Raj

P.D.C.S MINOR PROJECT REPORTON

STUDY ON BANKING PATTERN AND NEEDS

OF SMES

SUBMITTED BYNIIKHIL VIRMANI

16719201711

STUDENT OF

LINGAYA’S LALITA DEVI INSTITUTE OF MANAGEMENT & SCIENCES

MANDI ROAD, NEW DELHI-110047

FOR THE PARTIAL FULFILLMENT OF

BACHELOR IN BUSINESS MANAGEMENT

UNDER THE SUPERVISIONOF

Mr. PRANAV MISHRA

SUBMITTED TO

GURU GOBIND SINGH INDRAPASTHA UNIVERSITY

1NIIKHILVIRMANI16719201711

DELHI, INDIA

CERTIFICATE

Certified that this project report “STUDY ON BANKING

PATTERN AND NEEDS OF SMES.”

is the bonafide work of “ NIIKHIL VIRMANI” who carried out the

project work under the supervision of Mr. Pranav Mishra.

SIGNATURE SIGNATURE

PRANAV MISHRA PRANAV MISHRA

HEAD OF THE DEPARTMENT Project Incharge

BBA BBALLDIMS LLDIMSMandi road, mandi Mandi road, mandiNew delhi - 49 New delhi -49


DECLARATION

This work has not previously been accepted in substance for any degree and is not being

concurrently submitted in candidature for any degree / diploma.

Signed: ……………………..

Date: ………………………..

Statement 2

This project is the result of my own independent work/investigation, except where otherwise

stated. Other sources are acknowledged by giving explicit references. A bibliography is

appended.

Signed: ……………………..

Date: ………………………


ACKNOWLEDGEMENT

I owe a great many thanks to a great many people who helped and

supported me during the writing of this report. My deepest thanks to

Lecturer, [MR.PRANAV MISHRA] for correcting various documents of

mine with attention and care. He has taken pain to go through the project

and make necessary correction as and when needed. I express my thanks to

the hod of, [B.B.A], for extending his support. My deep sense of gratitude to

MR.PRANAV MISHRA, [STUDY ON BANKING PATTERN AND

NEEDS OF SMES] support and guidance. Thanks and appreciation to the

helpful people at [STUDY ON BANKING PATTERN AND NEEDS OF

SMES], for their support. I would also like to thank my Institute and my

faculty members without whom this project would have been a distant

reality.


http://www.blurtit.com/q6229703.html

1. Cover page 1

2. Certificate 2

3. Declaration 3

4. Acknowledgement 4

5. Table of content 5

1. Introduction 05-35

2. Objectives & Scope of Project 36-37

3. Methodology 38-41

4. Analysis and Interpretation 42-64

5. Limitations 65-65

6. Conclusion 66-70

7. Bibliography 71-71


INTRODUCTION

Small and Medium Enterprises (SMEs) have played a significant role world

over in the economic development of various countries. Over a period of

time, it has been proved that SMEs are dynamic, innovative and most

importantly, the employer of first resort to millions of people in the country.

The sector is a breeding ground for entrepreneurship. The importance of

SME sector is well-recognized world over owing to its significant

contribution in achieving various socio-economic objectives, such as

employment generation, contribution to national output and exports,

fostering new entrepreneurship and to provide depth to the industrial base of

the economy.

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

economies and are a key source of economic growth, dynamism and

flexibility in advanced industrialized countries, as well as in emerging and

developing economies. SMEs constitute the dominant form of business

organization, accounting for over 95% and up to 99% of enterprises

depending on the country. They are responsible for between 60-70% net job

creations in Developing countries. Small businesses are particularly

important for bringing innovative products or techniques to the market.

Microsoft may be a software giant today, but it started off in typical SME


fashion, as a dream developed by a young student with the help of family

and friends. Only when Bill Gates and his colleagues had a saleable product

were they able to take it to the marketplace and look for investment from

more traditional sources. SMEs are vital for economic growth and

development in both industrialized and developing countries, by playing a

key role in creating new jobs. Financing is necessary to help them set up

and expand their operations, develop new products, and invest in new staff

or production facilities. Many small businesses start out as an idea from one

or two people, who invest their own money and probably turn to family and

friends for financial help in return for a share in the business. But if

they are successful, there comes a time for all developing SMEs when

they need new investment to expand or innovate further. That is where

they often run into problems, because they find it much harder than

larger businesses to obtain financing from banks, capital markets or other

suppliers of credit.

Common Characteristics of SMEs

(a) Born out of individual initiatives & skills

SME startups tend to evolve along a single entrepreneur or a small group of

entrepreneurs; in many cases; leveraging on a skill set. There are other

SMEs being set up purely as a means of earning livelihood. These includes

many trading and retail establishments while most countries continue SMEs

to manufacturing services, others adopt a broader definition and

include retailing as well.


(b) Greater operational flexibility

The direct involvement of owner(s), coupled with flat hierarchical structures

and less number of people ensure that there is greater operational flexibility.

Decision making such as changes in price mix or product mix in response to

market conditions is faster.

(c) Low cost of production

SMEs have lower overheads. This translates to lower cost of production,

least upto limited volumes.

(d) High propensity to adopt technology

Traditionally SMEs have shown a propensity of being able to adopt and

internalize the technology being used by them.

(e) High capacity to innovate export:

SMEs skill in innovation, improvisation and reverse engineering are

legendary. By being able to meet niche requirements, they are also able to

capture export markets where volumes are not huge.

(f) High employment orientation:

SMEs are usually the prime drives of jobs, in some cases creating up to

80%. Jobs SMEs tend to be labour intensive per se and are able to generate

more jobs for every unit of investment, compared to their bigger

counterparts.


(g) Reduction of regional imbalances

Unlike large industries where divisibility of operations is more difficult,

SMEs enjoy the flexibility of location. Thus, any country, SMEs can be

found spread virtually right across, even through some specific location s

emerge as ‘clusters’.

SMEs in India

India has a vibrant SME sector that plays an important role in sustaining

economic growth, increasing trade, generating employment and creating

new entrepreneurship in India. In keeping in view its importance, the

promotion and development of SMEs has been an important plank in our

policy for industrial development and a well-structured programme of

support has been pursued in successive five-year plans for. SMEs in India

have recorded a sustained growth during last five decades. The number of

SMEs in India is estimated to be around 13 million while the estimated

employment provided by this sector is over 31 million. The SME sector

accounts for about 45 per cent of the manufacturing output and over 40 per

cent of the national exports of the country.

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

with the global economy in 1991. The liberalization of economy, while

offering tremendous opportunities for the growth and development of Indian

industry including SMEs, has also thrown up new challenges in terms of

fierce competition. The very rules which provide increased access for our


products in the global markets also put domestic industry under increased

competition from other countries. In today’s world, access on a global basis

to modern technology, capital resources and markets have become the most

critical determinants of international competitiveness.

Defining SMEs

In India, the enterprises have been classified broadly into two categories:

(i) Manufacturing; and

(ii) Those engaged in providing/rendering of services.

