external funds regard SME as risk in enterprises for a number of reasons. First, SME face a more uncertain competitive environment than larger companiesthey experience more variable rates of return and higher rates of failure. Second, SME are comparatively less equipped in terms of both human and capital resources to withstand economic adversities. Third, there is the problem of inadequate accounting systems, which undermines the accessibility and reliability of information concerning profitability and repayment capacity. In developing countries, there is the added problem of a more volatile operating environment, which has a negative impact on the security of transactions. There is a greater risk that lenders/investors will not get paid, or that assets will not be properly registered.

41

Transaction Costs
Irrespective of risk profile considerations, the handling of SME financing is an expensive business. The cost of appraising a loan applicationor of conducting a due diligence exercise in view of a possible equity investmentis largely independent from the size of the financing under consideration. For all practical purposes, the following costs are fixed: (i) administrative costs; (ii) (ii) legal fees; (iii) and(ii) costs related to the acquisition of information, such as the purchase of a credit profile from a specialized agency. In the case of smaller loans or investments, it is more difficult to recoup these costs. Similar considerations apply to the costs thatoutside financiers must incur after disbursement,when conducting field inspections, or attending board meetings. Again, the problem is more severe in developing countries for the following reasons: (i) the lack of adequate management information systems in financial institutions; (ii) the undeveloped state of the economic information industry; and (iii) the poor state of certain public services, such as the registration of property titles and collaterals. To some extent, the problem can be solved by raising the cost of financing through a higher interest rate or closing fee. This is indeed the approach adopted by many micro lending schemes, but it is possible only up to a certain point.

42

Lack of Collateral
In the case of debt financing, lenders typically request collateral in order to mitigate the risks associated with the moral hazard. The lack of collateral is probably the most widely cited obstacle encountered by SME in accessing finance. The amount of collateral required in relation to the loan size is a measure frequently adopted to empirically assess the severity of the financing gap. In some cases, the enterprise may be unable to provide sufficient collateral because it is too newbecause itis not firmly enough established. That problem is closely related to the higher risk argument presented above. In some cases, the lender may deem the collateral insufficient in view of the size of the loan requested. In other words, the proposed expansion project may be too large in comparison with the current size of the firm. Again, this is an issue related to the higher risk argument presented above. In other cases, the collateral may be insufficient simply because the managers-owners tend to siphon off resources from the company for personal or other purposes. Again, this is closely related to the risk profile and the moral hazard issues. Lack of collateral can be viewed more as a symptom than as a direct cause of the difficult relations between SME and providers of finance. Whatever the sequence of causes and effects, it is widely acknowledged that in developing countries the issue of collateral is comparatively much more severe. The following section examines how the undeveloped state of institutional and legal frameworks, prevents the possibility of pledging the owned assets as collaterals.

Institutional and Legal Factors

In the case of many developing countries, the above mentioned obstacles to SME financing are exacerbated by institutional and legal factors. First, many developing countries still have highly concentrated and uncompetitive banking sectors. This is often the result of restrictive government regulations. This reinforces the tendency to adopt very conservative lending policies or to charge high interest rates. If banks can thrive with a stable pool of well-established clients, they have no real incentive to improve the range of financial products and, in particular, no incentive to go down market, to meet the needs of small businesses. The same is true if banks can make hefty profits simply by buying government debtas is often the case in Latin American countrieswhich results in the crowding out of small-scale lending. Second, insufficiently developed legal systems effectively prevent the development of certain financing instruments, including the use of collateral as a risk-mitigating
43

element. For instance, legal provisions regarding security interests (how the collateral is protected, how the collateral priority is determined, etc.) are of crucial importance in determining the efficacy of collaterals. Likewise, if company laws offer only limited protection to minority shareholders, the development of venture capital and angel financing is inevitably negatively affected. These problems were particularly severe at the beginning of the transition period in former socialist countries, when even the memories of certain fundamental market institutions had disappeared. Third, even when adequate legislation is available, there are often problems with enforcement. Today, transitional and developing economies often have cadastres and registers of movable assets. Nevertheless, their functioning is often less than ideal. Records are frequently missing or misplaced. There are lengthy procedures for filing mortgages and pledges, and for ascertaining the status of certain assets. There are often cases of corruption among personnel. Fourth, the information infrastructure is still largely undeveloped. There is a lack of credit bureaus and other mechanisms for collecting and exchanging information on payment performance. This inevitably exacerbates the informational asymmetries between enterprises and lenders/investors. While some of the above institutional constraints apply to all enterprises, it is clear that small businesses are likely to suffer disproportionately from their presence.

