Chapter- 1

Introduction to MSME

Micro, Small and medium enterprises (MSMEs ) also known as small and medium scale
enterprises are the essential part of healthy economy. The MSME sector represents over
90 percent of enterprises in most of the developing countries and contribute 40-60 percent
of the total output or value added to the national economy.

The growth recorded by SSI in India is 2% more than any other sector; it accounts for 40% of the
countrys GDP, 35% of Direct exports, 15% of Indirect Exports (through Merchant Exporters,
Trading Houses & Export Houses) and employs more than 20 million people. The SSIs needs just
Rs. 60, 000 70, 000 to generate employment for one man, while for the same a whopping 56lakhs is required for other sectors.

MSME sector faces a number of problems - absence of adequate and timely banking finance,
limited knowledge and non-availability of suitable technology, low production capacity, ineffective
marketing and identification of new markets, constraints on modernization and expansions, non
availability of highly skilled labour at affordable cost, follow up with various agencies in solving
regular activities and lack of interaction with government agencies on various matters.
MSMEs have strong technological base, international business outlook, competitive spirit and
willingness to restructure them shall withstand the present challenges and come out with shining
colors to make their own contribution to the Indian economy.

Brief history Of MSMEs

YEAR 1950
In the year 1950, SME was defined as a size of Gross Investment in fixed assets (incl. Plant &
machinery, land & building etc.) Not exceeding Rs.5lakhs and strength of workforce viz.
Employment less than 50 workers per day using power or less than 100 workers per day without
use of power.
YEAR 1950 TO 2004
Small scale industries (SSI) are those engaged in the manufacture, processing or preservation of
goods and whose investment in plant and machinery (original cost) does not exceed Rs.1crore.
This would include units engaged in mining or quarrying, servicing and repairing of machinery. In
this case of ancillary units, the investment in plant and machinery (original cost) should not exceed
Rs.1crore to be classified under SSI.
2

The investment limit of Rs.1crore for classification as SSI has been enhanced to Rs.5crore in
respect of certain specified items under hosiery, hand tools, drugs pharmaceuticals and stationary
items and sports goods by the Government of India.
YEAR 2006
The Government of India has enacted the Micro, Small and Medium Enterprises Development
(MSMED) Act, 2006 on June 16, 2006 which was notified on October 2, 2006. Consistent with the
notification of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006, the
definition of micro, small and medium enterprises engaged in manufacturing or production and
providing or rendering of services has been modified.

1.1 Micro, Small and Medium Enterprises Development-

Introduction-

MICRO-

Micro (manufacturing) Enterprises

Enterprises engaged in the manufacturing/production or preservation of goods and whose
investment in plant and machinery (original cost excluding land and building and such items as
in 1.1.1) does not exceed Rs. 25 lakh, irrespective of the location of the unit.

Micro (service) Enterprises

Enterprises engaged in the providing/rendering of services and whose investment in
equipment (original cost excluding land and building and furniture, fitting and such items as in
1.1.2) does not exceed Rs. 10 lakh.
SMALLSmall (manufacturing) Enterprises:
Enterprises engaged in the manufacture/production or preservation of goods & whose
investment in plant and machinery (original cost excluding land and building & the items
specified by the Ministry of Small Scale Industries vide its notification No.S.O.1722 (E)
Dated October 5, 2006 as furnished in Annexure I) does not exceed Rs. 5 crores.

Small (service) Enterprises

Enterprises engaged in the providing/rendering of services and whose investment in
equipment (original cost excluding land and building & furniture, fittings and other not directly
related to the service rendered or as may be under the micro, Small and Medium Enterprises
development, (MSMED), Act 2006) does not exceed Rs. 2 crore.

MEDIUM-

Medium (manufacturing) EnterprisesEnterprises engaged in the manufacture/production or preservation of goods and whose
investment in plant and machinery (original cost excluding land and building and the items
specified by the Ministry of Small Industries vide its notification No.S.O. 1722(E) dated October 5,
2006) is more than Rs. 5 crore but does not exceed Rs. 10 crore.
Medium (service) Enterprises
Enterprises engaged in the providing/rendering of services and whose investment in equipment
(original cost excluding land and building and furniture, fittings as such items as in 1.1.2) is more
than Rs. 2 crore but does not exceed Rs. 5 crore.
1.1. MSME Classification
*
MANUFACTURING SECTOR
ORIGINAL I NVESTMENT

IN

SERVICE SECTOR
P LANT ORIGINAL

original

INVESTMENT

IN

cost

& MACHINERY

EQUIPMENTS

excludin

MICRO ENTERPRISES

UP TO RS.25.00 LACS

UP TO RS. 10.00 LACS.

SMALL ENTERPRISES

FROM

RS.25.00

LACS

TO

RS.500.00 LACS
MEDIUM ENTERPRISES

FROM

RS.500.00

FROM RS.10.00

LACS

TO

RS.200.00 LACS.
LACS

RS.1000.00 LACS

TO

FROM RS.200.00

land
and

building
LACS TO

RS.500.00 LACS.

and the
items

specified by the Ministry of Small Scale

original cost excluding land & Building and Furniture, Fittings and other items not directly
related to the service rendered or as may be notified under MSMED Act, 2006

 Eligibility criteria

(i) These guidelines would be applicable to the following entities, which are viable or potentially
viable:
a) All non-corporate SMEs irrespective of the level of dues to banks.
b) All corporate SMEs, which are enjoying banking facilities from a single bank, irrespective of the
level of dues to the bank.
c) All corporate SMEs, which have funded and non-funded outstanding up to Rs.10 crore under
multiple/ consortium banking arrangement.
(ii) Accounts involving willful default, fraud and malfeasance will not be eligible for restructuring
under these guidelines.
(iii) Accounts classified by banks as Loss Assets will not be eligible for restructuring. Banks
lending to medium enterprises will not be included for the purpose of reckoning under priority
sector.
1. TINY UNIT WOULD BE MICRO ENTERPRISES.
2. SSI WOULD BE SMALL ENTERPRISES
MSMEs have been established in almost all-major sectors in the Indian industry such
as:
1. Chemical & Pharmaceuticals
2. Electrical, Electronics
3. Bio-engineering
4. Engineering
5. Food Processing
6. Electro-medical equipment
7. Textiles and Garments
8. Sports goods
9. Plastics products
10. Meat Products
11. Computer software (IT)
12. Leather and Leather goods etc.

1.2 SWOT ANALYSIS OF MSMES IN INDIA

STRENGTHS

WEAKNESS

They contribute to National Economic

Encounters problems due to lack of

growth.

Funds.

They generate Employment and help

MSMEs lack Marketing skills

MSMEs are not fast in adapting the

in vitalizing Indian brand to the world

Helps in the Regional Development

changing trade trends

Export Market Expansion.

Non availability of technically trained

Technological Innovation

human resources

Poor Management skills

They lack in technological information
and consultancy services

OPPORTUNITIES
Bilateral

and

THREATS
Multilateral

Dumping from developed countries

trade

Lot of distrust between SMEs and

agreements

Credit support is enhanced

Financial institutions

They get support for

Slow improvements in quality to meet

technological up-gradation

the international standards

Virtual

Comprehensive support for cluster

absence

of

Enterprise

Education

development

Poor

Marketing assistance and export

incentive

structures

for

entrepreneurs

promotion support

Non-tariff barriers from developed

Growing domestic and international

countries

markets

CHAPTER-2
INTRODUCTION TO BANKING INDUSTRY

The development of banking is an inevitable precondition for the healthy and rapid development of
the national economic structure. Banking institutions have contributed much to the development of
the developed countries of the world. Today we cannot imagine the business world without
banking institutions. Banking is as important as blood in the human body. Due to the development
of banking advances are increased and business activities developing so it is rightly said, "The
development of banking is not only the root but also the result of the development of the business
world." After independence, the Indian government also has taken a series of steps to develop the
banking sector. Due to considerable efforts of the government, today we have a number of banks
such as Reserve Bank of India, State Bank of India, nationalized commercial banks, Industrial
Banks and cooperative banks. Indian Banks contribute a lot to the development of agriculture, and
trade and industrial sectors. Even today the banking systems of India possess certain limitations,
but one cannot doubt its important role in the development of the Indian economy.

Without a sound and effective banking system in India it cannot have a healthy economy. The
banking system of India should be able to meet new challenges posed by the technology and any
other external and internal factors

DEFINITION OF THE BANK

As per Banking Regulation Act, 1949 (section 5):

The bank is the institutions which accept the deposits from the public, repay the same on
their demands by cheques, demand draft or by order, for the purpose of investment and lending.

Sayers more clearly states:

We can define bank as an institution whose debts (Bank Deposits) are widely accepted in
settlement of the other peoples debts to each other.

HISTORY OF BANKING IN INDIA

Banking in India originated in the first decade of 18th century. The first banks were
General Bank of India, which started in 1786, and Bank of Hindustan, both of

The

which are

now defunct.
The oldest bank in existence in India is the State Bank of India, which originated in the "The
Bank of Bengal" in Calcutta in June 1806.

 This was one of the three presidency banks, the other two being the Bank of Bombay and
the Bank of Madras. The presidency banks were established under charters from the British
East India Company.
They merged in 1925 to form the Imperial Bank of India, which, upon India's independence,
became the State Bank of India.
For many years the Presidency banks acted as quasi-central banks, as did their
Successors.
The Reserve Bank of India formally took on the responsibility of regulating the Indian
banking sector from 1935. After India's independence in 1947, the Reserve Bank was
nationalized and given broader powers.

EARLY HISTORY
The first fully Indian owned bank was the Allahabad Bank, established in 1865.However, at
the end of late-18th century; there were hardly any banks in India in the modern sense of
the term.
The American Civil War stopped the supply of cotton to Lancashire from the
Confederate States. Promoters opened banks banks to finance trading in Indian
cotton.
With large exposure to speculative ventures, most of the banks opened in India during that
period failed.
The depositors lost money and lost interest in keeping deposits with banks. Subsequently,
banking in India remained the exclusive domain of Europeans for next several decades until
the beginning of the 20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire
d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;
branches in Madras and Pondichery, then a French colony, followed. Calcutta was the most
active trading port in India, mainly due to the trade of the British Empire, and so became a
banking center.