Both categories of enterprises have been further classified into micro, small

and medium enterprises based on their investment in plant and machinery

(for manufacturing enterprises) or on equipments (in case of enterprises

providing or rendering services). The classification on basis of investment is

as under:

Table 1.1

Classification Of Micro, Small And Medium Enterprises

Classification Investment Ceiling for Plant, Machinery or

Equipments

Manufacturing

Enterprises

Service Enterprises

Micro Upto Rs.25 lakh Upto Rs.10 lakh

Small Above Rs.25 lakh & upto

Rs.5 crore

Above Rs.10 lakh & upto

Rs.2 crore


Medium Above Rs.5 crore & upto

Rs.10 crore

Above Rs.2 crore & upto

Rs.5 crore

Table 1.2

Classification Of Micro, Small And Medium Enterprises Before 2nd

October, 2006

Classification Investment Ceiling For Plant, Machinery Or

Equipments*@

Manufacturing

Enterprises

Service Enterprises

Micro Upto Rs.25 lakh Upto Rs.10 lakh

Small Above Rs.25 lakh & upto

Rs.1 crore

Not defined

Medium Not defined Not defined

While calculating the investment in plant and machinery/equipment referred

to above, the original price thereof shall be taken into account, irrespective

of whether the plant and machinery/equipment are new or second hand. In

case of imported machinery/equipment, the following duty/charges/costs

shall be included in calculating their value:

Import Duty (not to include miscellaneous expenses such as

transportation from the port to the site of the factory, demurrage paid

at the port);


Shipping Charges;

Customs Clearance charges; and Sales Tax or Value-added Tax. Cost

of the following plant & machinery/equipments etc would be

excluded:;

Equipments such as tools, jigs, dies, moulds, and spare parts for

maintenance and the cost of consumable stores;

Installation of plant &machinery;

Research and development and pollution control equipments;

Power generation set and extra transformer installed by the enterprises

as per the Regulations of the State Electricity Board;

Bank charges and Service Charges paid to the National Small

Industries Corporation or the State Small Industries Corporation;

Procurement or Installation of cables, wiring bus bars, electrical

control panels (not mounted on individual machines)

Oil circuit breakers or miniature circuit breakers which are necessarily

to be used for providing electrical power to the plant and machinery or

for safety measures;

Gas producer plants;

Transportation charges (other than sales tax or value-added tax and

excise duty) for indigenous machinery from the place of their

manufacture to the site of the enterprise);

Charges paid for technical know-how for erection of plant machinery;

Such storage tanks which store raw materials and finished products

only and are not linked with the manufacturing process;

Fire-fighting equipment; and


Such other items as may be specified, by notification from time to

time.

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

and other items not directly related to the services rendered. Land and

Building would also not be included while computing the

machinery/equipments cost.

SME would be meant to include Micro Small and Medium Enterprises

(MSMEs). The above definitions of Micro, Small and Medium Enterprises

would be in place of the existing definitions of Small & Medium Industries

and SSSBEs/Tiny Enterprises.

Micro Enterprises would include Tiny Industries also.

Small Enterprises (Manufacturing) would mean Small Scale

Industries (SSIs).

Medium Enterprises (Manufacturing) would mean Medium Industries

(MIs).

Small Enterprises (Services) and Medium Enterprises (Services)

would mean other Small & Medium Enterprises. Thus, SME

Advances would be categorised as under:

All advances to segments viz. Micro, Small and Medium Enterprises

in the Manufacturing sector irrespective of sanctioned limits,

(including advances against TDRs/Govt. Securities etc for business

purposes to these categories of Borrowers), and

Advances to Services Sectors such as Professional & Self-Employed,

Small Business Enterprises, and Small Road/Water Transport

Operators and other enterprises, engaged in providing/rendering of

services, conforming to the above investment criteria and enjoying


borrowing/non-borrowing facilities with the Bank (including advances

against TDRs/Govt. Securities etc for business purposes to these

categories of Borrowers).

Those enterprises exceeding the investment ceilings would be

categorized as Large Enterprises and be outside the purview of SME.

The sanctioned limits would no longer be the criteria determining the

status as micro or small or medium enterprises in these cases.

Reserve Bank of India has since reviewed the definition on Priority

Sector and have issued revised guidelines on lending to Priority Sector

vide their Master Circular dated 2nd July, 2007. As per this circular

Retail Trade is excluded from the activities classified as SME.

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

2009)

Development of SMEs In India

Making the best use of the material resources by employing higher order of

skill and artistic talents through traditional handicrafts, India has

occupied a permanent place of pride in the world before industrial

resolution. However, the advent of modern large scale mechanized

industry, the imposition of restrictions on Indian trade by the British rulers

and deteriorating socio-economic conditions lead to the decline of

Small Scale Industry. But with the provisions of permanent place in the

nation's policy of economic development after the attainment of the


http://www.bankofindia.com/smepol.aspx

Independence, it has staged a grand recovery and is now well entrenched

on the path of progress towards great expansion.

SME has emerged into prominent sector in Indian economy in general and

industry in particular. SSI sector in India has posted impressive growth in

1990's from 15% in 1991-92 to 55% in 2001-02.The growth in

employment generation has been equally impressive from 3% to 45%

during the same period. Employment in SME touched 19 million, just

behind agriculture. Share of SSI exports crosses 40% of total exports.

Growth by itself in SME sector is impressive enough indicating a

positive response to the Economic Reform process initiated in the country

since 1991.

--- Development of infrastructure

--- Assured supply of Raw Materials

--- Availability of Cheap Credit

--- Concessionary Taxes and Tariffs.

--- Financial subsidies

--- Equity contributions are all the protective measures for the sector

Table 1.3

Progress Of SMEs In India

Year Total SME Units

(Lakhs)

Fixed Investment (Rs

Crores)

1990-91 67.87 93555

1991-92 70.63 100351

1992-93 73.51 109623


1993-94 76.49 115795

1994-95 79.60 123790

1995-96 82.84 125750

1996-97 86.21 130560

1997-98 89.71 133242

1998-99 93.36 135482

1999-00 97.15 139982

2000-01 101.1 146845

2001-02 105.21 154349

2002-03 109.49 162317

2003-04 113.95 170219

2004-05 118.59 178699

2005-06 123.42 188113

(http://www.smechamberofindia.com/rol_of_sme_sector.aspx last accessed

on 27 Nov, 2009)

Small and Medium Enterprises - Industrial policy:

The small and Medium industries have a specific role to play by the

Industrial policy 1948 which stated that cottage and small scale

industries are particularly suited for better utilization of local resources

and for the achievement of local self-sufficiency in respect of certain

type of essential goods. A Small and Medium Industries Board was

constituted in 1954 and a number of helping schemes such as supply of

machinery on hire purchase, liberal and wider grants.

The Government announced its second Industrial policy in 1956 which

replaced the Industrial policy resolution of 1948.While such measures


http://www.smechamberofindia.com/rol_of_sme_sector.aspx

continue to be taken wherever necessary, the aim of the state policy is to

ensure that the decentralized sector acquires sufficient vitality to be

self supporting and its development is integrated with that of large

scale industry. Besides, the Government intended to strengthen the existing

arrangements to finance small scale units and make changes if necessary to

ease the credit problems of the sector. The system of reservation of

items for exclusive production by small scale units would continue in future.

The Industrial policy statement of 1985 was also accorded importance to

small scale sector and made some suitable policy changes. The definition of

small scale unit was revised to include all manufacturing units having

investment in Plant and Machinery unto Rs.35 Lakhs. In case of

ancillary units, the investment ceiling was Rs.45 Lakhs.

In the policy statements of 1991, the state followed a policy of

supporting small enterprises in the country. Small and Medium enterprises

account for 55% of industrial production, 40% of exports and above 88% of

manufacturing employment. Hence, this sector is considered as dynamic

and vibrant sector of the country. The relative importance tends

to vary inversely with the level of development and their contribution.

Small and Medium enterprises have emerged as the leaders in the industrial

sector. In recognition of their significance and stature, the then government

announced policy measures on August 6, 1991 for the first time in the post

independence period. This was to promote and strengthen small, tiny and

village enterprises. This is almost a U-turn in policy stimulants and

structure of micro and small enterprises in the country.


Problems of SMEs

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

does not get the required support from the concerned Government

Departments, Banking Sector, Financial Institutions and Corporate Sector,

which is a handicap in becoming more competitive in the National and

International Markets and which needs to be taken up for immediate and

proper redressal. SME sector faces a number of problems - absence of

adequate and timely banking finance, limited knowledge and non-

availability of suitable technology, low production capacity, follow up with

various agencies in solving regular activities and lack of interaction with

government agencies on various matters.