Specific Obstacles Affecting SME in the ICT/ICTE Industry

In the ICT/ICTE sector, industry specific aspects often limit access to finance for SME.

Informational Asymmetries and Transaction Costs

In the case of ICT activitiessomewhat less so for certain ICTE businessesthe informational asymmetries that characterize any lending or investment decision are magnified by the high-tech nature of the business. This is particularly true of commercial banks, which can rarely count on loan officers with substantial experience in the variegated aspects of ICT. This inevitably increases transaction costs, because the economics of high technology firms are more difficult to evaluate than the fundamentals of brick and mortar businesses. Similar considerations apply to equity investments. Venture capitalists are, by definition, better equipped than loan officers to understand and capture the upside of a variety of different businesses. Still, the due diligence process of ICT/ICTE deals may require the deployment of specialized expertise that is not normally available to generalist venture capital funds.
44

Risk Profile
ICT/ICTE is widely perceived as high risk activities, characterized by a skewed distribution of returns and by a high probability of failure. This adds to the generally unfavorable risk profile of SME in general, resulting in a peculiarly unattractive picture for more conservative financiers. In reality, only a minority of ICT businesses are involved in the development of new products and in the use of new processes in untested markets, while many firms perform activities that are not riskier than many brick and mortar businesses. This is especially the case of simple IT services (e.g. the customization of software) and of several ICTE activities (e.g. the performance of remote accounting and transcription services). However, many providers of finance are largely unfamiliar with the fundamentals of the ICT/ICTE business, and therefore are often unable to differentiate between different categories of risk.

The Issue of Collateral

In the case of ICT/ICTE, the issue of collateral is made more severe by the intangible nature of innovation activities and of assets generated through such innovation. Indeed, not only are innovation related assets difficult to value in monetary terms, but they also have little salvage value in the event of commercial failure. Therefore, innovation activities have limited collateral value in obtaining a loan. However, the severity of the problem obviously depends upon the specifics of different lines of business. Firms involved in software development and IT-consulting are in a comparatively more difficult position, whereas companies working on contract for foreign firms (as is often the case for firms in the BPO segment), may rely on highgrade accounts receivable as collateral. This may facilitate access to various forms of trade finance, such as factoring and forfeiting.

Institutional Factors
The presence of institutional and legal obstacles that have a special bearing for ICT/ICTE activities compound the fundamental problems examined above. Two of the largest of these obstacles are as follows: Initial public offerings (IPO) are by far the preferred exit mechanism for venture capitalists. However, in most developing countries stock markets are still undeveloped and thinly traded while SME-oriented stock markets of the NASDAQ variety are largely nonexistent. Such a limitation in exit mechanisms inevitably has a negative impact on
45

venture capital operations; in several countries, taxation is skewed in favor of debt financing. This results in a powerful brake on the emergence of business angel activities, and on the fundraising capabilities of venture capitalists. In some developed economies (e.g. the UK), tax legislation is formulated to encourage the involvement of wealthy individuals in high risk investment activities, but similar schemes have been adopted by only a handful of emerging and developing countries.

Demand-side Considerations
The behavior of financial institutions is not the only reason that SME have problems accessing financing. Constraints on the demand side also have an impact. Indeed, while SME advocates loudly lament the inaccessibility of external finance, bankers and venture capitalists often decry the shortage of bankable or investable firms. In this connection, the following three factors play a significant role. The poor quality of projects submitted for financing; the inability of SME to make the best possible use of available sources of funding; the negative attitude displayed by SME toward equity financing. These aspects are briefly analyzed in the following section.

Poor Quality of Projects

One demand side constraint has to do with the quality of projects submitted for financing, which is often well below minimum standards. This also applies to the ICT/ICTE industry, where more than a few business ideas do not meet the basic standards for receiving any serious consideration by financiers. Needless to say, the poor quality of projects is frequently invoked as an excuse by conservative bankers, but the problem is often acknowledged also by independent parties, such as members of the scientific community. Indeed, as it will be shown later in this Report, in certain countries the pipeline of potentially viable projects is extremely limited, at least in the more advanced segments, such as software development and IT services. In part, the issue of the quality of projects is a problem of perception.