NATIONALIZED BANKS IN INDIA

Banking System in India is dominated by nationalized banks. The nationalization of banks in
India took place in 1969 by Mrs. Indira Gandhi the then prime minister.
The major objective behind nationalization was to spread banking infrastructure in rural
areas and make available cheap finance to Indian farmers.
9

 Fourteen banks were nationalized in 1969. Before 1969, State Bank of India (SBI) was the
only public sector bank in India.
SBI was nationalized in 1955 under the SBI Act of 1955. The second phase of
nationalization of Indian banks took place in the year 1980. Seven more banks were
nationalized with deposits over 200 crores.

PRIVATE BANKS IN INDIA

All the banks in India were earlier private banks. They were founded in the re independence
era to cater to the banking needs of the people.
But after nationalization of banks in 1969 public sector banks came to occupy dominant
role in the banking structure. Private sector banking in India received a fillip in 1994 when
Reserve Bank of India encouraged setting up of private banks as part of its policy of
liberalization of the Indian Banking Industry.
Housing Development Finance Corporation Limited (HDFC) was amongst the first to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in
the private sector. Private Banks have played a major role in the development of Indian
banking industry.
They have made banking more efficient and customer friendly. In the process they have
jolted public sector banks out of complacency and forced them to become more
competitive.

For the past three decades India's banking system has several outstanding achievements
to its credit. The most striking is its extensive reach. It is no longer confined to only
metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to
the remote corners of the country. This is one of the main reasons of India's growth
process. The government's regular policy for Indian bank since 1969 has paid rich
dividends with the nationalization of 14 major private banks of India.

The first bank in India, though conservative, was established in 1786. From 1786 till today,
the journey of Indian Banking System can be segregated into three distinct phases. They
are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
10

New phase of Indian Banking System with the advent of Indian Financial & Banking Sector
Reforms after 1991.
A. GLOBAL :

After the house price bubble burst in 2007, governments and monetary authorities took a broad
range of drastic measures to avoid the collapse of the global financial system. The restoration of
public confidence in the banking industry had top priority in the short term, while the need for
remodelling the global financial architecture to make the financial system more resilient against
future shocks became apparent. In 2008 and 2009, many banks were engaged in reorganizations
of their businesses. Some returned to the basics of traditional banking and others needed to
strengthen their capital position substantially. Todays banking industry is facing the effects of a
deep economic recession and is set to suffer additional losses in credit portfolios.

Meanwhile, governments and financial authorities have announced stricter banking rules and more
stringent supervision at an international level. Capital and solvency requirements for banks will be
tightened, and improved risk management will be required. Moreover, stringent policy measures to
safeguard the stability of the financial system are underway the global turbulence shook up the
banking sector and led to new rules of the game. Banks had to rethink their strategy and adjust
their business principles and structures. The new financial system will maintain a tighter focus on
customer centricity, while integrity and ethics will play a more important role in retail banking than
in the past. International controls will be improved, and the corporate governance and
compensation schemes of banks must be adjusted to provide adequate incentives for a
responsible balance between risks and their capital position. Banks have to apply a long-term
perspective instead of a dominant focus on short-term profit.

A distinction is drawn in this study between private and co-operative banks. The fundamental
difference between them is their corporate governance: shareholder versus member ownership.
This difference entails numerous consequences in terms of their business orientation and
principles. The characteristics and achievements of co-operative banks in the past few years have
remained notably underexposed in recent publications, the press and various reports. But the
success of the co-operative business model is abundantly evident in the figures they have posted.
Average market shares of European co-operative banks as well as member-to-population ratios
have increased over the last decade. This is one of the strongest proofs of the vitality of the cooperative business model. But one has to bear in mind that co-operative banking is not by
definition better than other banking models and after all, past performance is no guarantee of
11

future success. For instance, co-operative banks were - and are - not sheltered from extraordinary
events resulting from the crisis.

They too suffered losses and incurred write-downs directly related to the financial crisis. But they
appear to have been hit less hard than private banks and they did not need large-scale
government support. They too feel the effects of the general loss of confidence in the banking
sector and face competitors on a sharply tilted playing field. Owing to their strong position in there
tail markets, they will feel the negative impact of the deep economic recession. To sum up, cooperative banking is not a panacea for post crisis banking in general, but should be viewed as an
interesting alternative to the other banking models that have been in the spotlight for most of the
time in recent decades. Looking further ahead, the unique features and natural core competences
of co-operative banks provide clear-cut opportunities in this new banking environment. The new
characteristics of the financial system have been part of co-operative banks DNA from the start
and are considered to be their main competitive advantage. As member-owned institutions, cooperative banks now have the opportunity to leverage the new banking rules and ethics to their
advantage in a well-designed public relations campaign. In addition, their strong capital base,
balanced corporate governance structure and large yet finely-meshed branch networks enable
them to maintain a more pronounced external focus than many of their competitors, which may
translate into market share gains.

Building on the work by UNICCO and the European Association of Co-operative Banks, closer
international co-operation between European co-operative banks likewise offers promising
advantages. The reason is that operational scale will become increasingly important to remain
competitive, operate efficiently and attract customers in the future. By joining forces in specific
banking areas, co-operative banks may achieve sufficient scale compared to their counterparts
and diversify the risks of cross-border activities. To that end, ways of closer co-operation on
international markets could be developed, building on the awareness that non-committal attitudes
and non-committal partnerships belong tothe past. The ultimate aim of these alliances could be to
create European co-operative institutions in certain banking areas. The feasibility of this strategic
direction requires further evaluation, but could be an enticing prospect for co-operative-minded
bankers. Another opportunity stems from the origins of most co-operative banks. They were often
established more than a century ago in rural areas where people were deprived of financial
services. The origin may have disappeared for mature co-operative banks in mature financial
markets, but this is definitely not the case in many countries all over the world.

12

B.NATIONAL:

A co-operative bank is a financial entity which belongs to its members, who are at the same time
the owners and the customers of their bank. Co-operative banks are often created by persons
belonging to the same local or professional community or sharing a common interest. Co-operative
banks generally provide their members with a wide range of banking and financial services (loans,
deposits, banking accounts etc.). Co-operative banks differ from stockholder banks by their
organization, their goals, their values and their governance. In most countries, they are supervised
and controlled by banking authorities and have to respect prudential banking regulations, which
put them at a level playing field with stockholder banks. Depending on countries, this control and
supervision can be implemented directly by state entities or delegated to a co-operative federation
or central body. Co-operative banking is retail and commercial banking organized on a cooperative basis. Co-operative banking institutions take deposits and lend money in most parts of
the world. Co-operative banking, includes retail banking, as carried out by credit unions, mutual
savings and loan associations, building societies and co-operatives, as well as commercial
banking services provided by manual organizations (such as co-operative federations) to cooperative businesses. The structure of commercial banking is of branch-banking type; while the
co-operative banking structure is a three tier federal one.

- A State Co-operative Bank works at the apex level (ie. works at state level).
- The Central Co-operative Bank works at the Intermediate Level.
(i.e. District Co-operative Banks ltd. works at district level)
- Primary co-operative credit societies at base level (At village level)

POSITION OF COOPERATIVES

Most of the developments taking place in the banking sector have bypassed cooperatives since
they are financially not so strong and technically ill-equipped due to aging and not so qualified
human resources. In order to remedy the situation and bring back the cooperatives to their glory a
series of measures to Increase efficiency and ability of Cooperatives to give better services to rural
clients had been initiated by Government of India and the following gives the package devised for
revitalization of cooperatives:

13

Govt. of India Revival Package for STCCS (Vaidyanathan Committee)

The Government of India (GoI) is committed to increasing the flow of credit to agriculture,
especially to small and marginal farmers. The short term rural cooperative credit structure (CCS),
which should play a central role in this respect, is unable to do so. This structure is severely
impaired financially and institutionally. Its share in total credit flow to agriculture has been
declining. Concerned at this state of affairs, the GoI had set up a special Task Force in August
2004 under the Chairmanship of Prof.A.Vaidyanathan to suggest an implementable action plan for
reviving the CCS. The Task Force submitted its report to the GoI on 04 February 2005. The
Government, after due consideration, accepted their recommendations in principle. The
recommendations are now being implemented.

The package is aimed at reviving the short-term rural cooperative credit structurec(STCCS) and
make it a well-managed and vibrant medium to serve the creditcneeds of rural India, especially the
small and marginal farmers. It seeks to (a)cprovide financial assistance to bring the system to an
acceptable level of health; (b) introduce legal and institutional reforms necessary for their
democratic, selfreliant and efficient functioning; and (c) take measures to improve the quality of
management. It is to be emphasised that all three components are equally important and should
be treated and implemented as an integrated package.

Financial assistance under the package would cover accumulated losses in the CCS. This
however, does not mean writing off of the loans which are yet to be repaid by the borrowers. The
cooperatives will have to continue to make efforts to recover these loans and thereby improve their
financial health further.

14

C.STATE:

The following table shows the clear picture of co-operative banks functioning in Gujarat state. The
list below has some of well-known and well established co0operative banks of Gujarat which are
functioning in their respective cities since a long time. The table has supporting data about the total
deposits, advances and number of branches of various banks having its operations in Gujarat
state under cooperative umbrella. For brief understanding about how much penetration do these
cooperative banks have there also some data helping to understand its strong presence in state of
Gujarat.