Some of the major problems are briefly as follows:

a)Financial problems of SMEs:

The financial problem of SMEs is the Root Cause for all the other

problems faced by the SME sector. The small and medium industrialists are

generally poor and there are no facilities for cheap credit. They fall into the

clutches of money lender who charges very high rates of interest, or else

they borrow from the dealers of their goods, who exploit them by

completing them to sell their products at very low price. After the


nationalization of 14 major Indian Banks in July, 1969, the Commercial

banks were providing only a small proportion of SMEs financial

requirements. Credit to the SME sector continues to be non-commensurate

with its contribution to the total industrial output. As against the share of

the village and SME at 40% in the industrial output, its share in total credit

to the industrial sector is only about 30%.

b) Raw Material problem of SMEs:

This difficulty is experienced in a very pronounced form. The quantity,

quality and regularity of the supply of raw materials are not

satisfactory. There are no quantity discounts, since they are

purchased in small quantities and hence charged, higher prices by

suppliers. Difficulty is also experienced in procuring semi-manufactured

materials. Financial weakness stands in the way of securing raw materials in

bulk in a competitive market.

c) Production problem of SMEs:

SME units suffer from inadequate work space, power, lighting and

ventilation, and safety measures etc. These short comings have tended to

endanger the health of workmen and have adversely affected the rate of

production. Many units are following primitive methods of

production. Adoption of modern techniques is either disliked by the

entrepreneurs is not feasible. Wage rates and service conditions of

small industries are not attractive to skilled labor.


d) Technological problem of SMEs:

Today technology is changing at a very fast phase; it becomes difficult for

SMEs to cope up with changing technology. Technology up gradation and

the frequent need to renew the equipment has emerged as a big problem.

d) Marketing problem of SMEs: As marketing is not properly

organized, the helpless artisans are completely at the mercy of middle

man. The potential demand for their goods remains under developed. The

SMEs have to face the competitions from large scale units in marketing their

products. It causes damage to the growth and stability of SMEs. SMEs

cannot afford to spend lavishly for advertisement to promote their sales.

e) Managerial problem of SMEs:

Small scale industries in our country have suffered from the lack of

entrepreneurial ability to develop initiative and undertake risks in

the unexplored industrial fields. The in efficiency in management

comes first among managerial problems. The entrepreneurial ability

of promoters of cottage industries and SMEs are handicapped by technical

know how in the areas of production, finance, accounting and marketing

management.

f) Sickness of SMEs:


A serious problem which is hampering small and medium sector has been

sickness. Many small units have fallen sick due to one problem or the

other. Sickness is caused by two sets of factors, Internal and external factors.

From among the various internal and external causes of sickness

the important ones are bud management, high rate of capital

gearing, inadequacy of finance, short of raw materials, outdated plant and

machinery, low labor productivity etc.

The above figure shows that finance has been the major reason for the

sickness of SME units. The other major reasons are ineffective management

and technology upgradation according to the latest technological changes.

SME Financing

SME Finance is the funding of small and medium sized enterprises and

represents a major function of the general business finance market – in

which capital for firms of types is supplied, acquired, and costed/priced.

Capital is supplied through the business finance market in the form of bank

loans and overdrafts; leasing and hire-purchase arrangements;

equity/corporate bond issues; venture capital or private equity; and asset-

based finance such as factoring and invoice discounting

Importance The economic and social importance of the small and medium

enterprise (SME) sector is well recognized in academic and policy literature.

It is also recognized that these actors in the economy may be underserved,

especially in terms of finance. This has led to significant debate on the best

methods to serve this sector. There have been numerous schemes and


http://en.wikipedia.org/wiki/Significant

http://en.wikipedia.org/wiki/Small_and_medium_enterprise

http://en.wikipedia.org/wiki/Small_and_medium_enterprise

http://en.wikipedia.org/wiki/Private_equity

programmes in markedly different economic environments. However, there

are a number of distinctive recurring approaches to SME finance.

Collateral based lending offered by traditional banks and finance

companies is usually made up of a combination of asset-based finance,

contribution based finance, and factoring based finance, using reliable

debtors or contracts.

Information based lending usually incorporates financial statement

lending, credit scoring, and relationship lending.

Viability based financing is especially associated with venture capital.

There is also a more favorable environment now with the Govt. committed

to give fillip to this sector through infrastructure development; skill set

development/entrepreneurship development, technology up gradation etc.

With the deregulation of the financial sector, the general ability of the banks

to service the credit requirements of the SME sector depends on the

underlying transaction costs, efficient recovery processes and available

security. There is an immediate need for the banks generally to focus on

credit and finance requirements of SMEs. Although the banks are allowed to

fix their own targets for funding SMEs in order to achieve a minimum 20%

year-on-year growth, the Government’s objective is to double the flow of

credit to the SME sector from Rs.67,600 crore in 2004-05 to Rs.1,35,200

crore by 2009-10 i.e. within a period of 5 years. Also, Credit risk in the SME

sector is widely dispersed and Banks get better yield from SME advances as

against the traditional advances where the spread is getting gradually

reduced. The SME clientele base could also be utilized by the Branches to


http://en.wikipedia.org/wiki/Venture_capitalists

http://en.wikipedia.org/wiki/Credit_score

http://en.wikipedia.org/wiki/Factoring_(finance)

http://en.wikipedia.org/wiki/Asset-based_lending

http://en.wikipedia.org/wiki/Collateral

http://en.wikipedia.org/wiki/Finance

http://en.wikipedia.org/wiki/Economic

step-up “cross selling” of various other products including technology-

enabled products.

SME Financing Gap

A substantial portion of the SME sector may not have the security required

for conventional collateral based bank lending, nor high enough returns to

attract formal venture capitalists and other risk investors. In addition,

markets may be characterized by deficient information (limiting the

effectiveness of financial statement-based lending and credit scoring). This

has led to claims of an "SME finance gap”. The SMEs that fall into this

category have been defined as Small Growing Businesses (SGBs) at a

workshop in Geneva in July 2008, hosted by The Network for Governance;

Entrepreneurship & Development (GE&D) There have been at least two

distinctive approaches to try to overcome the so-called SME finance gap.

The first has been to broaden the collateral based approach by encouraging

bank lenders to finance SMEs with insufficient collateral. This might be

done through an external party providing the collateral or guarantees

required. Unfortunately, to the extent that the schemes concerned run

counter to basic free market principles they tend to be unsustainable. Thus,

the second approach has been to broaden the viability based approach. Since

the viability based approach is concerned with the business itself, the aim

has been to provide better general business development assistance to reduce

risk and increase returns.

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


http://en.wikipedia.org/wiki/SME_finance

http://en.wikipedia.org/wiki/Free_market

Sources of SME Finance: The most common sources of SME finance are

as follows

Problems of SMEs Financing

The main problem faced by SME’s when trying to obtain funding is that of

uncertainty:

• SME’s rarely have a long history or successful track record that potential

investors can rely on in making an investment;

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

required to prepare and publish much more detailed financial information –

which can actually assist the finance-raising process;

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

that they represent a greater credit risk.

Because the information is not available in other ways, SME’s will have to

provide it when they seek finance. They will need to give a business plan,

list of the company assets, details of the experience of directors and

managers and demonstrate how they can give providers of finance some

security for amounts provided. Prospective lenders – usually banks – will

then make a decision based on the information provided. The terms of the

loan (interest rate, term, security, and repayment details) will depend on the

risk involved and the lender will also want to monitor their investment. A

common problem is often that the banks will be unwilling to increase loan

funding without an increase in the security given (which the SME owners

may be unable or unwilling to provide).A particular problem of uncertainty


relates to businesses with a low asset base. These are companies without

substantial tangible assets which can be use to provide security for lenders.