Inability to Exploit Existing Opportunities

A second constraint is that promoters are often unable to make the best use of available opportunities, irrespective of the intrinsic quality of the projects. This relates not only to their limited ability to convincingly articulate business ideas, but also to the
46

unwillingness of many small entrepreneurs to waste time in dealing with financial institutions. In this respect, the ICT/ICTE industry is not much better than more traditional sectors, despite the higher than average level of education of entrepreneurs. Certainly, there are examples of promoters who have been able to cultivate a strong relationship with venture capitalists or business angels, and who have been able to gradually build a relationship of trust and familiarity that could compensate for other factors. However, in many cases, high tech promoters tend to concentrate exclusively on technical aspects and are not inclined to invest time in creating financing opportunities. Even in the case of well-established businesses, there are indications that knowledge of financial instruments is limited. Business associations and incubators can sometimes help in overcoming this attitude, but so far, this has not always been the case.

Negative Attitude towards Outside Investors

A third problem has to do specifically with equity financing and relates to the unwillingness of enterprises to relinquish control over the company to outsiders. This attitude is referred to as control aversion in the literature. It is quite widespread among SME, and the ICT/ICTE industry is no exception. The problem is found in several countries. That includes countries with a more advanced ICT industry and a well-developed financial sector, such as India, where references to the 51% syndrome were quite common in conversations with industry experts. Somewhat at odds with conventional wisdom, there are indications that control aversion may be more widespread among firms at the very early stages of development (those believing that they will become another Bill Gates, as one of our interlocutors put it), than among more established firms (those who have already faced the reality of business life). In the Philippines, focus groups were run with enterprises at different stages of development. The more established companies displayed great interest in accessing equity financing, whereas promoters of initiatives at the seed stagemany of which were still hosted in a business incubatorproved much less enthusiast, if not outright negative. This aspect has non-negligible implications in terms of the financing gap at the various stages of development.

47

OBJECTIVES OF THE PROJECT:This study reports on the perceptions of SME owners regarding various aspects of the financing of their firms. In order to give as accurate a picture as possible of the position of entrepreneurs, the survey considered all financing sources, i.e. the chartered banks, , credit unions, factoring companies, leasing companies, trusts, venture capital companies, government institutions and all other financing sources, including employees, family members and informal investors. The survey measures:

Requests made by SMEs to various financing sources in a variety of contexts (start-up, growth, exporting, etc.< obstacles major the highlighting while> entrepreneurs' motivations in seeking financing; entrepreneurs' knowledge of the various financing sources available; entrepreneurs' satisfaction with the financing obtained, with an emphasis on the major determinants of satisfaction; entrepreneurs' willingness to finance future projects with current lenders; and Variations in financing conditions experienced by firms in the previous six months.

Although a section of this report looks at certain specific characteristics of the respondents, it will also attempt to note distinctions between the various groups of entrepreneurs (gender, education, age, etc.) and firms (size, age, phase of development, etc.) when discussing other elements, including satisfaction, approval or diversity of the financing sources used. The main objective of this study is to improve SME access to financing by promoting a stable, diverse, well-functioning financial system, which is capable of effectively servicing SMEs needs and working on the micro level initiatives that directly impact SMEs access to credit.

48

DEVELOPMENT PLAN:Banks tend to charge SMEs higher interest rates and adopt a rigorous and pre-emptive approach with respect to collateral because of the difficulty they face in identifying creditworthy and promising SMEs. The most efficient way to encourage lending to SMEs is to improve the ability of existing institutions to construct profitable and efficient lending programmes. This can be achieved by minimizing the risks through appropriate tools and methodologies that assess the creditworthiness of potential SME borrowers and lower the overall costs of lending to them. SMEs and their need for finance differ in many ways, depending on their growth objectives, risk and return profiles, etc. To accommodate their different financial needs efficiently, the financial sector must provide different types of financial services. International financial institutions can play a catalytic role in promoting the diversification of the financial sector by working through different types of institutions including credit pools, insurers, venture capital funds and leasing companies. For example, they could all join with governments and private partners to create publicprivate venture capital funds and investment banks for assisting SMEs. A well-regulated and properly functioning financial system is a necessary but insufficient condition for ensuring SMEs access to finance. Financial institutions must also construct profitable and efficient credit and equity programmes for this sector. To compete effectively in the SME financing sector, they also need to provide financial services that meet their specialized needs while coping with the high risks and costs associated with servicing them. To achieve this, there is a distinct need for adoption of separate strategies to service SME customers. The emphasis should shift from a product-based focus to a more customer-oriented focus for providing packages of financial services tailored to their needs. This has the potential of considerably improving the banks relations with the SME sector, as well as increasing the profitability of providing financial services to it.