Table No-2.1
Name of bank

Total

Total

deposits

advances

Kalupur Commercial co-op Bank

2,23,729.11

1,35,691.10

32

Rajkot Nagarik Sahakari Bank

1,58,309.66

1,11,217.60

27

Surat District Co-op Bank

2,50,145.07

54,505.42

59

Mehsana Urban Co-op Bank

1,13,113.04

68,676.84

26

Co-operative Bank of Rajkot

87,172

51,420.42

20

Sutex Co-op Bank Ltd, Surat

63,573.78

41,856.46

15

Co-op 60,649.22

27,760.63

26

56,514.93

31,477.73

21

Ahmadabad

Mercantile

branches

Bank
Nutan Nagrik Sahakari Bank

15

This

Prime Co-op Bank Ltd, Surat

50,059.26

25,514.91

27

S.B. Pardi Peoples Co-op Bank

36,228.01

18,949.56

*Figures

in

Rs lakh; Source:

Gujarat Urban Cooperative Banks

Federation, banks' websites As on
March

31,

2012

INTRODUCTION OF CO-OPERATIVE BANK

The Co-operative banks in India started functioning almost 100 years ago. The Cooperative bank
is an important constituent of the Indian Financial System, judging by the role assigned to co
operative, the expectations the co operative is supposed to fulfill, their number, and the number of
offices the cooperative bank operate. Though the co-operative movement originated in the West,
but the importance of such banks have assumed in India is rarely paralleled anywhere else in the
world. The co-operative banks in India play an important role even today in rural financing. The
businesses of co-operative bank in the urban areas also have increased phenomenally in recent
years due to the sharp increase in the number of primary co-operative banks.
The co-operative banks provide credit and other allied facilities to the rural and agricultural sectors.
The drawn of this century saw the evaluation of the co-operative movement in India. Co-operative
societies came into being when the Co-operative banks which are engaged in serving the
industrial and commercial sectors Societies Act, 1904, was enacted. The movement was started
with the aim of providing farmers funds with low rates of interest so that exploitation by the village
moneylenders is foiled. The Act provided for the formation of co-operative credit societies and a
number of small primary credit societies were established in various parts of the country. These
16

societies, however, could not mobilize enough resources as compared to loans demanded by its
members. This led to the enactment of a new act in 1912.
Although co-operative banks in India have shown progress since their establishment, there still
exist a number of defects in the organization. This has led qualitative improvement to suffer.
However, the Reserve Bank Of India took the initiative to revitalize, reorganized and promotes the
growth of co-operative bank in India. Under the Banking Regulation Act of 1949, Co-operative
Banks have been brought under the control of the Reserve Bank of India.

D. PESTAL ANALYSIS OF Banking Industry

1. POLITICAL AND LEGAL ENVIRONMENT ANALYSIS

The advent of liberalization and globalization had seen a lot of changes in the focus of Reserve
Bank of India as a regulator of the banking industry. Deregulation of interests rates and moving
away from issuing operational prescription have been important changes. The focus has really
shifted from micro monitoring to macro management. In a totally deregulated and globalized
banking scenario a strong regulatory framework would be needed. The role of regulator would
be critical for

a. Ensuring soundness of the system by fixing benchmark standards for capital adequacy
and prudential norms for key performance paramateres.

Adoption of this practices

especially in areas like risk management, provisioning, disclosure, credit delivery, etc.
b. Adoption of good corporate government practices.
c. Creation of an institutional framework to protect the interests of depositors. Regulating
the entry and exit of banks including cross border institutions. Further the expected
integration of various intermediaries in the financial system would add a new dimension
to the role of regulators.

17

Some of this issues are addressed in the recent amendments bill to the banking regulation act
introduced in the Parliament.

The integration of various financials would need a number of

legislative changes to be brought about for the system to remain contemporary & competitive.

2. ECONOMIC ANALYSIS
The Reserve Bank of India (RBI) in its annual monetary policy for 2012-13 on March 17, 2012
slashed the policy rates by 50 basis points. The repo rate at which banks borrow money from
the RBI now stands at 8% from 8.50% earlier.
Similarly, the reverse repo rate at which RBI borrows money from banks is now at 7% from
7.50% earlier. The cash reserve ratio (CRR) was left unchanged at 4.75%.

The Reserve Bank of India reduced the Cash Reserve Ratio (CRR) by 75 basis points from
5.5% to 4.75 % with effect from March 10, 2012. This reduction will inject around Rs.48,000
crore of primary liquidity into the banking system to ensure smooth flow of credit to productive
sectors of the economy. Earlier, RBI in its third quarter review in January 2012 reduced the
CRR by 50 basis points from 6% to 5.5% injecting a liquidity of Rs.31,500 crore into the
banking system to mitigate the tight liquidity conditions, which was the first move in the CRR
since it was increased to 6% in April 2010

The Indian economy has recorded remarkable growth over the past decade. India's economic
growth is expected to robust in 2012 and 2013. The International Monetary Fund (IMF) has
pared Indias economic growth projection to 6.9% in 2012 from its January estimate of 7%, the
only emerging economy for which it has done so. Banks provide capital formation to various
sectors which directly help in the Growth of Indian economy.

3. SOCIAL ANALYSIS

Indian banking system has been progressing rapidly. There are ample opportunities for the
banks to cover untapped rural market. Yet, banking facilities are not available in many rural
areas. Many farmers are taking loan from moneylender at a very high rate of interest. Smallscale industries would remain important for banks. Changes could be expected in near future
for unorganised sectors.

4. TECHNOLOGICAL ANALYSIS

18

Technology will bring fundamental shifts in the functioning of banks. It would not only help
them bring improvements in their internal functioning but also enable them to provide better
customer services. Technology will break all boundaries and encourage cross border banking
business.

Banks would have to undertake extensive business process reengineering and

tackle issues like how best delivers products and service to the customers, designing and
appropriate organizational model to fully capture the benefit of technology and business
process changes brought about. How to exploit technology for delivering economies of scale
and how to create cost efficiencies, and how to create a customer centric operation model.
Entry of ATMs has changed the profile of front offices in bank branches. Customers no longer
need to visit branches for their day to day banking transactions like cash deposits, withdrawals,
cheques collections, balance inquiry, etc. E banking and internet banking have opened new
avenues in convening banking. Internet banking has also let to reduction to transaction costs
for banks to about a tenth of branch banking.

E.CURRENT INDIAN BANKING SYSTEM SCENARIO

Currently India is facing difficulty in getting deposits. There are many reasons behind following are
for what was happening in banking and investment sector in the last 5 years
1. Increased consumerism: If we look at the consumption pattern in last 5 years, people were
moving from being savers to consumers, i.e., more emphasis on benefits gained today rather
than gains received through savings in future, this changing attitude is one of the reasons for
higher growth in lending compared to deposits.

2. Alternatives and risks: People were looking for more alternatives like mutual funds, different
insurance schemes, stock market, etc. People were moving to these products with higher
return expectations. These instruments also have higher risk and increased income level
people who deposit high amounts of money into banks were ready to take these high-risk
alternatives.

3. Branch Banking: Expansion of branch network is one of the means to augment

business.

The new generation private sector banks and foreign banks have started exploiting business
potential through other strategies as well. Traditionally public sector commercial banks have been
able to augment the business level by increasing their branch network.
19

4. Transparency and Disclosures:

With a view to ensuring meaningful disclosure of the true financial position of banks and to enable
the users of financial statements to study and have meaningful comparison of their positions, a
number of measures were taken by RBI. These disclosure norms covered aspects like capital
adequacy, asset quality, profitability, country risk exposure, risk exposure in derivatives segment
etc. In the context of implementation of Basel II norms, RBI has proposed enhanced disclosure
norms for implementation by banks.

5. Capital Adequacy Norms:

The main objective of capital adequacy norm is to strengthen the soundness and stability of the
banking system, Capital adequacy ensures that the financial fundamentals of the banks are strong.

6. Best Practices Code:

The Best Practices Code represents detailed procedural rules for entering into transactional
relations within the banks. The objective of BPC is to ensure that all procedures, especially in
sensitive areas are well documented, compared with national and international best practices and
improved upon in the light of the experience gained. Best practices Code involve examination of all
procedures, products, activities and systems.

F. Major Players in Indian Banking Industry

Public sector Banks are as follows:
1. State bank of India and its subsidiaries
2. Central Bank of India
3. Allahabad Bank
4. Punjab National Bank
5. Bank of Baroda
6. Indian Bank
7. Bank of India
20

8. Canara Bank
9. Punjab & Sind Bank
10. Corporation Bank India
Private Sector Banks are as follows:
11. ICICI
12. HDFC
13. AXIS
14. City Union Bank
15. ING Vysya Bank
16. Yes Bank
17. Kotak Mahindra Ltd

NBFC are as follows:

18. Housing Development Finance Corporation Limited
19. Power Finance Corporation Limited
20. National Bank of Agriculture and Rural Development
21. Infrastructure Development Finance Company Limited

Foreign Banks are as follows:

22. Citi Bank
23. HSBC Ltd
24. Standard Chartered Bank
25. Deutsche Bank AG
26. DBS Bank Ltd

Co-operative Banks of Surat City are as follows:

27. The Surat Peoples Cooperative Bank
28. The Sutex Cooperative Bank
29. The Surat District Milk Producers Co-op. Union Ltd. (SUMUL)
30. The Purushottam Farmers Co-op. Ginning & Pressing Society Ltd.
31. The Surat District Co-op. Spinning Mills Ltd.
32. The Surat Jilla Sahakari Sale & Purchase Union
33. The Surat Central Co-op. Stores Ltd.
34. Cotton Co-op. Societies of Olpad Taluka
21

G. Major Offerings by Banks-

Following are the Customer Service available at banks DEPOSITS:

1) Current Account:
The current accounts with promises you a unique banking experience through innovative features
and best services for businessmen, firms, companies, public enterprises etc. that have numerous
daily banking transact.

2) Savings Accounts:
A safe and easy way to save your money is with a bank savings account. Interest will be earned
on the money you have on deposit at the bank.

3) Fixed Deposit:
Bank fixed deposits are one of the most common savings scheme open to an average investor.
Fixed deposits also give a higher rate of interest than a savings bank account. Monthly interest
facility also available in this scheme.

4) Recurring Deposit:
Recurring Deposit Scheme is meant for investor who wants to deposit a fixed amount every
month. The scheme, a systematic way for long term savings is one of the best investment options
for the low income group.
INSURANCE

Bank enters in insurance sector and providing two types of insurance.

1. General insurance:

It offers various general insurance policies provided by own insurance agencies or acting as a
agent or joint venture with business entities.