When an SME is not growing significantly, financing may not be a major

problem. However, the financing problem becomes very important when a

company is growing rapidly, for example when contemplating investment in

capital equipment or an acquisition. Few growing companies are able to

finance their expansion plans from cash flow alone. They will therefore need

to consider raising finance from other external sources. In addition,

managers who are looking to buy-in to a business ("management buy-in" or

"MBI") or buy-out (management buy-out" or "MBO") a business from its

owners may not have the resources to acquire the company. They will need

to raise finance to achieve their objectives

1.2 ROLE OF PUBLIC SECTOR BANKS IN SME FINANCING

Banks are playing a major role in financing SMEs in India. Nearly 82% of

the total SME financing in year 2006-07 is through banks. And among them

the major share is of public sector banks i.e. 57%. Thus it is clear that the

most common source of finance for SMEs is Bank Financing. There is no. of

banks that help in assisting the SMEs for financing. The main channel used

by the SMEs via Banks is Specialized loans by various Banks. The

Main reason for choosing bank loans by SMEs compared to other sources of

financing like venture capital, PE funding etc is that is only interest to be

paid no stake is to be diluted thus the whole command of the SME is with

the owner only. There are a number of Private as well as Public sector banks

who assist SME in Financing

Figure 1.4


Sources Of SME Finance (2006-07)

Public sector banks57%

Private sector abnks25%

Others18%

(http://www.businessworld.in/bw/

2009_11_19_Reforms_To_Improve_Credit_Access_To_SMEs.html last

accessed on 5 Jan, 2010)

The role of Banks, in general, has become very important in the above

context The SME sector’s demands were comprehensively taken care of by

the Public sector Banks through several initiatives such as:

Single Window dispensation,

Quick decision with least Turnaround Time through specially

constituted SME Cells, and above all,

Better service.

Cluster-based Schemes are also on the list of the Bank’s initiatives.

The Bank prioritized the following more particularly:-

Provision of timely and adequate credit to the SMEs,

Encouraging Technology Up gradation, for better quality and

competitiveness of their product(s), and


http://www.businessworld.in/bw/2009_11_19_Reforms_To_Improve_Credit_Access_To_SMEs.html

http://www.businessworld.in/bw/2009_11_19_Reforms_To_Improve_Credit_Access_To_SMEs.html

Proactively detecting sick and viable units in time so as to nurse them

back to health through appropriate re-structuring.

Financing of Clusters with adequate and concessional Bank finance

on liberal terms in several pockets for specified activities concentrated

in these pockets, which would result in reducing transaction cost and

greater economies of scale.

Credit to SME sector from Public Sector Banks

The table below gives the status of credit flow to the micro and small

enterprises

(SME) sector from the public sector banks since 2000:

Table 1.5

Credit to SME sector from Public Sector Banks

Year Net Bank

Credit

Credit to SMEs % of NBC

2000 316427 46045 14.6%

2001 341291 48400 14.2

2002 396954 49743 12.5

2003 477899 52988 11.1

2004 558849 58278 10.4

2005 718772 67634 9.4

2006 1017614 82492 8.1

2007 1317705 104703 8.0

(http://www.rbi.org.in/scripts/PublicationsView.aspx?id=11993 last

accessed on 11 Jan, 2010)27

NIIKHILVIRMANI16719201711

http://www.rbi.org.in/scripts/PublicationsView.aspx?id=11993

Figure 1.5

Steps For SME Loans By Public Sector Banks

The above figure shows the steps for availing finance through Public

sector Banks using loans. Here is the brief description of the above shown

procedure:

First of all the SME who wants to avail loan has to visit the local

branch office of the bank of their area, where by the loan application

is been filled by the SME.

After that the executives of that branch check whether all the

necessary documents are provided by the SME or not, then if all

necessary documents are submitted the next step comes whereby the


Application for loan by SME to local branch of a particular bank in that area

. Inspection/Survey of SME by the Executives of that Local branch.

Sending the Documents of survey by Local branch to SMECC branch

Preparing credentials of Promoters and firm by SMECC branch and investigating the same

Estimating the amount of loan to be sanctioned and forwarding thedocuments for sanctioning.

If the loan is been sanctioned by the central authority thendisbursement of the loan amount into account of the SME.

officials of that local branch go to the premises of that SME and

just have a brief survey of promoter as well as the premises.

After they are satisfied they send the file of necessary

documents to the SMECC branch, which is a special branch for

SME loans. Where by the credit appraisal takes place, which

consist of credit appraisal of promoter, financial appraisal,

determining cost of project, understanding various means of finance

used, profitability estimate, cash flow projections , marketing

appraisal etc., which is explained in next section. This step brings

out the clear picture whether the loan should be given to the SME or

not?

If the SMECC branch is satisfied with the details then it forward the

request of granting loan to the sanctioning authority.

And finally after the verification by sanctioning authority, the

disbursement of loan amount takes place in the account of that SME

This whole procedure right from application to disbursement of

loan amount takes approximately 20-25 days as the procedure

involves analysis of documents by various branches and thus the

movement of documents amongst them, if all this procedure would

have taken place at single place then it would take only 10-12 days

for disbursement.

Some Public sector Banks offering SME financing schemes are as follows:

1) State bank of India and its subsidiaries 7) Central Bank of

India


http://finance.indiamart.com/investment_in_india/central_bank_india.html

http://finance.indiamart.com/investment_in_india/central_bank_india.html

2) Allahabad Bank 8) Punjab National

Bank

3) Oriental Bank of Commerce 9) IDBI Bank

4) Bank of Baroda 10) Indian Bank

5) Bank of India 11) Canada Bank

6) Punjab & Sind Bank 12) Corporation

Bank

State Bank of India

State Bank of India has been playing a vital role in the development of small

scale industries since 1956.The Bank has financed over 8 lakhs SSI units in

the country. It has 55 specialized SSI branches, 99 branches in industrial

estates and more than 400 branches with SIB divisions. The Bank finances

for Small Business activities which are of special significance to a large

number of people as many of these activities can be started with relatively

lower investment and with no special skills on the part of the entrepreneurs.

The following are the SME products offered by State Bank Of India:

Commodity Packed Warehouse Receipt Financing

Surabhi Deposit Scheme

Traders Easy Loan Scheme

SSI Loans

Business Current Accounts

Open Term Loan


http://finance.indiamart.com/investment_in_india/corporation_bank.html

http://finance.indiamart.com/investment_in_india/corporation_bank.html

http://finance.indiamart.com/investment_in_india/canara_bank.html

http://finance.indiamart.com/investment_in_india/bank_of_india.html

http://finance.indiamart.com/investment_in_india/bank_of_baroda.html

http://finance.indiamart.com/investment_in_india/allahabad_bank.html

Retail Trade

Doctor Plus

SBI Shoppe

Cyber Plus

SME Credit Plus

Small Business Credit Card

SME Petro Credit

Dal Mill Plus

Paryatan Plus

Auto Loans

Transport Operators

Rice Mills Plus

School Plus

(http://www.sbi.co.in/user.htm last accessed on 27 Nov, 2009)

IDBI Bank

IDBI Bank has been actively engaged in providing a major thrust to

financing of SMEs. With a view to improving the credit delivery mechanism

and shorten the Turn around Time (TAT), IDBI Bank has developed a

special business model to serve the SMEs in India. The Bank has set up 24

City SME Centres (CSCs) across India in Mumbai, Delhi, Kolkata, Chennai,

Bangalore, Hyderabad, Pune to name a few. These CSCs are the Bank's hubs

while dedicated SME desks have been set up in several branches across

these cities. These branches serve as front offices for sales delivery and

customer service.