49

The following are the issues of SME financing: They are unable to capture market opportunities, which require large production facilities and thus could not achieve economies of scale, homogenous standards and regular supply. They are experiencing difficulties in purchase of inputs such as raw materials, machinery and equipments, finance, consulting services, new technology, highly skilled labor etc. Small size hinders the internalization of functions such as market research, market intelligence, supply chain, technology innovation, training, and division of labor that impedes productivity. Emphasis to preserve narrow profit margins makes the SMEs myopic about the innovative improvements to their product and processes and to capture new markets. They are unable to compete with big players in terms of product quality, range of products, marketing abilities and cost. And most importantly, absence of a wide range of Financing and other services those are available to raise money and sustain the business. Absence of Infrastructure, quality labor, Business acumen and limited options / opportunities to widen the business. Poor IT and Knowledge infrastructure To overcome all these difficulties, Indian SMEs and rural artisans deserves all the policy support the Government can offer. What they need is, not protection but institutional support to fund modernization and technology up gradation, infrastructure support and adequate working capital finance. Also they have to have professional inputs and knowledge about various happenings in their own industries in and around the country. This brings in the concept of SME networks and clusters that stimulate innovative and competitive SMEs. THE Indian SME (small and medium enterprise) market seems to be emerging a promising hunting ground for banks and financial institutions because it poised for tremendous growth. As the access of SMEs to capital markets is very limited, they largely depend on borrowed funds from banks and financial institutions. In majority of the economies, while the investment credit to
50

SMEs was being provided by financial institutions, commercial banks extended working capital. In the recent past, with growing demand for universal banking services, the term loan and working capital are becoming available from the same source. Besides the traditional needs of finance for asset creation and working capital, the changing global environment has generated demand for introduction of new financial and support services by SMEs. Small and Medium Enterprises (SMEs) are critical to the nation's economy: they contribute approximately 40 per cent of India's domestic production, almost 50 per cent of total exports and 45 per cent of industrial employment. More importantly, they are the second largest employers of manpower, after agriculture. SMEs in India operate mostly in the unorganised sector and are the source of livelihood for millions of people. The social contribution made by SMEs is even more significant than its economic contribution. Within the SME sector, the small sector serves as a seed-bed for nurturing entrepreneurial talent and originating units to eventually grow into medium and large enterprises. The promotion of SMEs, therefore, becomes a major area for policy focus. The regeneration of SMEs must receive public support particularly for village, cottage and micro level enterprises. Despite their economic significance, SMEs face a number of bottlenecks that prevent them from achieving their full potential. Some of the major obstacles in the path of business development for SMEs relate to a wide range of issues:

Financing: Lack of access to finance and timely credit as well as escalating cost are
cited as the primary reasons for under-utilisation of the manufacturing capabilities of SMEs.

Infrastructure: The infrastructural facilities in India have not reached to the desired
level. This restricts private initiatives in this sector. Therefore, creation of better infrastructural facilities for SMEs must receive greater priority.

Taxes And Regulations: A multiplicity of regulating agencies lead to harassment and

inspections with greater impact on operations of SMEs than on larger units.

Marketing: With growing access to modern means of communication, particularly

51

revolution in the information technology, the sheltered market for the SMEs product is no longer so. SMEs should join hands globally to create a global commodity chain. In this regard, SME mother units in marketing, similar to mother units in production, may be promoted. Technology: It becomes difficult for SMEs to access cutting-edge technology due to the high initial costs, thus leaving them behind in the race for competitiveness. A major impediment in SME development is their inability to access timely and adequate finance. There are several reasons for low SME credit penetration, key among them being insufficient credit information on SMEs, low market credibility of SMEs (despite their intrinsic strengths) and constraints in analysis. This leads to sub-optimal delivery of credit and services to the sector. As the access of SMEs to capital markets is very limited, they largely depend on borrowed funds from banks and financial institutions. While investment credit to SMEs is provided by financial institutions, commercial banks extend working capital. In the recent past, with growing demand for universal banking services, term loans and working capital are becoming available from the same source. Besides the traditional needs of finance for asset creation and working capital, the changing global environment has generated demand for introduction of new financial and support services by SMEs. There is an urgent need to regenerate SME financing. As SMEs have been the green-field for nurturing entrepreneurial talent, first generation entrepreneurs should be facilitated in accessing desired finance through the creation of guarantee funds. Finance should not only be timely but also cost effective. Among instruments of SME Financing, SIBDI is the principal financial institution for the promotion, financing and development of industry in the SME sector in the country. SIDBI also provides appropriate support in the form of promotional and developmental services. In order to improve the credit flow to the SME sector, it has tied-up with eight public sector banks in the country. With these tie-ups, it has covered 150 SME clusters, out of the total 388 clusters identified across the country. In spite of the various initiatives taken by the government, banks and financial institutions, SMEs face certain challenges which are universal in nature. These problems relate to the issue

52

of collaterals, cost of loans, delay in receivables, obsolete technology, marketing, etc. In order to address the above problems in the Indian context, some innovative instruments of financing have been introduced and institutional set ups have been created. Some of the major initiatives include:

Credit Guarantee Fund Trust for Small Industries: Government of India, in

association with SIDBI, has set up a Credit Guarantee Fund Trust for Small Industries (CGTSI) to implement the guarantee scheme.