22

2. Life insurance:
Banks offers various life insurance policies provided by Insurance Companies, Owned or Joint
Venture.

LOANS AND ADVANCES

Bank provides different types of loan at less interest rate. The different type of loans as specified
below-

Business Banking Loans Against Government Securities

Composite Loan
Loan for small Scale Industrial (S.S.I.) unit
Technology Up gradation Fund Scheme
Business Loan
Project Finance
Term Loan
Cash Management Services (Lock box, Remote deposits capture, Merchant Processing)
Risk Management (FX, interest rates, commodities, derivatives)
Capital Raising (Equity/Debt/Hybrids)

Retail Banking Checking Account

Savings Account
Money Market Account
Certificate of Deposits
Credit Card
Debit Card
Mortgage
Home Equity Loan
Personal Loan
ATM Card
Current Accounts

NRI Banking23

Accounts and deposits-

Savings account

Current account

Fixed deposits

Foreign currency deposits

Accounts for returning india

Offshore accounts and deposits

Loans-

Home loan
Loan against securities
Loan against fixed deposits

24

CHAPTER-3
INTRODUCTION TO THE
COMPANY

25

A.BRIEF HISTORY AND PROFILE

The year 1909 on 17th June, with the strenuous efforts of Late Shri B.A.Modi and Late Shri
K.G.Desai, Society viz. The Surat Dist Co. Operative (Urban) Union Limited was registered. In
the year 1921, this society had undertaken banking activities in absolute terms and in 1923, The
Surat District Co. Operative (Urban) Union Limited was converted into The Surat District Cooperative Bank Ltd., The work extended to the entire Surat District, which had 21 talukas and a
vast working area with geographical variations. The coastal area which included city of Surat and
towns like Navasari, Bulsar, Bilimora, sizeable tribal areas with hills and dense forests.
The Vast Surat District was bifurcated in1965 district of Bulsar was separated. At present, there
are 15 talukas in the Surat district, of which 9 are in the tribal area. However the Surat District is
again bifurcated from 2nd of October-2007 and Tapi District comprising of five blocks viz. Nizar,
Uchhal, Songadh, Vyara and Valod was created. But for administrative convenience there is only
one District Bank viz. The Surat District Co-operative Bank has been functioning for both the
Districts i.e., Surat District and Tapi District. Bank had separate department for agriculture advance
from the year 1944, and became an effective central agency for co-ordination and smooth flow of
finance to co-operative sector in the district.
Co-operative organizations like,

The Surat District Milk Producers Co-op. Union Ltd. (SUMUL),

The Purushottam Farmers Co-op. Ginning & Pressing Society Ltd.,

The Surat District Co-op. Spinning Mills Ltd.,

The Surat Jilla Sahakari Sale & Purchase Union,

The Surat Central Co-op. Stores Ltd.,

Cotton Co-op. Societies of Olpad Taluka,

Have since been developed and Bank had provided timely assistance to them. During this period,
Forest Labourers Co-op. Societies were also very active in tribal
area and were engaged in coop cutting activity for which substantial finance was provided to
them.

In1960, when Shree Khedut Sahakari Khand Udyog Mandali Ltd., Bardoli Came into

existence, the entire Surat District gradually became a sugar belt. All existing Sugar factories had
teething financial troubles in the beginning. However, Bank had provided them enough finance as
also assisted even for meeting share capital also. The sugarcane crop has now become principal
crop in the district, and out of total cultivable area of 4,90,000 hectares, 83,191 hectares is under
26

sugarcane cultivation. This revolution in agriculture was amply supported by the Surat District Cooperative Bank. These factories have become main strength of the economic structure of the
district, particularly for farmers.
Bank has been enjoying privilege of having prominent citizens in fields like Social, Co-operation
and Agriculture, on its Board. The present and former members of the Board included outstanding
Lawyers, Members of Parliament, District Panchayat Presidents, Mayor of Surat City and Leaders
from various walks of life including Ministers.
Immediate past Chairman of the Board Shree Pramodbhai K. Desai was awarded Kaka Saheb
Award for his outstanding services to the society and was also awarded by the Gujarat State Cooperative Union Sahakari Award. Shree Popatbhai Vyas, the then Director on the Board,
remained as Home Minister of the State. Shree Dilipbhai Bhakta, the present Chairman is also the
Chairman of Madhi Vibhag Khand Udyog Sahakari Mandli Ltd. He has been doing excellent job for
upliftment of Co-operative movement in the Districts. M/s. Kribhco has awarded him with Sahakari
Shiramani Award in the year 2008.
Board has formed Committees for Loans, Staff matters, legal matters and computer etc. Bank has
been committed for overall upliftment of the society and for the purpose special corpus amounting
to Rs.6.41 crores has been created so far and from the interest income of the corpus donations
are being given to the Hospitals, Schools, Colleges and Social Charitable Institutions. In the year
2002 Bank had donated Rs.50/- lakhs for the ultimate benefit of people affected with natural
calamities in addition to Rs.26/- lakhs or so to the different organizations setup, for betterment of
medical education etc. Further during the cenetary year Bank had donated sizeable amount for
upliftment of education, medical assistance and economic growth. of the Adivasi community.
Also donations were given to the institutions working for physically handicapped children.
Computerization
Out of 60 branches of the Bank, all branches have been fully computerized. They have
successfully implemented Central Data Base System and by the end of the current half year they
will start RTGS facility.

Management/Staff relations
Relations with the staff are quite cordial. No strike, Pen Down, Lay-off or otherwise, have
ever occurred so far. Better Pay scales and other perquisite like reimbursement of Medical
Bills, Leave Fare Concession, Leave Encashment etc. are being given to the employees to
their utmost satisfaction.
27

One director from each Taluka

14

Two individual directors

One director from Surat city

Three nominated director from state government

One director from The Gujarat State CO-OP. Bank Ltd.

***

District Registrar (Co.op.Societies), Surat

TOTAL MEMBERS

21

Management has always remained progressive, be a challenge after Bank Nationalization

introduction of non- farm advances, introduction of New banking concepts in liberalized economy.
Board

has

formed

committees

for

loans,

staff

matters,

Legal

matters

etc..

Deposits:
Growth of deposit was steady and in harmony with Advances. At the esnd of March 2011 deposit
of bank was Rs. 2501.45 crores.
Advances:
It is obvious true as the major crop of the district is sugar cane. There are 8 sugar factories in Cooperative sector, which have a turnover exceeding Rs.600/- crores and as such, banks major
share goes to this sector. Major chunk of advances goes to sugar sector earlier.
In the last decade, bank has gradually paid more attention to non agriculture and Individual
advances. New schemes, to finance for consumer durables, vehicles, House construction, and
professional loans also have been introduced. More attention is paid to develop banking routine
business also. Bank has actively taken up the steps for diversification of Loan portfolio. Powers are
delegated to the branch Managers to sanction loans up to Rs.5, 00,000/- for A1-Grade branch
and Rs.3, 00,000/- for B Grade branch under individual nonfarm sector loans. Also powers are
delegated to the branch Managers to sanction loans up to Rs.1, 00,000/- of all branches under
individual farm sector loans which is also increased up to Rs. 2 lacs.
Branches
There are 60 branches of Surat district co-operative bank and all are fully computerized.
28

Awards and Achievements:

The bank was judged as best bank, and also the best performer award for the year 1996-97 by
NABARD. Reserve Bank of India has granted license to the bank to carry out banking business in
entire India especially when very few DCCB'S are having such type of license. Bank has always
been securing audit classification under category "A" and has been paying highest permissible
dividend to members, under state co-operative Act.

29

B.ORGANISATION STRUCTURE OF SURAT DIS. CO-OPERATIVE BANK LTD.

Managing Director

Assistant
General
Manager
(Loan & Adv)

Assistant
General
Manager
(Manager)

Assistant
General
Manager
(A/C)

Assistant
General
Manager
(Development)
and )

Manager
(Loan)

Assistant
Manager
(Housing)

Assistant
General
Manager
(ADM)

Manager
(Super
vision&
Recovery)

Assistant
Manager
(Supervision)

Manager
(Industry)

Assistant
Manager
(Recovery)

(Recovery)

30

Assistant
Manager
(Industry)

 BOARD OF DIRECTORS OF SURAT DIS. CO-OPERATIVE BANK LTD.

Sr. no

Board of directors

Shri Dilipbhai B Bhakt

Shri Amarshinh J Chaudhari

Shri Bhagabhai P Patel

Shri Maganbhai R Patel

Shri Narayanbhai H Donvala

Shri Ramanbhai A Patel

Shri Shradbhai S Patel

Shri Narendrabhai D Solanki

Shri Maganbhai B Vasava

10

Shri Jayansinghbhai D Vasava

11

Shri Kiritbhai R Desai

12

Shri Prabhubhai N Vasava

13

Dr. Vikasben K Desai

14

Shri Dhansukhbhai N Patel

15

Shri Balubhai K Patel

16

Shri Chotubhai L Patel

17

Shri Nayanbhai N Bhartiya

18

Shri Lalchandbhai V Patel

19

Shri Ajaybhai J Shah

20

Shri Pradipshigh G Atodaria

21

Shri District Registrar Association

22

Shri Pravinchand C Parekh

23

Shri Sureshbhai J Patel

C.Division and Department of SUDICO Bank1. Assistant general manager (ADM)

2. Assistant general manager (Banking)
3. Assistant general manager (Supervision)
4. Assistant general manager (Development and Recovery)
5. Assistant general manager (Industry)
31

6. Assistant general manager (Housing)

VISION To finance co-operative societies in the district of Surat affiliated to the bank and generally to
carry on banking business of all types.
To draw accept enclose, negotiate, buy and sell, negotiable instruments and dividend warrants
in accordance with the rules framed by the board of directors from time to time.
To organize and develop co-operative societies within the district.
To arrange for supervision and inspection of affiliated co-operative societies and to assess their
credit.
To advances loans and\or overdrafts to agriculturists admitted as ordinary or nominal members
upon personal security of movable property including crops and marketing of agricultural
produce.

MISSION AND VALUES

Customer Service and Product Innovation tuned to diverse needs of individual and
corporate clientele.
Continuous technology up gradation while maintaining human values.
Progressive globalization and achieving international standards.
Efficiency and effectiveness built on ethical practices.
Customer Satisfaction through
providing quality service effectively and efficiently
"Smile, it enhances your face value" is a service quality stressed on
Periodic Customer Service Audits
Maximization of Stakeholder value
Success through Teamwork, Integrity and People

Future PlanThe Surat District Co-operative Bank completed a century of its existence on Wednesday.
Founded on June 17, 1909, the bank entered its 103rd year on Thursday and has set ambitious
growth plans for the coming years.
"Our current business is around Rs2,600 crore, which includes deposits of Rs 2501.45
crore and advances of Rs 545 crore. We are aiming to achieve business of more than Rs5,
000 crore

32

 Growth Table of Surat Dis. Co-operative Bank Ltd.