IDBI Bank has a wide variety of products and services catering to the needs


http://www.sbi.co.in/user.htm

of different segments within small business. Long years of experience in

being the trusted partner of large and mid corporates has translated into

deeper understanding of needs of business and industries. The Bank has

parameterised products for transporters, dealers, traders, and vendors. In

addition, it has a separate Transaction Banking Group that has expertise in

products like cash management services, letter of credit, bank guarantees

and treasury products”

IDBI Bank provides following SME products:

Sulabh Vyapar Loan

Dealer Finance

Funding Under CGFMSE

Direct Credit Scheme-SIDBI

Preferred Customer Scheme

Vendor Financing Programme

Lending against the security of future Credit Card Receivables

Working Capital Financing

Finance to Medical Practitioners

Loans to SRWOTs

SME Hosiery Special Current Account

(http://www.idbi.com/sme/ last accessed on 27 Nov, 2009)

Bank of Baroda

Bank of Baroda started its operation in the year 1908 in Baroda though its

Corporate Centre is in Mumbai now. Its mission is "to be a top ranking

National Bank of International Standards committed to augment stake


http://www.idbi.com/sme/

holders' value through concern, care and competence”. Bank of Baroda

offers following SME products and services:

Baroda Vidyasthali Loan

Baroda Arogyadham Loan

Baroda Laghu Udhyami Credit Card

Baroda Artisans Credit Card

Technology Upgradation scheme

SME short term loans

SME medium term loans

Composite Loans

(http://www.bankofbaroda.com/bbs/sme.asp last accessed on 26 Nov, 2009)

Union Bank of India

Union Bank is committed to extend its best services to Micro, Small and

Medium enterprises and at a very competitive price. Union Bank of India

has adopted a policy package for stepping up credit to Small & Medium

Enterprises.

Union Bank of India has adopted a policy package for stepping up credit to

Small & Medium Enterprises [SME] with the approval of the Board in its

meeting held on 30th September 2005 and subsequently following steps

have been initiated in this direction.

Union High Pride

Union Procure

Union Supply

Union Cyber

Union SME Plus

Union Transport33


http://unionbankofindia.co.in/union_transport.aspx

http://unionbankofindia.co.in/union_smeplus.aspx

http://unionbankofindia.co.in/union_cyber.aspx

http://unionbankofindia.co.in/cb_union_supply.aspx

http://unionbankofindia.co.in/cb_union_procure.aspx

http://unionbankofindia.co.in/cb_union_high_pride.aspx

http://www.bankofbaroda.com/bbs/sme.asp

Financing SMALL HOSIERY UNITS in Kolkata

(http://www.unionbankofindia.co.in/cb_sme.aspx last accessed on 27 Nov,

2009)

Canara Bank

Canara Bank was founded by Shri Ammembal Subba Rao Pai, a great

visionary and philanthropist, in July 1906, at Mangalore, then a small port in

Karnataka

The Bank has adopted a Policy for lending to SME sector, in tune with Govt.

of India guidelines as per MSMED Act, 2006, which has come into force

w.e.f. 2nd October, 2006.

LOAN PRODUCTS

Schemes for Capital Investment

Term loan for acquisition of fixed assets

Standby credit for capital expenditure

Standby term loan scheme for Apparel Exporters

Loan scheme for reimbursement of investment made in fixed assets by

SMEs

Soft loan scheme for Solar Water Heaters

Scheme for Energy Savings for SMEs

Technology Upgradation Fund scheme (TUFS) for textile & jute

industries in SME sector

Credit linked capital subsidy scheme (CLCSS)

Loans under Interest Subsidy Eligibility Certificate (ISEC) Scheme of

Khadi & Village Industries Commission (KVIC) to eligible

institutions34


http://www.canarabank.com/Upload/English/Content/LoanSME_KVIC_ISEC.doc



http://www.canarabank.com/Upload/English/Content/LoanSME_CLCSS.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_TUFS.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_TUFS.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_Energy_Savings_Scheme.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_Solar_Water_Heater.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_Reimbrursement_scheme.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_Reimbrursement_scheme.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_Apparel.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_Credit.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_TermLoan.doc

http://www.unionbankofindia.co.in/cb_sme.aspx

http://unionbankofindia.co.in/hosiery_units.aspx

Schemes for Working Capital

Simplified Open Cash Credit (SOCC)

Open Cash Credit (OCC)

Micro financing joint liability groups (Handloom weaver & Agarbathi

manufacturer groups)

Laghu Udhyami Credit Card (LUCC)

Bill of Exchange discounting facility to Small Enterpreneurs at

concessional rate of interest (BE-SE)

SCOPE AND OBJECTIVES OF THE STUDY

3.1 Need of the study

The researches that were conducted in past by the various professionals are

in foreign context and not in Indian context. Study relating to SMEs, their


http://www.canarabank.com/Upload/English/Content/LoanSME_BE_SE.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_BE_SE.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_LUCC.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_Micro_Financing.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_Micro_Financing.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_OCC.doc

http://www.canarabank.com/Upload/English/Content/LoanSME_SOCC.doc

problems and source of financing has been done but regarding the SME

financing schemes of public sector banks has not been done. This gap has

been identified and it has led to the present research to be undertaken. So,

the need was felt to cover the areas neglected. Thus, here a study on SME

financing schemes of public sector banks was taken care of.

3.2 Scope of the study

The scope of this study was limited to Ludhiana city only.

3.3Objectives of the study

Objectives are the guiding lights of a study. The present study was

undertaken to achieve the following objectives: -

To know about the various SME financing schemes of public sector

banks and their usage.

To know the effectiveness of various SME financing schemes of

public sector banks.

To know the problems faced by SMEs in getting credit from public

sector banks.

To know the benefits of SME financing schemes of the public sector

banks.

To check the satisfaction level of Small and Medium enterprises

regarding SME financing schemes of the public sector banks.



METHODOLOGY

Research Methodology is a way to systematically solve the research

problem. The Research Methodology includes the various methods

and techniques for conducting a Research. “Marketing Research is

the systematic design, collection, analysis and reporting of data and

finding relevant solution to a specific marketing situation or problem”.

D. Slesinger and M.Stephenson in the encyclopedia of Social

Sciences define Research as “the manipulation of things, concepts or

symbols for the purpose of generalizing to extend, correct or verify

knowledge, whether that knowledge aids in construction of theory or

in the practice of an art”.

Research is, thus, an original contribution to the existing stock of

knowledge making for its advancement. The purpose of Research is to

discover answers to the Questions through the application of scientific

procedures. Our project has a specified framework for collecting data in an

effective manner. Such framework is called “Research Design”. The

research process followed by us consists of following steps:

4.1 RESEARCH DESIGN

This research was descriptive and conclusion oriented research.

Conclusion Oriented Research: -Research designed to assist the

decision maker in the situation. In other words it is a research when

we give our own views about the research.


Descriptive Research: -A type of conclusive research, which has as

its major objective the description of something-usually market

characteristics or functions. In other words descriptive research is a

research where in researcher has no control over variable. It just

presents the picture, which has already studied.

4.2 SAMPLING DESIGN

Sampling can be defined as the section of some part of an aggregate or

totality on the basis of which judgment or an inference about aggregate or

totality is made. The sampling design helps in decision making in the

following areas: -

4.2.1 Universe of the study-The universe comprises of two parts as

theoretical universe and accessible universe

Theoretical universe- It includes all the SMEs throughout the

universe.

Accessible universe- It includes the SMEs in Ludhiana city.

4.2.2 Sample Frame-Sample frame was Small and Medium enterprises all

over India.

4.2.3 Sample Unit- Sampling unit is the basic unit containing the elements

of the universe to be sampled. The sampling unit of the present study was

SMEs located in Ludhiana city in Punjab.