Risk Sharing Facility: While the CGTSI extends guarantee cover for the loans up to
Rs.2.5 million, there is a need for offering guarantees for loans extended by banks beyond the above limit. Under a World Bank led Project on Financing and Development of SMEs, a possibility of introducing a risk sharing facility for the SME sector is being examined, wherein the risk in lending by banks to SMEs could be shared on pari passu basis between the originating banks and the suggested entity.

Venture Capital Funding: With regard to, many countries are considering
liberalizing the rules regarding venture capital investments. In India also, various measures have been taken in this direction. SIDBI, along with some other institutions, has taken a lead in promoting venture capital funding in the country.

Micro Credit: Realising the potential of micro finance in stimulating economic

growth, SIDBI, has laid emphasis on increasing the capacity of the sector to handle credit and growth in the disbursements of micro finance. SIDBI Foundation for Micro Credit has been established.

Small and Medium Enterprises Fund: The most important amongst the sectoral
initiatives taken by the GoI and SIDBI is an SME Fund, with a view to giving impetus to the fund flow to the SME sector. Under the Fund, assistance is being provided to SMEs at an interest rate of 200 basis points below the Bank's PLR. Direct assistance is being extended to SMEs through SIDBI's own offices at 9.5 per cent rate of interest as also by way of providing refinance to the primary lending institutions.
53

Refinance to SFCs is available in the interest rate band of 7.5 per cent to 8 per cent. The SME Fund provides for routing of assistance, besides SFCs, through commercial banks as well. The Fund, besides up scaling the flow of assistance to SMEs, addresses the issue of cross sector parity in the cost of loans. Setting up of a dedicated credit rating agency for SMEs can play an important role in addressing some of these concerns. In this context, SMERA is wholly committed to facilitating the overall growth and development of Indian SMEs. The agency's primary objective is to provide SME ratings that are comprehensive, transparent and reliable. All facilities to SMEs should be in the form of a level playing field. Boundary-less markets of today can sweep aside which are not globally competitive. At the same time, businesses which enjoy comparative advantages are forward looking and can attune themselves to the changing environment, will have tremendous opportunities. SMEs need to rediscover and regenerate themselves to integrate with the world markets.

IMPORTANCES OF SMEsThe Importance of Small and Medium Enterprises (SMEs) in any economy cannot be overlooked as they form a major chunk in the economic activity of nations. They play a key role in industrialization of a developing country like India. They have unique advantages due to: Their size Their comparatively high labor-capital ratio need a shorter gestation period focus on relatively smaller markets need lower investments ensure a more equitable distribution of national income facilitate an effective mobilization of resources of capital and skills which might otherwise remain unutilized and Stimulate the growth of industrial entrepreneurship.

54

RESEARCH METHODOLOGY:Research methodology is a methodology for collecting all sorts of information & data pertaining to the subject in question. The objective is to examine all the issues involved & conduct analysis. The methodology includes the overall research design, sampling procedure & fieldwork done & finally the analysis procedure. The methodology used in the study consistent of survey using secondary data. Only some of the primary data has been collected with the help of personal visiting the SMEs of BHAYANDAR (EAST). The questionnaire has been drafted & presented by the researcher himself. To study the Project, a secondary data is used. The secondary data was the records which was the records of DENA BANK

COLLECTION OF DATA:Collection of data is done by Secondary Data by studying the recorded documents of Dena banks & through i.e., Primary data was collected through visiting a few SMEs i.e. (LAXMI MOULDS and many more) of the Bhayandar East.

ANALYSIS OF DATA:After data collection, Im able to analyze proprietors and partners views, ideas and opinions related to and about financing of SME s and from this, Dena bank will come to know how to improve financing to SMEs, what should be done to encourage to become an entrepreneur.