Table No.3.1
(Rs. In Lacs)

Share

capital

Year

& funds

Deposits

Advances Profits

Dividends

1997-98

5641.49

70787.16

29301.44

375.00

15%

1998-99

6113.07

86035.83

23666.51

161.76

15%

1999-00

6528.11

91513.49

25889.64

210.09

15%

2000-01

6934.59

99824.76

35388.69

386.38

15%

2001-02

7654.09

110574.59

46008.14

425.54

15%

2002-03

8233.94

113999.72

39434.34

451.39

15%

2003-04

9616.36

120979.51

36868.87

471.15

15%

2004-05

10084.04

111604.22

24592.07

305.00

15%

2005-06

10434.40

129343.18

22346.28

246.00

15%

2006-07

10940.52

120340.60

35005.31

293.00

15%

2007-08

12257.00

151929.97

73007.29

555.00

15%

2008-09

14984.00

174318.79

56689.93

700.00

15%

2009-10

15640.11

237854.43

50282.66

775.00

15%

2010-11

17114.55

213704.05

51002.38

825.00

15%

2011-12

19776.06

250145.07

54505.42

875.00

15%

Customer Service Available in Surat Dis. Co-operative Bank

DEPOSITS-

1)Current AccountThe current accounts with The Surat Dist. Co-op. bank Ltd., promises you a unique banking
experience through innovative features and best services for businessmen, firms, companies,
public enterprises etc. that have numerous daily banking transact.

2) Savings AccountsA safe and easy way to save your money is with a bank savings account. Interest will be earned
on the money you have on deposit at the bank.
33

3) Fixed DepositBank fixed deposits are one of the most common savings scheme open to an average investor.
Fixed deposits also give a higher rate of interest than a savings bank account. Monthly interest
facility also available in this scheme.

4) Recurring Deposit:
Recurring Deposit Scheme is meant for investor who wants to deposit a fixed amount every
month. The scheme, a systematic way for long term savings is one of the best investment options
for the low income group.
INSURANCE
Bank enters in insurance sector and providing two types of insurance.

3. General insurance:
The Surat District Co-Op Bank Ltd. offers various general insurance policies provided by United
India Insurance Company.
4. Life insurance:
The Surat District Co-Op Bank Ltd. offers various life insurance policies provided by AVIVA Life
Insurance.

LOANS AND ADVANCES

The Surat Dist. Co-operative Bank provides different types of loan at less interest rate. The
different type of loans as specified below and we will see each in detail in next chapter.
Loans Against Government Securities
Individual Home consumable Loan
Individual Vehicle Loan
Loan for higher education studies
Loan Base on Government Scheme
Individual Housing Loan
Loan against Fixed Deposit
Business Loan
Composite Loan
34

 Loan for small Scale Industrial (S.S.I.) unit

Technology Up gradation Fund Scheme & doctor plus loan

E.SWOT Analysis of SUDICO Bank

The banking sector is also taken as a proxy for the economy as a whole. The performance of bank
should therefore, reflect Trends in the Indian Economy. Due to the reforms in the financial sector,
banking industry has changed drastically with the opportunities to the work with, new accounting
standards new entrants and information technology. The deregulation of the interest rate,
participation of banks in project financing has changed in the environment of banks.

The performance of banking industry is done through SWOT Analysis. It mainly helps to know the
strengths and Weakness of the industry and to improve will be known through converting the
opportunities into strengths. It also helps for the competitive environment among the banks.

STRENGTH

WEAKNESS

Dedicated and well trained staff.

Lack of funds

Long standing clients.

High Non Performing Assets

Excellent customer relationship.

Functioning at District Level only

Effective front-end services.

Sanction Loan & Advances only to

Trendsetters in high tech banking.

citizen of surat.

Unavailability of Net Banking Service

and FOREX.

OPPORTUNITY

Threat
Bank has threat from-

Differential in interest rate

Working on Core Banking Solution.

Support

Increasing number of Multistate Cooperative Bank in Surat City.

Scheduled Co-operative Banks.

gradation

Private and Public Sector Banks

Growing domestic and export market

Inflation and Change in RBI Policy

Ready to become Techno Bank by

for

technological

up

starting up ATM & Internet Banking in

near future.

35

CHAPTER-4
MSME

36

4.1 MSMEs in India

India has a vibrant MSME 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 MSMEs 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. MSMEs in India have recorded a sustained growth during last five
decades. The number of MSMEs 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.

(http://www.dcmsme.gov.in/ssiindia/MSME_OVERVIEW09.pdf last accessed on 26 Nov, 2009)

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 todays
world, access on a global basis to modern technology, capital resources and markets have
become the most critical determinants of international competitiveness.

37

4.2 Problems of MSMEs

Despite its commendable contribution to the Nation's economy, MSME 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. MSME 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 MSMEs:

The financial problem of MSMEs is the Root Cause for all the other problems faced by the MSME
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 MSMEs 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 MSME at 40% in the industrial output, its share in
total credit to the industrial sector is only about 30%.

b) Raw Material problem of MSMEs:

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,
they

are purchased

in

small quantities and hence

charged,

higher

Difficulty is also experienced in procuring semi-manufactured materials.

prices

since

by suppliers.

Financial weakness

stands in the way of securing raw materials in bulk in a competitive market.

c) Production problem of MSMEs:

MSME 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

38

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 MSMEs:

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.

e) Marketing problem of MSMEs: 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 MSMEs have to face the competitions from large scale units in
marketing their products.

It causes damage to the growth and stability of MSMEs. MSMEs

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

f) Managerial problem of MSMEs:

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

initiative

and

undertake

in management

comes

risks

in

the unexplored

first among managerial

industrial

problems.

The

ability

to

fields. The

in

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.

g) Sickness of MSMEs:
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
sickness

the important

ones

are

bud

the various internal and external

management,

high

rate

of

causes of

capital

gearing,

inadequacy of finance, short of raw materials, outdated plant and machinery, low labor productivity
etc.
(http://www.smechamberofindia.com/challenges_to_sme_sector.aspx last accessed on 27 Nov,
2009)

39

Figure 1.2.a
Reasons For The Sickness Of SMEs

(http://milagrow.in/k-solutions/msme-planet/sickness-rehabilitation last accessed on 25 Jan, 2010)

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 up gradation according to the
latest technological changes.
4.3 Role of Micro, Small and Medium Enterprises (MSMEs)
MSMEs have been playing a pivotal role in countrys overall economic growth, and have achieved
steady progress over the last couple of years. From the perspective of industrial development in
India, and hence the growth of the overall economy, SMEs have to play a prominent role, given
that their labour intensiveness generates employment. The MSME segment also plays a major role
in developing countries such as India in an effort to alleviate poverty and propel sustainable
growth. They also lead to an equitable distribution of income due to the nature of business.
Moreover, MSMEs in countries such as India help in efficient allocation of resources by
implementing labour intensive production processes, given the abundant supply of labour in these
countries, wherein capital is scarce.
The enactment of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006
was a landmark initiative taken by the Government of India to enable the MSMEs competitive
strength, address the issues and challenges and reap the benefits of the global market. MSME
policy initiatives at the national and state level are aimed at strengthening the role of MSMEs at the
base as well as at the higher level.

40

With globalization, all forms of production of goods and services are getting increasingly
fragmented across countries and enterprises. With large players adopting different models of
business that include involvement of the traditional partners, suppliers or distributors at a different
level, MSMEs now are experiencing a new model of functioning in the value chain. The past few
years has seen the role of the MSME segment evolve from a traditional manufacturer in the
domestic market to that of an international partner. The restructuring of production at the
international level through increased outsourcing is having significant effects on small and medium
entrepreneurs in a positive as well as negative manner. Demand in terms of new niche products
and services are providing more opportunities for MSMEs that are in a better position to take
advantage of their flexible nature of operations. However, at the same time they have realized their
drawback in terms of inadequate availability of managerial and financial resources, lack of working
capital, personnel training and inability to innovate on a faster pace.
The combined effect of market liberalization and deregulation has forced the MSME segment to
change their business strategies for survival and growth. Some of the changes that MSMEs are
focusing on include acquiring quality certifications, increasing use of ICT, creating e-business
models and diversification to meet the increasing competition. Globalization, economic
liberalization and the WTO regime would undoubtedly open up a unique opportunity for the largest
business community, i.e. MSMEs through effective involvement in international trade by
streamlining certain factors, such as, access to markets, access to technology, access to skills,
finance, development of necessary infrastructure, MSME-tax friendly environment, exchanges of
best practices to name a few.
The MSME sector has also registered a consistently higher growth rate than the overall
manufacturing sector. In fact, it plays a dual role since the output produced by MSMEs is not only
about final consumption but also a source of capital goods in the form of inputs to heavy industries.
4.4Financing the MSMEs
In Feb 2008, the Ministry of Micro, Small and Medium Enterprises (MSME), continued with its
dereservation policy by removing 79 items from the list of 114 items reserved specifically for SSI
(small scale industries) manufacturing. Only 35 items remain in the reserved category from the
total 836 selected in 1994 denoting the declining monopoly of the SSI segment on the reserved
products. However, the government has set up various schemes in place such as the Credit
Linked Capital Subsidy Scheme, MSME Cluster Development Scheme and ISO 9000
Reimbursement Scheme to help SMEs for procuring timely funds. Also the government has put in
place the Credit Guarantee Scheme to encourage banks to lend up to Rs 0.50 million without
41

collateral. There has also been a recent budget announcement of setting up of a Risk Capital
Fund.
Though SMEs are being touted as the priority sector within the economy, they continue to face
problems pertaining to finance. When it comes to banks, they have a very traditional way of
lending to this segment against collateral and SMEs end up being under financed. Evidently, the
biggest challenge before the SMEs today is to have access to non debt based and non-traditional
financial products such as external commercial borrowings, private equity, factoring etc.
Lately this segment has been witnessing winds of change in the new sources of capital- in the form
of private equity (PE) and foreign direct investments (FDI). In Jan 2008, The Soros Economic
Development Fund (SEDF), Omidyar Network and Google.org announced a Small to Medium
Enterprise Investment Company with an initial corpus of $17 million for providing capital to SMEs
in underserved markets. Mauritius-based Frontline Strategy launched a $200 million India
Industrial Growth Fund (IIGF) for investment in SMEs targeting companies, primarily in the
industrial space with revenues between Rs 200 1,000 million. In 2007, Mauritius-based Horizon
advisors launched Ambit Pragma Fund I, an India dedicated PE fund, with a corpus of $100 million
for providing equity capital and professional management advice to SMEs.
Investments in the SME sector are not only by PE funds but this sector is also attracting FDI. In
this respect the government has removed the 24 per cent cap on FDI in the SME sector. Foreign
entities are also keen on promoting trade and cooperation between SMEs of different countries.
Genesis Initiative, an UK-based organization consisting of entrepreneurs, policy makers and
SMEs, is trying to forge mutual cooperation between SMEs in India and UK for in terms of JVs and
partnerships in sectors such as textiles, IT, infrastructure etc.