4.2.4 Sample Size- Sample size is the number of elements to be included in

a study. Keeping in mind all the constraints 100 respondents were selected.

4.2.5 Sampling Techniques- The sampling techniques used were

convenience technique and simple random sampling technique.

4.3 DATA COLLECTION AND ANALYSIS

4.3.1 Data Collection: Information has been collected from both Primary

and Secondary sources of data collection.

Secondary sources- Secondary data are those, which have already

been collected by someone else, which already had been passed

through the statistical process. Secondary data had been collected

through websites, newspapers and journals.

Primary sources- Primary data are those, which are collected are

fresh and for the first time and thus happen to be original in character.

Primary data had been collected by conducting surveys through

questionnaire, which include several questions and personal and

telephonic interview.

b) Tools of Analysis and Presentation:

To analyze the data obtained with the help of questionnaire, following tools

were used:

Tools of Analysis: -

Summated Score: This tool was used for the analysis of questions

based on Likert scale.


Weighted Average Score: This tool was used to calculate highest and

lowest rank.

Tools of Presentation: -

Tables: This tool was used to present the data in tabular form.

Bar Graphs and Pie Charts: These tools were used for analysis

of data.


ANALYSIS AND INTERPETATION

1. Demographic Profile of Respondents.

Table 5.1

Demographic Features

Demographics No. Of Respondents

%Age Of Respondents

DesignationOwner 73 73Partner 19 19Other 6 6Total 100 100LocationLudhiana 100 100Other 0 0Total 100 100GenderMale 95 95Female 5 5Total 100 100BusinessHosiery 100 100Other 0 0Total 100 100

Analysis and Interpretation:

It had been analyzed from the table that 73% of the respondents were the

owner, 19% were co-partners and 6% were at some other designation.100%

of the respondents were from the Ludhiana city. 95% of the respondents

were male and only 5% were female. All the respondents i.e. 100% were

from the hosiery business.


So it had been interpreted that maximum of the respondents were male,

owner of the business and from Ludhiana city. All the respondents were

from hosiery business.

2. What are the sources of finance used by your enterprise?

Table 5.2

To Know The Sources Of Finance Used By SMEs

Sources of Finance No. Of Respondents %Age Of RespondentsOwners Financing 80 29Private financial institutions

46 16

Equity finance 12 4Bank financing 75 27Venture capital 14 5Hire purchase and leasing

24 9

Business angel financing

29 10

Total 280 100

Figure 5.1

To Know The Sources Of Finance Used By SMEs


No. Of Respondents

29%

16%

4%

27%

5%

9%

10%

Owners Financing

Private financialinstitutions

Equity finance

Bank financing

Venture capital

Hire purchase andleasing

Business angelfinancing

Analysis and Interpretation:-

The number of respondents had increased from 100 to 280, as this is a

multiple-choice question. From the survey it was found that respondents use

multiple sources for financing their enterprises. The figure shows that 29%

respondents rely on their own funds for financing SMEs.28% respondents

use bank financing and 16% take credit from private financial institutions.

Equity finance and venture capital are the least used.


3. Rank the obstacles that are faced by your enterprise in its growth from 1 to 5; 1 being the biggest obstacle.

Table 5.3

Obstacles In The Growth Of Enterprise


Obstacles Rank1

Rank2

Rank3

Rank4

Rank5

Weighted

Average Score

The frequent need to renew the equipment

12 19 28 24 17 315

Instability of demand for product or service

7 16 16 28 33 364

Obtaining adequate financing

40 27 17 8 8 217

Low profitability of the sector

11 12 21 29 27 349

Taxation levels 30 26 18 11 15 255

Analysis and Interpretation: -

In this above table weighted average score method is used where 1 rank is

given to the biggest obstacle in the growth and 5 is the least important rank.

As in the above table various obstacles faced by the enterprises in their

growth are being ranked. The obstacle of obtaining adequate finance is

ranked first with summated score of 217. Second rank is given to the

taxation levels charged by the government and third rank to the frequent

need to renew the equipment. The Fourth rank is given to the low

profitability of the sector and fifth to the instability of demand of product or

service.

From the above table it can be concluded that obtaining adequate finance is

the biggest obstacle faced by SMEs in their growth followed by burden of

heavy taxes on them. Easy financing schemes should be provided. Rates of

taxes should also be decreased; it will help in the growth of SMEs in India.46


4. Have you ever raised finance from public sector banks?

Table 5.4

To Know Whether SMEs Raise Finance From Public sector Banks

Raised Finance No. Of Respondents %Age Of RespondentsYes 100 100No 0 0Total 100 100

Figure 5.2

To Know Whether SMEs Raise Finance From Public sector Banks

No. Of Respondents

100%

0%

Yes

No



The above figure shows that 100% of the respondents have raised finance

from the public sector banks .This shows that public sector banks are the

most popular source of SME financing. The reason is low rates of interest

which gives them capital at low cost. The service fees and bank charges are

also less which results in low cost of financing than the other sources.

5. What type of loan is taken by you?

Table 5.5

Type Of Loan

Type of Loan No. Of Respondents %Age Of Respondents

Sulabh Vyapar loan 67 28Transport loan 25 10Paryatan plus loan 56 23Open term loan 38 16Working capital loan 54 23Total 240 100

Figure 5.3

Type Of Loan


No. Of Respondents

28%

10%

23%

16%

23%

Sulabh Vyapar loan

Transport loan

Paryatan plus loan

Open term loan

Working capital loan

Analysis and Interpretation:

The number of respondents has increased from 100 to 280, as this is a

multiple-choice question The above graph shows that 28% of the

respondents have taken Sulabh Vyapar loan.23% of the respondents have

taken Paryatan plus and working capital loan. So Sulabh Vyapar loan is the

most popular scheme of public sector banks for financing SMEs.

6. For what purpose, your enterprise has taken loan?

Table 5.6

Purpose Of Taking Loan


No. Of Respondents %Age Of Respondents

Real estate acquisition to house the business

40 15

To increase the 63 2449


productionConstruction, renovation or leasehold improvements

33 12

For the flooring of inventory and for working capital

71 27

For modernization and upgradation of technology

58 22

Total 265 100

Figure 5.4


No. Of Respondents

15%

24%

12%

27%

22%

Real estateacquisition to house thebusiness

To increase theproduction

Construction, renovationor leaseholdimprovements

For the flooring ofinventory and for workingcapital

For modernization and upgradation oftechnology



multiple-choice question.27% of respondents have taken loan for the

flooring of inventory and working capital and 24% to increase the size of

production. Most of the firms are taking loans for fulfilling their frequent

needs for the capital. For technological upgradation and modernization, 22%


of the respondents have taken loan showing that SMEs require capital to

upgrade their technologies which is changing at a very fast phase.

7. Rank the benefits of these schemes on the scale of 1-5; 1 being the most important and 5 being the least important.

Table 5.7

Benefits Of SME Financing Schemes

Benefits Rank1

Rank2

Rank3

Rank4

Rank5

Weighted Average

ScoreBetter Service 8 12 12 30 38 378Single Window Dispensation

8 12 22 30 28 358

Attractive financing conditions

40 28 20 4 8 212

Easy access 4 12 32 30 22 354Low rates of Interest 40 36 14 6 4 198

Analysis and Interpretation: -

In this above table weighted average score method was used where 1 rank is

the most important rank and 5 is the least important rank.

As in the above table various benefits of SME financing schemes were being

ranked. The benefit ranked first with summated score of 198 was low rates

of interest. This shows that public sector banks financing schemes provide

finance at cheap rates. Second rank is with summated score of 212 was

given to the attractive financing conditions of these schemes. The schemes

are designed in such a way that makes financing easier for SMEs.


The third rank was given to easy access. The fourth rank was given to Single

window dispensation and fifth to Better service, being least preferred by the

respondents. This shows that respondents were not satisfied by the service

provided by these banks.