55

Summary:There are a number of issues in lending to the SME sector, which banks generally face. The key issues among them are outlined below:

(a) Information Asymmetry:

Accurate information about the borrower is a critical input for decision-making by banks in the lending process. Where information asymmetry (a situation where business own owners or managers know more about the prospects for, and risks facing their business than their lenders) exists, lenders may respond by increasing lending margins to levels in excess of that which the inherent risks would require.However, the sheer ticket size of SME lending makes it inviable for banks to invest in development of information systems about SME borrowers.In such situations, banks may also curtail the extent of lending even when SMEs are willing to pay a fair riskadjusted cost of capital. The implication of raising interest rates and/or curtailing lending is that banks will not be able to finance as many projects as otherwise would have been the case. (b) Granularity: This refers to a situation where the risk grading system at banks does not have the requisite capability to discriminate between good and bad risks. The consequence is tightening of credit terms, or an increase in prices, or both. From the borrowers perspective, this leads to an outcome where the bank is over-pricing good risks and under-pricing bad risks. The fact that most banks in India have not developed adequate expertise in SME lending risk assessment exercises leads to the problem of granularity when it comes to SME lending.

(c) Pecking Order Theory:

Pecking order theory flows from the above two issues, which makes SME lending highly difficult for banks. Under this hypothesis, SMEs, which face a cost of lending that is above the true risk-adjusted cost, will have incentives to seek out alternative sources of funding. Evidence suggests that in such situations SMEs prefer to utilize retained earnings instead of raising loans from banks. (d) Moral Hazard: Even when loans are made to SMEs, it may so happen that the owners of these SMEs take higher risks than they otherwise would without lending support from the banks. One reason for this situation is that the owner of the firm

56

benefits fully from any additional returns but does not suffer disproportionately if the fi rm is liquidated. This is referred to as the moral hazard problem, which can be viewed as creating a situation of over-investment. The moral hazard problem may, thus, result in SME lending turning bad in a short period of time, a situation that all banks would like to avoid. (e) Switching Costs: SMEs may find it harder to switch banks, when countered with any issue.It is a known fact that the smaller the business, the more significant the switching costs are likely to be and, therefore, it is less likely that the benefits of switching outweigh the costs involved. This situation results in SME lending becoming a sellers market, which may not be attractive to SME borrowers.

Steps for Smooth SME:Lending:In order to ensure that the above issues do not stand between SMEs and Bank Finance, the following steps could be taken as remedial measures: Collateral: Existence of collateral that can be offered to banks by SMEs could be one effective way of mitigating risk. Banks could, therefore, look at collateral when pursuing the question of SME lending. It can also be stated that a borrowers willingness to accept a collateralized loan contract offering lower interest (relative to unsecured loans) will be inversely related to its default risk. However, not all SMEs would be able to offer collateral to banks. Hence, Reserve Bank of India (RBI) allows banks, with a good track record and financial position on SSI units, to dispense with collateral requirements for loans up to Rs. 25 lakhs. (a) Relationships: The length of the relationship between a bank and its SME customers is also an important factor in reducing information asymmetry, as an established relationship helps to create economies of scale in information production. A relationship between a SME and a bank of considerable duration allows the bank to build up a good picture of the SME, the industry within which it operates and the caliber of the people running the business. The closer the relationship, the better are the signals received by the bank regarding managerial attributes and business prospects.

57

(b) Quality of Information:

SMEs are required to provide accurate and qualitative information to the banks for them to undertake a reliable risk assessment. Accurate risk assessments obviously rely upon good information regarding the SME and its prospects. Hence, it is suggested that banks should make efforts to encourage SMEs to improve the quality of information provided.

(c) Customer Consideration:

The SME market is somewhat different to the corporate market in that corporate customers generally have a wide range of financing options to choose from and is not as dependent on bank financing as is the case with SMEs. The extent to which SMEs can take necessary steps, with the aid of public initiatives, to easily switch to another bank is another factor that can influence the level of competitive pressure on banks in the case of SME lending.

Role of Government and Banking Regulator in SME Lending:As is apparent, the above factors are only idealistic solutions and may not be practical for SMEs to follow because they are faced with several problems such as weak financial strength, inability to provide adequate collateral and other factors. Hence, the Government and banking supervisors should take a holistic view of the SME Sector while considering SME financing, taking into account the risks faced by banks and the problems faced by SMEs. In this regard, the initiatives taken up by the Government and Banking Regulators across various countries and in India are as follows:

(a) Cross-country perspectives:

Increased competition in financial markets in developed countries has led several Governments and Banking Regulators to encourage banks and other financial institutions to launch a number of initiatives to serve the financing needs of SMEs effectively. Some of these initiatives (along with necessary government and regulatory support) include the promotion of venture capital; receivables financing; leasing finance; soft loans, grants, and guarantees for entry into public tenders; setting up of special financing companies with state participation; micro-finance programmes, etc. For instance, New Zealand has introduced a scheme called BIZ Investment Ready, which targets innovative businesses and entrepreneurs seeking funds to expand, s
58

diversify or commercialize a new concept. The European Union has devised a scheme to facilitate contacts between SMEs and banks and other financial institutions, by developing a code of good practice for SME lending. The Philippines has instituted a financing programme called SME Force (SME Financing for Organizationally Competent and Excellent Franchise Businesses), which is a franchise development financing facility that will be implemented with the participation of franchiser organizations.