42

INITIATIVES TAKEN BY THE GOVERNMENT OF INDIA TO SUPPORT MSMES

The concept of MSMEs is not new, nor is the problem faced by them. Since they are the real
backbone of an economy the GOI has taken various measures to promote this category of
industries, although not many have been benefited with the following measures listed below:

INFRASTRUCTURAL FACILITIES

The GOI in consultation with various state governments took many steps to industrialize various
states with a good number of units engaged in different trades spread throughout the state. The
important measures that were taken in this regard are as follows:

Provision of outlays for the development of roads and Transportation facilities.

Establishment of Industrial Estates.

Establishment of several Industrial Promotion Corporations and Agencies.

Promotion of subsidies and incentives for the promotion of industries in the specified
backward areas of the states.

Development of Primary sector and thereby to improve the resource Base to the agro based
units.

Provision of consultancy in the production, marketing, financial and Managerial areas

through different state agencies.

The approach to develop MSME industries by govt. will depend on:

Building skills and promoting technological development.

Providing infrastructure and credit.

Reforming policy and simplifying procedure.

Providing assistance with marketing.

Encouraging the development of special categories of entrepreneurs (women, scheduled

castes and tribes, backward classes, etc).

43

THE VARIOUS CREDIT SCHEMES AVAILABLE TO MSMEs

Credit Guarantee Fund Scheme for Micro, Small and Medium Industries:-

There are an estimated 128.44 lakh registered and unregistered micro and small enterprises
(MSEs) in the country at the end of March 2007, providing employment to an estimated 309.11
lakh persons. The MSE sector contributes about 39% of the manufacturing sector output and 33%
of the nations exports. Of all the problems faced by the MSEs, non-availability of timely and
adequate credit at reasonable interest rate is one of the most important. One of the major causes
for low availability of bank finance to this sector is the high risk perception of the banks in lending
to MSEs and consequent insistence on collaterals which are not easily available with these
enterprises. The problem is more serious for micro enterprises requiring small loans and the first
generation entrepreneurs.

The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was launched by
the Government of India to make available collateral-free credit to the micro and small enterprise
sector. Both the existing and the new enterprises are eligible to be covered under the scheme. The
Ministry of Micro, Small and Medium Enterprises and Small Industries Development Bank of India
(SIDBI), established a Trust named Credit
Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the Credit
Guarantee Fund Scheme for Micro and Small Enterprises. The scheme was formally launched on
August 30, 2000 and is operational with effect from 1st January 2000. The corpus of CGTMSE is
being contributed by the Government and SIDBI in the ratio of 4:1 respectively and has contributed
Rs.1346.54 crore to the corpus of the Trust up to September 30, 2007. Based on the future
requirement, the corpus is likely to be raised to Rs.2500 crore.

ELIGIBLE LENDING INSTITUTIONS

The institutions, which are eligible under the scheme, are scheduled commercial banks (Public
Sector Banks/Private Sector Banks/Foreign Banks) and select Regional Rural Banks (which have
been classified under Sustainable Viable category by NABARD). National Small Industries
Corporation Ltd. (NSIC), North Eastern Development Finance Corporation Ltd. (NEDFi) and SIDBI
have also been made eligible institutions. As on September 30, 2007, there are 62 Member

44

Lending Institutions (MLIs) of the Trust, comprising 28 Public Sector Banks, 13 Private Sector
Banks, 18 Regional Rural Banks and 3 other Institutions viz., NSIC, NEDFI and SIDBI.

ELIGIBLE CREDIT FACILITY

The credit facilities which are eligible to be covered under the scheme are both term loans and
working capital facility up to Rs.50 lakh per borrowing unit, extended without any collateral security
or third party guarantee, to a new or existing micro and small enterprise. For those units covered
under the guarantee scheme, which may become sick owing to factors beyond the control of
management, rehabilitation assistance extended by the lender could also be covered under the
guarantee scheme. It is noteworthy that if the credit facility exceeds Rs.50 lakh, it may still be
covered under the scheme but the guarantee cover will be extended for credit assistance of Rs.50
lakh only.

Another important requirement under the scheme is that the credit facility should be availed by the
borrowing unit from a single lending institution. However, the unit already assisted by the State
Level Institution/NSIC/NEDFi can be covered under the scheme for the credit facility availed from
member bank, subject to fulfillment of other eligibility criteria. Any credit facility in respect of which
risks are additionally covered under a scheme, operated by Government or other agencies, will not
be eligible for coverage under the scheme.

SMALL SCALE SERVICE & BUSINESS ENTERPRISES (SSSBES):

SSSBEs industry related service/ business enterprises with investment upto Rs 500,000 in fixed
assets, excluding land and building, are called Small Scale Service/ Business Enterprises
(SSSBEs). This limit has been raised to Rs.1 million w.e.f. September 2000

Credit - the Lifeline of MSMEs of all the elements that go into a business, credit is perhaps the
most crucial. The best of plans can come to naught if adequate finance is not available at the right
time. MSEs need credit support not only for running the enterprise & operational requirements but
also for diversification, modernization/ up gradation of facilities, capacity, expansion etc. In respect
of MSEs, the problem of credit becomes all the more critical when ever any episodic event occurs
such as a large order, rejection of consignment, inordinate delay in payment etc. In general, MSEs
operate on tight budgets, often financed through owner's own contribution, loans from friends and
relatives and some bank credit. Government of India recognized the need for a focused credit

45

policy for MSEs in the early days of promotion of MSEs. This in turn led to a credit policy with the
following components:-

PRIORITY SECTOR LENDING:

Credit to the small scale sector is ensured as part of the priority sector lending by banks. Banks
are required to compulsory ensure that defined percentage (currently 40%) of their overall lending
is made to priority sectors as classified by Government. These sectors include agriculture, small
industries, export etc. The inclusion of small industries in this list makes them eligible for this
earmarked credit.

IMPROVING THE CREDIT FLOW:

1.8.2.1 NAYAK COMMITTEE (1991-92)

Nayak Committee set up by the Reserve Bank of India in December 1991 (Report came in
September 1992) dealt with aspects of adequacy and timeliness of credit to SMEs. Nayak
Committee found that SMEs was getting working capital to the extent of 8.1% of its annual output
which was less than the normative requirement of 20%. Accordingly, Nayak Committee
recommended that the SSI sector should obtain 20% of its annual projected turnover by way of
working capital. Based on these, as well as other recommendations of the Nayak Committee, RBI
issued a number of guidelines advising the banks to grant working capital to the extent of 20% of
the projected annual turnover, timely disposal of loan applications and setting up of specialized
bank branches for SME loaning in areas of higher SME concentration. This norm is applicable to
units with annual turnover up to Rs.5 crores.
.

KAPUR COMMITTEE (1997-98)

Reserve Bank of India (RBI) had in December 1997 appointed a One Man Committee headed by
Shri S.L. Kapur, the then Member, Board for Industrial & Financial Reconstruction (BIFR), to
review inter-alia: the working of credit delivery system of SME industries with a view to making the
system more effective, simple and efficient to administer; and to make suggestions for
simplification and improvement in system and procedures. The Committee submitted its Report to
RBI on 30th June 1998, which contains recommendations. Out of 126 recommendations, 103 have
46

been examined by RBI and decision taken thereon. Banks/ Financial Institutions and other
agencies have already implemented 86 recommendations. Some of the important measures taken
pursuant to the Recommendations of the

Committee include:

Delinking of SIDBI from IDBI.

Opening of more specialized branches.

Enhancement in the limits of Composite Loan from Rs. 2 lakhs to Rs. 5 lakhs.

Setting of DRTs.

Introduction of Credit Guarantee Scheme.

THE CREDIT FACILITIES FROM NABARD

NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for
promotion and development of agriculture, smallscale industries, cottage and village industries,
handicrafts and other rural crafts. It also has the mandate to support all other allied economic
activities in rural areas, promote integrated and sustainable rural development and secure
prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is
entrusted with:

Providing refinance to lending institutions in rural areas

Bringing about or promoting institutional development and

Evaluating, monitoring and inspecting the client banks

Besides this pivotal role, NABARD also:

Acts as a coordinator in the operations of rural credit institutions

Extends assistance to the government, the Reserve Bank of India and other organizations
in matters relating to rural development

Offers training and research facilities for banks, cooperatives and organizations working in
the field of rural development

Helps the state governments in reaching their targets of providing assistance to eligible
institutions in agriculture and rural development Acts as regulator for cooperative banks and
RRBs

SOME OF THE MILESTONES IN NABARD'S ACTIVITIES ARE:

47

District Rural Industries Project (DRIP) has generated employment for 23.34 lakh persons
with 10.95 lakh units in 105 districts.