From the above table it can be concluded that Low rates of interest was most

preferred of all other benefits. Attractive financing conditions and easy

access were next in the preference order. Single window dispensation was

the next preferred benefit. Better service was the least preferred benefit by

the respondents.

8. What were the problems faced by your enterprise in raising finance from public sector banks?

Table 5.8

Problems Faced By SMEs In Raising Finance

Problems Faced No. Of Respondents %Age Of Respondents

Insufficient collateral 68 22Poor documentation 39 13Delay in the sanction of loan 80 26Cost involved is high 25 8Biasness 76 25High rate of interest 20 6Total 308 100

Figure 5.5

Problems Faced By SMEs In Raising Finance


No. Of Respondents

22%

13%

26%

8%

25%

6%

Insufficient collateral

Poor documentation

Delay in the sanction ofloan

Cost involved is high

Biasness

High rate of interest



multiple-choice question. The most common problem faced by SMEs in

raising finance is the delay made in sanctioning the loan with 26%.The

public sector bank employees work very slowly and usually an application

takes a lot of time for approval.25% respondents say biasness was one

another problem faced by them.22% respondents find the inability to provide

sufficient collateral as a problem.

9. What are the most common reasons given to your enterprise by the public sector bank for rejecting an application for Loan?

Table 5.9

Reasons For Rejecting An Application For Loan

Reasons No.Of Respondents

%Age Of Respondents

The management team is too 28 11


inexperienced The application did not meet the criteria 43 17The application was not correctly completed

24 9

Poor credit history 48 19The enterprise could not provide enough guarantees

60 23

Not a profitable venture 54 21Total 257 100

Figure 5.6

Reasons For Rejecting An Application For Loan

No.Of Respondents

11%

17%

9%

19%

23%

21%

The management team istoo inexperienced

The application did notmeet the criteria

The application was notcorrectly completed

Poor credit history

The enterprise could notprovide enoughguarantees Not a profitable venture



multiple-choice question. The above figure shows that 23% respondents says

that the most common reason given by the banks for rejecting an application

is that they could not provide enough guarantees.21 % says that banks reject

an application because they believe that it is not a profitable venture.19%


says an application got rejected because of poor credit history as banks lie on

the past performance of enterprises before granting any loan.

10. What factors demotivate you in applying for finance from these schemes of public sector banks?

Table 5.10

Factors that Demotivate In Applying for Finance

Factors that Demotivate No. Of Respondents

%Age Of Respondents

We were turned down before 40 24Procedure to obtain this type of financing is too complicated

25 15

The process is lengthy 62 38Too much of documentation is required 38 23Total 165 100

Figure 5.7

Factors that Demotivate In Applying for Finance

No. Of Respondents

24%

15%

38%

23%

We were turned downbefore

Procedure to obtain thistype of financing is toocomplicated

The process is lengthy

Too much ofdocumentation isrequired




multiple-choice question. The above figure shows that 38% respondents says

that the factor that demotivates them for applying for finance from these

schemes is the lengthy process involved.24% respondents says that they

were turned down before.23% respondents says that they do not apply for

loan from these schemes as too much of documentation is required.

11. Are the Private sector banks SME financing schemes are better than SME financing schemes of public sector banks?

Table 5.11

Whether Private Sector Banks Schemes Are Better Than Public Sector Banks Schemes

Private Sector Bank Schemes Are Better

No. Of Respondents %Age Of Respondents

Yes 64 64No 36 36Total 100 100

Figure5.8

Whether Private Sector Banks Schemes Are Better Than Public Sector Banks Schemes


No.Of Respondents

64%

36%Yes

No


The above figure shows that 64% of respondents think that private sector

banks schemes of financing are better than that of public sector banks

financing schemes and only 34% think that public sector banks schemes of

financing are better than that of private sector banks. The private sector

banks use latest technology and provide better service. Moreover, the time

involved for obtaining loan is also comparatively less. But private banks

charge heavy rates of interest and charge heavy service fees.

12. Please indicate your level of satisfaction with various aspects of obtaining finance from these public sector banks. Kindly rate them on 5-point scale basis; 5 being strongly satisfied and 1 being strongly dissatisfied

Table 5.12

Satisfaction Regarding Various Aspects Of Obtaining Finance From Public sector Bank Schemes


Various Aspects

StronglySatisfied

Satisfied Neutral Dissatisfied StronglyDissatisfied

SummatedScore

11.1) The amount granted by the bank relative to the amount requested

15 48 24 12 1 212

11.2) The simplicity of the application form

12 52 31 3 2 231

11.3) Interest rate

24 71 2 3 0 184

11.4) Service fees

15 48 24 12 1 236

11.5) Time to obtain approval

6 8 10 34 42 398

11.6) Guarantees required by the institution

0 16 21 36 27 374

11.7) Behavior of the bank staff

10 22 12 30 26 340

Number of respondents -100

Maximum Score - 500

Minimum Score - 100

Analysis and Interpretation: -58


As from the above table no. 5.11 comparison was done between maximum

score and Summated score. Maximum score is the score, which represents

the dissatisfaction level among the respondents. So, information related to

the level of satisfaction or least satisfaction to various factors influencing the

satisfaction level of respondents was interpreted in following manner-:

It was clear that respondents were satisfied with the ‘Rate of Interest’ as this

aspect lies between strongly agreed and agreed with summated score of 184.

So the respondents were satisfied with this aspect. The factor “amount

granted by the bank relative to the amount requested lies between agree and

neutral with summated score of 212 but was more close to satisfied. So,

respondents are satisfied with the interest rate and the amount sanctioned.

About other 2 factors ‘Simplicity of the application form’ and ‘Service fees’

were with summated score of 231 and 236 were between agreed and neutral

but are more close to agreed level. So the respondents were satisfied with

these aspects.

The other three factors ‘behavior of the bank staff’, guarantees required by

the institution and the time to obtain the approval are between the neutral

and dissatisfied. Respondents were not very satisfied with these aspects.


13. Apart from such schemes, what initiatives government can take for improving SME business in India?

Table 5.13

Initiatives For Improvement

Various Initiatives No. Of Respondents

%Age Of Respondents

Decrease the amount of taxes 35 28Support innovative technological companies

26 21

Guidance for upgrading skills & knowledge of entrepreneurs

15 12

Assistance and support for revival of sick units

29 23

Introduce a Single Window concept for helping SMEs

20 16

Total 125 100

Figure 5.9

Initiatives For Improvement


No. Of Respondents

28%

21%

12%

23%

16%

Decrease the amount oftaxes

Support innovativetechnological companies

Guidance for upgradingskills & knowledge ofentrepreneurs

Assistance and supportfor revival of sick units

Introduce a SingleWindow concept forhelping SMEs



multiple-choice question. The above graph shows that the 28% of

respondents believe that there is need for guidance for upgrading skills and

knowledge of entrepreneurs,23% respondents believe that assistance and

support should be provided for the revival of sick units as number of sick

SME units are increasing at a rapid ratew..21% of the respondents believe

government should support innovative technological companies. Moreover

government can introduce a single window concept for helping SMEs and

can provide guidance for upgrading skills and knowledge of entrepreneurs.

After undertaking the study, the following findings were made about the

usage of SME financing schemes of the public sector banks:


The respondents had used multiple sources for financing their

enterprises. Most of the respondents had relied on their own funds for

financing SMEs and bank financing. Private financial institutions

came third in the preference.

Obtaining adequate finance was the biggest obstacle faced by SMEs

in their growth followed by burden of heavy taxes on them. Easy

financing schemes should be provided. Rates of taxes should also be

decreased; it will help in the growth of SMEs in India.

Public sector banks were the most popular source of SME financing.