(b) Indian scenario Government initiatives:

Even in India, the financing of the SME sector has received some attention since independence. Some of the initiatives taken by the Government in this regard are as follows: _ setting up of the Small Industries Development Bank of India (SIDBI), as the apex refinance institution in India for the purpose of channeling of finance to Small Scale Industries (SSIs) and SMEs in an organized manner. _ In line with the announcement made in the Interim Budget for 2004-2005, SIDBI has proposed two fund based initiatives for improving credit flow to the SME sector as follows: _ A contribution of Rs. 100 crore to the Rs. 500 crore corpus of the SME Growth Fund (SGF), which shall make primarily equity/equity related capital investments in accordance with SEBI guidelines, in SMEs operating in various growth sectors such as the life sciences, biotechnology, etc. _ The SME Fund of Rs. 10, 000crore to give an impetus to the flow of funds to the SME sector. This fund has begun operations with effect from April 2004. Under the Fund, assistance is provided to SMEs at affordable rates of interest, and direct finance is extended to SMEs through SIDBIs network of branches. Further, refinance to State Financial Corporations (SFCs) has also been made attractive in terms of low rates of interest. _ The Government of India has launched the Credit Linked Capital Subsidy Scheme (CLCSS), which aims at facilitating technology upgradation of SMEs in specified products/sub-sectors.

59

Existence of collateral that can be offered to banks by SMEs could be one effe Existence of collateral that can be offered to banks by SMEs could be one effective way of mitigating risk. Banks could, therefore, look at collateral when pursuing the question of SME lending. (c) Indian scenario RBI initiatives:
The RBI, from time to time, has formed several committees and working groups to study the flow of credit to the SME sector in a comprehensive manner, and has issued detailed guidelines in this regard. Recently it has constituted an Internal Group under the Chairmanship of Shri C. S. Murthy to, interalia, consider the relaxation and liberalization of credit lending norms that are applicable to the SME sector. The Group has submitted its report on June 6, 2005. The Internal Group, with reference to financing of SMEs, has recommended: _ Constitution of empowered committees at the offices of the Reserve Bank to periodically review the progress in SME financing and also to coordinate with other banks/financial institutions and the state governments in removing bottlenecks, if any, to ensure smooth flow of credit to the sector. _ Opening of specialized SME branches in identified clusters/centers with preponderance of SME units to enable entrepreneurs to have easy access to bank credit and to equip bank personnel to develop the requisite expertise. _ Empowerment of the boards of banks to formulate policies relating to restructuring of accounts of SME units subject to certain guidelines. _ restructuring of accounts of corporate SME borrowers having credit limits aggregating Rs. 10 crore or more under multiple banking arrangements to be covered under the revised CDR mechanism. Appropriate authorities are currently examining the above recommendations of the Internal Group.

60

FINDINGS AND INTERPRETATIONS: The development of new entrepreneurs is critical to Indias growth and development. There has been a burst of entrepreneurship across the country, spanning rural, semi-urban and urban areas. Majority of the new entrepreneurs of today are still self-financed. There is a widely held perception among entrepreneurs that it is very difficult to get bank loans at the start-up stage while becoming comparatively easier at the growth stage. Perceptions regarding bank finance have not improved in case of entrepreneurs. Banks need to understand that there will be failures as well as successes in business. Banks will have to tone up their risk assessment and risk management capacities, and provide for these failures. Despite the risk, financing of first time entrepreneurs is a must for financial inclusion and growth of the country. MSMEs need to : Educate and empower themselves to make optimum utilization of the resources, both human and economic, to achieve success Be informed of the latest developments taking place globally. Acquire skills necessary to keep pace with the global developments.

61

 Develop a strong technological base. Develop an international business outlook. Inculcate competitive spirit Be willing to restructure themselves Innovate - it is the necessary core competence for success in the new landscape.