Credit functions, involving preparation of potential-linked credit plans annually for all districts
of the country for identification of credit potential, monitoring the flow of ground level rural
credit, issuing policy and operational guidelines to rural financing institutions and providing
credit facilities to eligible institutions under various programmes

Development functions, concerning reinforcement of the credit functions and making credit
more productive

Supervisory functions, ensuring the proper functioning of cooperative banks and regional
rural banks

FINANCIAL INCLUSION

Indian economy in general and banking services in particular have made rapid strides in the recent
past. However, a sizeable section of the population, particularly the vulnerable groups, such as
weaker sections and low income groups, continue to remain excluded from even the most basic
opportunities and services provided by the financial sector. To address the issue of such financial
exclusion in a holistic manner, it is essential to ensure that a range of financial services is available
to every individual. These services are:

A no-frills banking account for making and receiving payments,

A savings product suited to the pattern of cash flows of a poor household,

Money transfer facilities,

Small loans and overdrafts for productive, personal and other purposes, &

Micro-insurance (life and non-life)

In order to address the issues of financial inclusion, the Government of India constituted a
Committee on Financial Inclusion under the Chairmanship of Dr. C. Rangarajan. The Committee
submitted its final report to Hon'ble Union Finance Minister on 04 January 2008.
NATIONAL EQUITY FUND SCHEME (NEF)
DIRECT CREDIT SCHEMES
TECHNOLOGY UP GRADATION FUND SCHEME FOR TEXTILE INDUSTRIES (TUFS)
DIRECT DISCOUNTING SCHEME - EQUIPMENT (DDS-E)

48

 LIST OF KEY FINANCIAL INSTITUTIONS

INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

EXPORT-IMPORT BANK OF INDIA (EXIM BANK)

INDUSTRIAL RECONSTRUCTION BANK OF INDIA (IRBI)

SHIPPING CREDIT AND INVESTMENT CORPORATION OF INDIA (SCICI)

INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LTD. (IL&FS)

TECHNOLOGY DEVELOPMENT AND INFORMATION CORPORATION OF INDIA LTD.

(TDICI)

RISK CAPITAL AND TECHNOLOGY FINANCE CORPORATION LTD. (RCTFC)

TOURISM FINANCE CORPORATION OF INDIA (TFCI)

NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT (NABARD)

NATIONAL SMALL INDUSTRIES CORPRATION (NSIC)

STATE FINANCIAL CORPORATIONS (SFCs)

STATE INDUSTRIAL DEVELOPMENT CORPORATIONS

STATE INDUSTRIAL INVESTMENT CORPORATIONS (SIICs)

STATE SMALL INDUSTRIES DEVELOPMENT CORPORATIONS (SSIDCs)

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

49

Government of Gujarat initiatives to support MSMEs

Small and Medium Enterprises engaged in manufacturing sector produce more than 8000 different
products, providing employment to large number of skilled and unskilled workers. There are
around 30 million Micro, Small and Medium Enterprises in India who train the unskilled workers
and transform them into skilled personnel thereby increasing the skilled workforce of India. While
services sector is the biggest contributor to India's GDP, manufacturing sector is seen as the driver
for boosting the exports.

Gujarat is one of the leading States in India with high industrial growth and enterprising business
community. The State has carved a niche in the areas of textiles, diamond processing, chemicals,
pharmaceuticals, petrochemicals, refineries, power, dairy and other major industries. Gujarat has
also attracted huge investments from Indian and Overseas companies.

Every year Govt. of Gujarat supports summit called

GUJARAT SME MANUFACTURING

SUMMIT, organized by SME CHAMBER OF INDIA, to provide guidance on various challenges

SME units face. Its main moto is to encourage the enterprises owners, and providing platform to
explore. Govt. of Gujarat also provide support on strengthen marketing support to their products
and financial assistance and subsidies. Under Vibrant Gujarat, SME Units are invited from all over
the world to do business with domestic units.

Incentives for Small and Medium EnterprisesThe following incentives are provided for the benefits of Small and Medium Enterprises1. Interest subsidy
2. Support for technology up gradation
3. Sponsored research subsidy
4. Quality Certification and Marketing support

50

Investment in Micro, Small and Medium Enterprises in Gujarat in Last 3 YearsTable No-4.1
(Rs. In Lacs)

Enterprises

2009-10

2010-11

2011-12

Micro

67513.55

84343.28

169076.86

Small

94122.09

89203.68

125449.38

Medium

25362.35

43426.34

45955.67

Chart No-1
180000
160000
140000
120000

Inestment in Units 200910

100000

Inestment in Units 201011

80000
60000

Inestment in Units 201112

40000
20000
0
Micro

Small

Medium

4.9 Major Small and Medium Enterprises Sectors in Gujarat-

Sector

Units in %

Textiles

21.39

Machinery and Parts

7.61

Metal Products

7.49

Chemicals and Products

4.97

Wood Products

4.32

Rubber & Plastics Products

3.77

51

4.9.1 Cluster DevelopmentThe development of Small and Medium has taken place in the form of different industrial cluster.
There are, all 83 industrial cluster in state for different industrial goups have been identified in
state, developed at number of different location in state. The approch of cluster based
development has helped in improving cost competiveness of industries, by way of creating
common facilities, developing marketing centres, brand name and promotion of skills.
The following are type of cluster in Surat city1. Textiles-Powerlooms
2. Textile stores
3. Textile-synthetic
4. Diamond processing
5. Data processing

Surat City Detail Information

Industries

Key industry sectors in the district include Petrochemicals, Textiles, Diamond processing,
Engineering and Logistics

Surat is emerging as a potential hub for IT/ITeS and Biotechnology industry

There are over 600 medium and large scale industries and over 41,300 small scale Industries
based in Surat district

Hazira LNG Terminal project is one of the largest Greenfield projects in India

Some of the key industrial players having large investments in the district are Essar Power, Indian
Oil Corp. Ltd., Indian Oil Corp. Ltd., KRIBHCO, Larsen & Toubro, NTPC, ONGC, Reliance
Industries, HPCLJndo Burma Petroleum Ltd., etc.

Investment Opportunities
Gems & Jewellery

Diamond processing centre

Gold refinery units

Studded Jewellery
52

Artisan training centre and design institutes

IT/ITeS

Software Development Centres

Business Process Outsourcing (BPO)

Knowledge Process Outsourcing (KPO)

Training & Educational centres

Agriculture

Sugar farms

Cattle feed manufacturing

Wax-related units
Textiles

Modern spinning with captive power generation

Manufacturing of fabrics

Modern energy efficient textile processing

Technical textiles
Minerals

Lignite-based thermal power stations

Roofing tiles factory

Stone ware pipes & drainage pipe industry & Glass factory

Credit ratings and MSME

With focus of growth now being on inclusive growth, the role of MSME sector in India's socio
economic development also needs to be ascertained appropriately. With a view to address the
impediments for the sector's growth, GoI has initiated various steps and schemes. Adequate credit
flow being one of the bottlenecks, credit rating assists in rationalized lending decisions through
proper analysis of the credit risk. Gradually, the coverage of MSMEs for credit rating is expected to
increase.

53

 Increased funding options as credit ratings are widely recognized by banks, financial
institutions and other investors
Faster processing of loan applications by banks/FIs
Assists in capability assessment by existing/prospective clients
Credibility and favorable trade terms with suppliers & customers
Meet regulatory requirements
Assists in self-assessment
Recognition (as ratings are made public)
SSI ratings through NSIC; and
Bank facility ratings.
SMERA

SME Rating Agency of India Limited (SMERA) is a third party rating agency exclusively set up
for micro, small and medium enterprises (MSME) in India for ratings on creditworthiness. It
provides ratings which enable MSME units to raise bank loans at competitive rates of
interest. However, its registration with Securities Exchange Board of India SEBI as a Credit Rating
Agency and accreditation by Reserve Bank of India RBI in September 2012 as an external credit
assessment institution (ECAI) to rate bank loan ratings under Basel II guidelines has paved way
for SMERA to rate/grade various instruments such as: IPO, Bonds, Security Receipts, Bank Loan
Instruments etc. In addition to this, RBI has told that Banks may use ratings of SME Rating Agency
of India (SMERA), in addition to grades provided by other agencies, to assign risks to loans for the
purpose of computing capital adequacy requirements

54

CHAPTER-5
LITERATURE REVIEW

55

 BRAHMANANDAM, G, N., RAI, H.L., DAKSHINA MURTHY, D (MAY 1981)

Financing Small Scale Sector. The Role of Banks INDIAN BANKING TODAY AND
TOMORROW, the above article was prepared on the role of banks in financing the SMEs in
the year 1981. At those times the Indian banking was not all interested in financing the
SMEs, because of their credit worthiness. Later due to changes in the industrial policy of
India, the commercial banks come forward made immense help to the growth of SMEs. This
article was written before the economic reforms taken place. Here is a gap for more
analysis about the role of the banks in the post economic reforms. Study on this topic totally
focused on the credit facilities available to the SMEs in the wake of MSME act 2006. Due to
the presence of the gap about the present to day activities are different to those of 1980s. I
made in depth study of the bankers role in providing the credit to promote the SMEs.

CHOPRA, K.C (MAY 1981)

Financing for the Decentralized sector small and medium industries THE BANKER, The
above article prepared on the thesis, reveals the financing for the SMEs in the decentralized
sector. This article helped me in selecting the path for my study on credit facilities for SMEs.
The article vividly discussed about the possible ways to finance the SMEs in the
decentralized sector like agricultural based and artisan based SMEs. Really there is a gap
between the centralized and decentralized sectors in getting the finance from the banks.
The banks are very much lenient in providing lone facilities to the centralized sector.
Through my study I made an attempt to study the intricacies faced by the decentralized
sector SMEs in Guntur District, well known for its agricultural based industries.

JAILAL SAAW (April -2005)

Growth of small scale industries in India JOURNAL OF INDUSTRY AND TRADE, The
growth of small and medium industries in India was discussed in the above article. The
expected growth was not there because of lot of root causes to sickness and under
development in the SME sector. This article discussed about the slow growth rate of SMEs,
dues to several problems.

56

 JAYA PRAKASH REDDY, R., BRAHANANDAM G.N. (JAN, 1987)

Small Scale Sector: problems and prospects YOJANA 1-15, the above article deals with
the various problems like marketing, raw material, labour, technical and financial problems.
The focus on the finance related issue is very limited. They gave more importance to the
procurement of raw material and marketing and labour problems in SME segment. But not
discussed about the credit facilities for the SMEs.

KAURA, M.V., SHARMA G.L. (MARCH, 1999)

Financing Small Industries institution should Change Their Attitudes, Procedures
JOURNAL OF INDUSTRY AND TRADE, the above article discussed very vividly the
attitudes of the financial institutions where belong to Central Government or State
Government or the Governmental Agencies promoted for these propose. In the wake of the
MSME act 2006 passed in the interest of the small scale sector by the Government of India,
the attitude of the financial institutions towards SME sector was totally changing The
employees of above said financial institutions are very much helpful and friendly with the
promoters of the SMEs.

