SME Finance

8/2/2019 SME Finance

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SMALL AND MEDIUM EN

TERPRISE-AN OVERVIEW-


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DEFINITIONS

Micro Enterprise: Investment in P&M25

lacs manufacturing & upto Rs 10 lacs in

equipment in service sector

S.S.I-Investment in p&m does not exceed

Rs500lacs in P&M and Rs10 to 200 lacs in

equipment in service sector Medium Enterprise: Above 500 lacs and

upto Rs1000lacs in P&M in manufacturing

and Above rs 200 lacs upto Rs500 lacs in


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DEFINITIONS

Equipment in service sectorncillary units-

proposes to supply 50% of its production or

services

Tiny units-Investment in p&m does not

exceed Rs25lacs

Village & cottage industry.--population notexceeding 50000.


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DEFINITION CONTD.

Women enterprises--SSI related related

service where share of the women as partner

shareholders,directors not less than 51%.

Export oriented units--exports at least 30%

of its production.

SSSBE--An industry related servicebusiness enterprises with investment in

fixed assets upto 5lacs except land&bldg


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Importance of S.S.I.

Provides employment next to Agri.

Accounts 40% of the total export of the

country

Plays crucial role in the economy.


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Inherent advantage of S.S.I

1-Shorter gestation period

2-Low cost of establishment

3-Widely dispersed building wider

industrial base.

4-Low capital intensive.

5-Potential for employment

6-Effective mobilisation rural resource


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Why S.S.I fails

Inordinate delay in sanction of credit limit

Need based lending not extended

Big units deleberately promote ancillaries

Placed order in large nos of small ones

Gets payment on the whims & fancies ofbig units

Disadvantageous position of raising funds


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Inherent weakness of S.S.I.

Lacking basic infrastructure

Old/outdated technology

Poorly placed in market situation

Promoters lack specialisation

Weak capital base &lesser access to capital

market

Lacking managerial&professional skills


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Inherent weakness of SSI contd.

Face resource crunch

Poor accounting system

No planning budgeting or monitoring

Short term fund are deployed for long term

uses

Pre operative expenses are not considered in

project appraisal


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Role of Govt.of India& R.B.I

Banks should convey timely sanction

Loan applications to be timely disposed

Need based & timely credit to be extended

Simplified & uniform application form

Rejection of application form should bedone with approval of higher authorities

Collaterals upto 1lac not to be insisted


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Role of GoI & R.B.I. Contd.

Financial assistance for meetig T/L&W/C

be given

Interest on delayed payment to SSI and

ancillary undertaking act 1993.

Target for financing priority secctor where

SSI is a constituent


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Bankers approach to SSI

financing Anxiety to secure banks fund at any cost

Stop discounting bills of SSI units

Discourage to draw against book debts

Current ratio is lowered due to high

receivables

Branches are not equiped nor trained

Borrowers are not educated.


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Activities not covered under SSI

SSI units set up by state/central govts.

Hotels,Tourism,Cinema house

Tea processing blending ,Diagonistic center

Pharmaceutical companies working on loan

licencing policy


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Structured approach in SSI

financig DEHEJIA COMMITTEE RECOM.

1-Tendency to avail short term credit more

than requirement

2-Tendency to divert short term funds for

acquisition of non current assets

3-Approach of the bank is security oriented

4-Correct credit assessment is not done


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Dehejia committee

recommendation

Appraisal of credit application based on

present & projected financial position

Bank with one bank to avoid multiple

financing

Cash credit requirement should be

segregated into hardcore &short termcomponent


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Puri Committee recommendation

Uniformity & simplicity of loan application

No viable scheme shall be turned down for

want of margin

Largely be guided for viability not to insist

collaterals

Repayment considered as per sustenance

Loaning power,uniform appraisal


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Tandon committee

recomendations Norms for inventory & receivables

Approach to lending

Identification of excess borrwing

No slip back in current ratio except

expansion, diversification,reduction of

public deposit ,payment of statutory

dues,full capacity utilisation


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Chore committee

recommendation Periodical review

Quarterly information system QIS-I,II,III

Peak nonpeak level limit

Regulation of drawal of funds

Ad hoc limits Enhancement of borrowers contribution


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NAYAK COMMITTEE

RECOMMENDATION Banks should step up the credit flow to meet the legitmate requirement

of SSI through preparing an annual budget for new units,functioning

units,&sick SSIunits

Single financing agency to meet T/L,W/c, requirementupto20lacs&10lacs respectively.The single window scheme of SIDIBI

enables the same agency to cater the need.

Inventory norms &Ist method of lending not applicable to ssi units

upto 50lacs(raised to 100lacs).As such fudbased facility upto 10lacs

&10 to 50 lacs are subjected to inventory&receivable norms & istmethod of lending respectively

The banks lend on the basis of 1st method of lending to those units

engaged in marketing&trading of SSI products.subjected to condition

that dealing with100% products &due settled in30days.


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Nayak committee (contd)

Banks have been advised to give preferences to village industries,tiny

industries,& other SSI while extending finance to SSIs.

IMPORTANT BANKING OPERATIONAL

CLARIFICATION ON NAYAK

COMMITTEE RECOMMENDATIONS The assessment of credit limitsfor all borrwers enjoying credit limits

less than 1crores--(fund based)is to be granted on higher of the 2 limits

assessed on the basis of traditional &turn over methods Where the w/c cycle is shorter than 3months the w/c requirements

would be less than 25%of the PTO

If the liquid surplus available is more than 5%of the T/Othe limit can


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Operational clearification on

Nayak commt. Contd. fixed at a lower than 20% of the T/O

The units having operating cycle more than 3monhs should be

provided proper limits since 20% T/O is the minimum

In case of seasonal industries peak/nonpeak level should be consideredinstead of annual turn over.