There are a number of issues in lending to the SME sector, which banks generally face. The key issues among them are; High administrative costs of small-scale lending; Quality of information provided. High risk perception of the micro and small enterprises (MSE). It has become difficult for banks to be able to assess risk premiums properly, creating differences in the perceived versus real risk profiles of SMEs. Weak financial strength of SMEs and rising NPAs in the sector. Inability to provide adequate collateral and other factors. SMEs are considered to be potential defaulters and financially less viable. Imposition of interest rate ceiling further reduces the desire of banks to service the credit requirement of these sectors
62

CREDIT FLOW TO MSME SECTOR

PERTICULER

31.3.2010

31.3.2011

31.3.2012

SOI Target March 2012

YoY Growth during 2011-2012 Actual %

OUT OF WHICH MSME MICRO SMALL

_
5647 2656 2282 6784 3214 2980 8291 4132 3364 4098 3352 1507 918 384 22.22% 28.56% 12.88%

TOTAL MSE
NPA MSME

4938
263

6194
245

7496
312

7450

1302
67

21.02%
27.35%

The bank has surpassed the SOI target of Rs.7450 crores for credit Flow to MSE Segment The outstanding credit to MSE Sector was at Rs.7496 crores as at March31, 2012. The credit to MSME sector increased from Rs.6784 crores as of march 2011 to Rs.8291 crores as of March2012, registering a growth of 22.22%. Credit flow to MSME grew by 21.02%duringFY 2011-12. While credit to Micro Enterprise increased by 28.56% during FY 2011-12, the credit flow to small Enterprise grew by12.88%.

63

As per Prime Ministers High Level Task Force committee recommendation on MSE, the following targets are specified. A. Credit growth in MSE should be 20% YoY. B. Credit Micro Enterprise should be 60% of the MSE credit in phases, i.e. 50% during 2010-11 ; 55% in 2011-12 and 60% in 2012-13. C. Number of account in Micro Enterprises should increase by 10% every year. OUR BANK HAS ACHIEVED ALL THREE PARAMETERS STATED ABOVE:Outstanding credit under MSE segment:[Rs in corers] 31.3.2012 Amt Micro Small Total MSE a. 4132 3364 7496 % Share 55.12% 44.88% 100% YoY Growth 28.56 12.88 21.02

MSE credit grew by 21.02% during2011-12 against the recommended growth rate of 20%. b. Micro Credit by the Bank is 55.12% of MSE credit as against minimum target of 55% stipulated by RBI/Goi.

64

CONCLUSION:Without adequate bank finance, SMEs cannot acquire or absorb new technologies nor can they expand to compete in global markets or even strike business linkages with larger firms. Similarly, banks cannot consider the financing of SMEs as a viable option unless their priorities are addressed by SMEs. In this regard, SMEs should be assisted largely by public initiatives involving participation of the banking industry. In India, however, the various public initiatives for promoting finance to SMEs have not been as successful as envisaged because there has been some overlapping of regional and national initiatives. Efforts to harmonies the standards and practices, therefore, need to be properly coordinated to facilitate SME finance further.

RECOMMENDATIONS AND A SCOPE FOR FUTURE ENHANCEMENT:Major Challenges in Financing to MSMEs: Lack of transparency of financials and other information with MSMEs, since most MSMEs follow a sole proprietorship or partnership structure. Limited reach of Banks to rural areas where MSMEs usually exists. Limited risk appraisal and credit delivery due to lack of local knowledge and proper documentation like financials and business plan etc. Competition from unorganized sector High servicing costs associated with the sector. Organized sector may see this as a higher risk and lower profitability business.

65

Possible Solutions: Provide lending in small buckets at rates that are more remunerative than the industrial sector, but competitive when compared to unorganized sector. Device innovative methods of risk appraisal and credit delivery. Example: Providing credit based on understanding of owners character, personality and capabilities. Use other delivery channels like post office, RRBs and NGOs to get access to those areas and information about the SMEs. Knowledge and training sessions to MSMEs to help them understand the importance of financials and business planning. Provide special receivable finance schemes and factoring services. Provide skills training to SME labor and technicians in collaboration with ITIs. Lowering cost of finance through tie-ups with CGTMSE and informing SMEs about the benefits of better credit ratings.

66

Need of the Hour:To empower the SME Sector to take its rightful place as the growth engine of Indian economy, it is necessary to support the SMEs, educate and empower them to make optimum utilization of the resources, both human and economic, to achieve success. The SMEs need to be educated and informed of the latest developments taking place globally and helped to acquire skills necessary to keep pace with the global development. SME Chamber of India has decided to start various activities to empower and educate the SME Sector by organizing various trade promotional activities in India and abroad. Also provide assistance and support for the promotion of domestic business as well as export promotion of the SME sector.

67

BIBLIOGRAPHY:-

68