The reason was low rates of interest which gives them capital at low

cost. The service fees and bank charges were also less which results in

low cost of financing than the other sources.

Sulabh Vyapar loan was the most popular scheme of public sector

banks for financing SMEs followed by working capital loan.

Most of the firms were taking loans for fulfilling their frequent needs

for the capital. They took credit for the flooring of inventory and

working capital and to increase the size of production. They had taken

loans for technological upgradation also as SMEs require capital to

upgrade their technologies which is changing at a very fast phase.


The most preferred benefit of these schemes was low rates of interest

as government is charging very less rates in comparison to other

sources. These schemes offer attractive financing conditions and easy

access also.

The most common problem faced by SMEs in raising finance was the

delay made in sanctioning the loan. The public sector bank

employee’s work very slowly and usually an application takes a lot of

time for approval. Biasness and insufficient collateral were another

problems faced by them.

The most common reason given by the banks for rejecting an

application was that the enterprises could not provide enough

guarantees. Banks reject an application because they believed that it

was not a profitable venture. An application also got rejected because

of poor credit history as banks lie on the past performance of

enterprises before granting any loan.

Most of the respondents get demotivated for applying for finance from

these schemes because of the lengthy process involved and because

they were turned down before. Some of the respondents did not apply

for loan from these schemes as too much of documentation was

required. The time to obtain the approval for loan and documentation

involved demotivates the SMEs.


Most of the respondents think that private sector banks schemes of

financing were better than that of public sector banks financing

schemes .The private sector banks use latest technology and provide

better service. Moreover, the time involved for obtaining loan was

also comparatively less. But private banks charge heavy rates of

interest and charge heavy service fees.

Most of the respondents were satisfied with the interest rate charged,

amount of loan sanctioned and service fees .Respondents showed their

dissatisfaction regarding time to obtain the approval, behaviour of the

bank staff.

Most of respondents were of the opinion that there is need for

guidance for upgrading skills and knowledge of entrepreneurs, that

assistance and support should be provided for the revival of sick units

as the number of sick SME units is increasing at a rapid rate. Some of

the respondents were of the view that government should support

innovative technological companies. Moreover government can

introduce a single window concept for helping SMEs and can provide

guidance for upgrading skills and knowledge of entrepreneurs.


LIMITATIONS OF THE STUDY

Due to constraints of time and resources, the study is likely to suffer from

certain limitations. Some of these are mentioned here under so that the

findings of the study may be understood in a proper perspective.

The limitations of the study are:

The research was carried out in a short period. Therefore the sample

size and the parameters were selected accordingly so as to finish the

work within the given time frame.

The information given by the respondents might be biased as some of

them might not be interested to give correct information.

Some of the respondents could not answer the questions due to lack of

knowledge.


Some of the respondents of the survey were unwilling to share

information.

CONCLUSION AND RECOMMENDATIONS

Over a period of time, it has been proved that SMEs are dynamic, innovative

and most importantly, the employer of first resort to millions of people in the

country India has a vibrant SME sector that plays an important role in

sustaining economic growth, increasing trade, generating employment and

creating new entrepreneurship in India. But the SME sector faces a lot of

obstacles in obtaining adequate finance. Government of India has started a

number of SME financing schemes in its public sector banks .These public

sector banks are playing a major role in the development of SME sector in


India. But due to few obstacles, these schemes are not as effective as they

should be. The review of researches has showed that SME sector plays an

important role in the economic development of a country but obtaining

adequate finance has emerged as a major problem faced by SMEs. The need,

scope and objectives of the study provided the framework for further

research. The basic purpose of conducting the study was to study the usage

of SME financing schemes of the public sector banks. The data was

collected from SME units. Various tools of data analysis and interpretation

were used for carrying out the research. The major findings of the study

were that bank financing is the most popular source for financing SMEs in

India. The SME financing schemes provide credit to this sector at low rates

of interest and at attractive conditions but the procedure involved is lengthy.

Moreover, too much of documentation is required .Insufficient collateral and

biasness are also the major problems. The re-orientation program,

workshops and seminars should be organized at district level to provide

latest information to the SMEs about the various SME financing schemes of

the public sector banks. New credit products may be developed to take care

of the diverse, unexpected and short-term requirements of the SME

customers in a hassle free manner and in a short time the process followed

in sanctioning the loan and documentation required is cumbersome;

hence it is suggested to make the process easier.

After carrying on the study, the following recommendations have been

made: -


The re-orientation program, workshops and seminars should be

organized at district level to provide latest information to the SMEs

about the various SME financing schemes of the public sector banks.

Product innovations in banks have set the rule of the game “Innovate

or perish”. The same rule applies to SME segment. At present, there

is a vast gap between requirements of the SME customer and

availability of suitable/matching products and services in the public

sector banks. New credit products may be developed to take care of

the diverse, unexpected and short-term requirements of the SME

customers in a hassle free manner and in a short time.

The conventional credit appraisal systems are heavily dependent on

financial statements and miss the softer strengths inherent in the

business. Banks may adopt a balanced score card model for credit

assessment under which risk weights may be assigned to (i)

managerial, technical and commercial competence of the entrepreneur

(ii) quality of trade references from suppliers/buyers (need not be in

writing) (iii) potential of the industry, unit and person.

The appraisal system is to be made more realistic and transparent.

The applicant and if required, his consultant, should be briefed on the

objective procedures which bank applies to arrive at decisions so as to

educate them to understand the requirements of bank and to prepare

credit proposals in a scientific manner .


As 95.8% of SME customers are proprietorship type of customers, it

is essential for the banks to closely focus on the non-financial

parameters also during appraisal (i.e. ability of person behind the

show).

The process followed in sanctioning the loan and

documentation required is cumbersome; hence it is suggested to

make the process easier.

Small entrepreneurs should make feasibility studies before they

finalize their projects. They should undertake only such

projects which are technically, operationally and economically and

financially viable.

The problem that the SMEs face while acquiring funds from Public

sector Banks is that their financial systems lack transparency. Credit

Ratings can benefit both the parties. The credit ratings will give Public

sector Banks ratings an easy access to the financial information of

SMEs that highlight the unit's strength and weaknesses, making it

easy for them to take a decision while lending.

The issue of high cost of acquiring, serving and monitoring SME

customers can be resolved by offering products which reduce frequent

visit of SME customers to the branch, provide flexibility to the

borrowers as well as to the bankers and fulfill other financial needs of

the customer.


Most SME customers have to make several small payments through

cash, bankers’ cheques or drafts. Banks may capitalize on emerging

electronic payment and settlement systems such as ECS, EFT, RTGS,

etc., to offer customized and cost effective retail payment/remittance

solutions or cash management services to the SME customers.

Public Sector Banks should develop flexible systems and procedures

for dealing with SME customers and modify their role to be a

facilitator. It may either provide software to these customers to

prepare stock and financial statements or help and guide them in

preparation of renewal proposal / statements.

Banks may publish periodicals/magazines to disseminate information

pertaining to various schemes of bank, various ministries, RBI,

SIDBI, CBDT, CBEC and other tax related policy matters. It may

also provide the same information through its website and e-mails.


BIBLIOGRAPHY

Nambiar, P.C.D. (2007). Financing For Priority Sectors. S.B.I Monthly

Review, 6(8).

Popli, G.S.and Rao, D.N. (2009). Service Quality Provided By Public Sector

Banks To SME Customers: An Empirical Study In The Indian Context.

Journal of Financial Services Research, 4.

Raju, B.Y. (2002). Small Scale Industries In The Liberalized Era Beg For

Attention. Global Business Review, 3(2), 351-367.


Rani and Rao, D.N. (2008). Financing Small enterprises: Recent Trends.

ICFAI Journal of Entrepreneurship Development, 5(1), 6-22.


Education

Raj