Creditos & OCL are to be considered as source of funds for building

C/A & will be treated in the same manner as in traditional method

The borrwers contribution should be 5%ofT/O except where the w/c

cycle is not taken as3 monthsThe margin will proportionately increasewith increase in period of operating cycle.Care to maintain 1:4 ratio

should be ensured. Higher liquidity surplus could be considered.

Dilution less than 5% could be considered except in sick units


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Operational clearification on

Nayak commt. Recomm. The sub limits against various componets of stock,Receivables are

sanctioned based on norms of inventory & receivables .Banks should

adopt a flexible approach.

Monitoring of borrowal account based on stock ,book debtstatements.actual turn over on monhly basis,Auditors certificate on

6monhly basis.This would help in arriving effective operational

limits.

In order to check the validity of projection of existing units actuals for

last 5 years ,esimates ,prjections including true analysis of industries towhich the borrowing unit belongs is useful.Other information like

modernisation, expansion,manufg.

Capacity,govt.policy,taxation,external&internal factors are relevent.


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Kapur committee

recommendation Delegation of sanctioning power

To be delegated to sanction 20% of limit as

adhoc limit

Banks to consider composite loan limit upto

5lacs (enhanced to 10lacs)

Project requiring credit upto 25lacs should

be sannctioned by banks or sfc .For loans

>25las sidibi with banks to have MOU sign


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Kapur committ. Recm. contd

sfc & selected public sector banks. The

securities shall be shared on pari pasu basis.

Application forms used--2lacs-->10lacs, 15lacs--->50lacs,upto 1crore--->50lacs to 2cr.

For considering applications acommittee

approach should be considered & disposedof with in1month.


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Kapur committ.recm. Contd.

One field officer in specialised branch

should handle at least 50ssi accounts

A charter of credit entitlements hae to bedisplayed at the banking hall.Selective

specialised banks have to experiments with

new products such as Factoring services. The loan application should be examined by

an officer with adequate experience.


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Kapur committ. Rcom. Contd.

Refer-april1998,co/br/84/71 dated4-6-1992

Where banks have first charge on fixed

assets ,they should not ask cash marginsfrom ssi borrowers for non-fundedfacilities

provided there is adequate surplus to cover .

Special term loans be granted to meet pre-operativeexp.,technicalfee,collaborationcost

, invst.inR&D,marketingexp..


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Kapur committ.recom.contd.

Exemption of collaterals upto 1lac

Upto 10lacs the collaterals plus netmeans of

3rd party guarentee should not exceed50%of fund & non fund based business.

Banks should at least should finance 10% of

its accounts without collaterals.


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Working capital requirement of

SSI units EXISTNG UNITS

Balance sheet,profit&loss accounts.

Cash & credit sales

Cash& credit purchases of raw materials

Basis for manufacturing cost&overheads

basis for administration expenses

liquid surplus available opening&closing stock balance

manufacturing process details&marketing

arrangements


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W/C requirement--new units

Projected balancesheet

Projected profit&loss account

Basis for projecting manuf.exp.&admn.exp.

Period involved in various stage of

operating cycle

Prportion of cash&credit sales

Liquid surplus presently available


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W/C assessment ---new units

Manufacturing process details

Closing stock of RM,SIP,FG,&receivable

estimate

Demand&supply &marketing arrangement


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Factors determine W/C

Policies for production

Manufacturing process

seasonality

pace of turn over


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Fixing the quantum of W/C

RM--place of availability,mode of

availability,minimum quantity stipulation,

seasonality,price variation,lead time, S.I.P.---Technology used,no. of processes,

Finished Goods--market for sale,Selling

arrangements, product quality

Receivables--Demand &supply position


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Fixing quantum of W/C contd.

--Receivables-----other competitors,credit

period,credit policy,discount allowed,

buyers financial soundness,


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Fixed assets financing through

Term Loan The appraisal of the term loan covers 4 broad aspects of the project

such as TECHNICAL, FINANCIAL,ECONOMIC.MANAGERIAL

FINANCIAL--COST OF THE PROJECT

Land&site development,Building,Plant&Machinery,Techinical Knowhow&other misc related charges,expenses on training,misc.fixed assets

preliminary exp.,preoperative expenses,provision for contigencies,

margin for working capital.

MEANS OF FINANCE

Share capital,reserve&surplus,retained earnings,long termborrowings,deferred payments,other sources.


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PRESENTING A CREDIT

PROPOSAL Documentation of creation of entity

Names,address,brief biodata &details of assets &liabilities

Particulars of securities other than primary

Copies of assessment orders of income-tax,wealth tax,sales

tax,excise duty assessment order .

Documents authorising the approval of---SSI registration

certificate,power sanction letter,NOC from muncipal

/pollution control board etc.

Details of borrwings

Audited balance sheet/profit &loss account


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Presenting a credit proposal

Details of associates

Loan application form

In case of term loan a project report covering -projected balance sheet,profit &loss a/c,cash/fund

flow,DSCR chart,break even

chart,depriciation,int.rate chart,copy of tittle of

land,estmate of construction,quotation,list ofexisting plant&machinery,copy of import licence


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Post sanction monitoring of SSI

advances A.Getting the sanction accepted

B.Documentation

C.Flow of information

Dperiodical inspection

E.Insurance

F.Periodical review/renewal of credit limits