NAMBIAR P.C.D. (Dec. 16, 2007)

FINANCING FOR PRIORITY SECTORS S.B.I MONYHLY REVIEW. The article on the
above topic paved the way for the thinking strategy for the financing the small scale and
medium scale industries by the bank offers. The Government of India through its industrial
policy clearly stated that the commercial banks should give priority treatment to the SMEs.
The nature of the banking officials also discussed in the article. But that is not sufficient to
promote the SME sector because the sector was totally neglected for the last several
decades due to invasion of the MNCs. By enacting the MSME act, 2006 the government of
India clearly indicated the signal to the banking people to provide the credit facilities to the
SMEs. This article is very much helpful in preparing the script for my thesis.

RAMACHANDRA, K.S., REVIVING SICK UNITS, (2001)

FINANCIAL EXPRESS ACT 9, the above article discussed the reviving the sick SSIs in
various aspects, like providing technology, management training, skilled labour, export
57

promotion and giving finance. The root cause for all the above problems is the financial
problem. The financial institution should provide sufficient amount at the easy disbursal
system to promote the SSIs.

SAHNEY, M. (12 DEC 2005)

BANKS ASKED TO STEM INDUSTRIAL SICKNESS INDUSTRIAL INDIA VOL 36.
Through this the author tires to express the need for banks intervention in the promotion of
the SSIs. The officials of the banks in India are belong to middle class families and unaware
of the industrial promotion and its need. Mere advice to the bankers is not helpful. So for
that reason SRIMATY INDIRA GANDI nationalized all private banks for the development of
agricultural sector in 1971. The MSME act 2006 instigates the banks to provide the credit
facilities without any hesitation to the SSIs.

SOUNDARRAJA (1980)
INANCING SMALL SCALE INDUSTRIES, A REPORT, RESERVEBANK OF INDIA
BULLETIN PAPER the reserve bank as a central bank and bankers bank and the prime
lending bank to the government should take initiatives to promote the SSI sector. The
author is very interested in financing the small and medium scale industries in India,
because it is providing more employment than any other sector. It arrests the migration to
the cities from the villages in search of better jobs and better facilities. This topic has given
me the encouragement to think in this way for the betterment of village and cottage industry
development.

EIM (2005) in his study on technology up gradation observed that growing enthusiasm for
internationalization by new technology based firms has led to a general perception that all
Small and Medium Enterprises, irrespective of industrial activity, can enter foreign market
through Foreign Direct Investment.

58

CHAPTER-6
RESEARCH
METHODOLOGY

59

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 MSMEs, their problems and source of financing has been
done but regarding the MSME financing schemes of Cooperative sector banks has not been much
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 problems faced by MSME to
avail finance from Cooperative banks. Government initiatives to support their growth, was taken
care of.

A. Problem Statement
To study the problem faced by Micro, Small and Medium Enterprises (MSMEs) to avail finance
from SUDICO Bank.

B. Research Objective
1. To study the Micro, Small and Medium Enterprises Sector (MSMEs), its contribution to
GDP, in employment generation and strategic importance for growth of economy.
2. The study about credit facilities provided to MSMEs and problem faced by them to get loans
and advances from bank.
3. To understand the credit assessment criteria of loans and advances to MSMEs and reasons
for rejection of loans and advances.
4. To study factors create obstacles in growth of MSMEs.
5. To analyze governments support in obtaining credit facilities. .
6. RBI Guideline and Committees.
7. To study growing importance of credit ratings in MSME Financing.

Scope Of the study

This study attempts to study the problems faced by MSMEs located in Surat city only. The study
can be extended in future by enhancing the geographical coverage.

60

C. Research Design

Type of design
The research design adopted for this study is Descriptive research. A descriptive research
study tries to discover answers the questions who, what, when and sometimes, how. The
researcher attempts to describe or define a subject often by creating a profile of group of
problems, peoples or events.

D. Data collection

1. Primary data collection

Approach: Primary data collection will be done by communication approach.
Communication method: Survey via personal interview.
A structured interview method is intended to be used by recording respondents answers on a
questionnaire form having pre-specified response format.
Instrument: Questionnaires

2. Secondary data collection:

Secondary data is intended to be collected through websites, newspapers and journals.

Sampling plan
Target Population
Micro, Small and Medium Enterprises from Surat city and which have availed finance from
SUDICO bank.

Sample size: 100 respondents (borrowers/Loan applicants)

Sampling area: Surat

Sampling Method:
Non probability - Convenience Sampling Method.
61

In non probability sampling, members are selected from the population in some nonrandom
manner. Population elements are selected on the basis of their availability (e.g., because they
volunteered) or because of the researcher's personal judgment that they are representative.
Among the various non probability sampling methods the chosen method is Convenience
sampling.
Convenience sampling is used in research when the researcher is interested in getting an
inexpensive approximation of the truth. As the name implies, the sample is selected because they
are convenient. This non probability method is often used during preliminary research efforts to get
a gross estimate of the results, without incurring the cost or time required to select a random
sample.
Tools of Data Analysis and Presentation:
To analyze the data obtained with the help of questionnaire, following tools were used:
Tools of Analysis:

Chi Square Test

Summated Score

Weighted Average Score

As this research deals with nominal and ordinal type of data, nonparametric measures of
association (Chi- square test and contingency coefficient) are appropriate choice for this study

Tools of Presentation:

Tables

Charts

Limitation of the StudyThe followings are problems faced during the research work1. The study is limited to time period.
2. Banks have some confidential reports which cant be handover to outsider, so in
depth research is not possible.
62

3. There is lot of MSMEs unregistered; due to this full details arent available for
evaluating the importance and problems of MSMEs.
4. There are lots of difficulties in getting the data of MSMEs
5. This research study is limited to Surat city only so it doesnt represent the whole
universe of MSMEs

63

CHAPTER-7
DATA ANALYSIS
AND
INTERPRETATION

64

Q-1 what is the nature of your business?

Table no. - 7.1
Particulars
Processing
Manufacturing

Frequency
65

Percentage
65%

Cumulative %
65%

Ancillary Services
Mining
Total

34
1
100

34%
1%
100%

99%
100%

Chart No. -7.1

Nature of Firm
Processing MFG

Ancillary Services

Mining

1%

34%

65%

InterpretationOut of sample size 100 MSME Units, 65 firms are in processing manufacturing business, while 20
firms are in Ancillary and 34 services and 1 firm is in Mining Business. Surat as textile hub,
processing Manufacturing units are more.

65

Q-2 what is the constitution of your firm/business?

Table no. - 7.2
Particulars

Frequency

Percentage

Cumulative %

Sole Owner

43

43%

43%

Partnership

55

55%

98%

Joint Stock
Company
Total

2%

100%

100

100%

Chart No. -7.2

constitution of business
2, 2%

43, 43%

sole owner
partnership

55, 55%

join stock company

InterpretationFrom the chart, it can be seen that 43% firm is owned by sole owners while 55% are in
partnership. It shows 43% firms are run by sole owner.

66

Q-3 how many years of experience firm/business have?

Table no. - 7.3
Particulars

Frequency

Percentage

Cumulative %

0-3 years
4-7 years
8-11 years
12-15 years
15 and above
years
Total

47
41
8
3
1

47%
41%
8%
3%
1%

47%
88%
96%
99%
100%

100

100

Chart No. -7.3

No. of years of experience firm have

50
45
40
35
30
25
20
15
10
5
0

0-3 years

4-7 years

8-11 years

12-15 years

15 and More

InterpretationIn terms of number of years of experience the firm have, most firms (47%) are startup or at the
growth stage. Maximum number (47%) of firms has 0-3 years experience.

67

Q-4 is your firm/business registered?

Table no. - 7.4
Particulars
YES
NO
Total

Frequency
97
3
100

Percentage
97%
3%
100%

Cumulative %
97%
100%

Chart No. -7.4

No. of firms registered

120
100
80
60
40
20
0
Yes

No

InterpretationFrom the above chart it can be seen that, 99% firms are registered while only 1% firm is
unregistered. By registration firms can get status of MSME and its benefits.

68

Q-5 which type of loan you have taken or applied?

Table no. - 7.5
Particulars
Term Loan

Frequency
29

Percentage
29%

Cumulative %
29%

Working
Capital loan

21

21%

50%

Composite
Loan

4%

54%

TUF Loan

40

40%

94%

Doctor Plus
Loan

4%

98%

Project
Finance

1%

99%

1%

100%

Export
Finance

Chart No. -7.5

type of loan applied

45
40
35
30
25
20
15
10
5
0

Term Loan

Working
Composite
Capital
Loan
Requirement

TUF Loan

Doctor Plus
Loan

Project
Finance

Export
Finance

InterpretationFrom the above chart, it can be interpreted that maximum firms (40%) had applied for TUF Loan
while least number of firm (1%) had applied for the export finance at the SUDICO Bank.

69

Q-6 what is the amount of loan taken by your firm?

Table no. - 7.6
Particulars
Below Rs. 5,00,000
Rs. 5,00,00125,00,000
Rs. 25,00,00150,00,000
Rs. 50,00,0011,00,00,000
Rs. 1,00,00,0015,00,00,000
Rs. 5,00,00,000
AND MORE
Total

Frequency
8

Percentage
8%

Cumulative %
8%

20

20%

28%

23

23%

51%

42

42%

94%

5%

99%

1%

100%

100

100%

Chart No. -7.6

Amount of loan applied

45
40
35
30
25
20
15
10
5
0

InterpretationFrom the above chart, Maximum firms (42%) have applied for loan ranging between 50 lacs to 1
crore. While the least amount applied was less than 5 crore.
8% Firms amount less than 5 lacs applied for the purpose of Working Capital Finance.

70

Q-7 what is the term of Loan?

Table no. - 7.7
Particulars
0-2 years
2-4 years
4-6 years
6-8 years
8 & more
Total

Frequency
15
20
60
4
1
100

Percentage
15%
20%
60%
4%
1%
100%

Cumulative %
15%
35%
95%
99%
100%

Chart No. -7.7

Term of Loan
70
60
50
40
30
20
10
0
0-2 years

2-4 years

4-6 years

6-8 years

8 & more

InterpretationMaximum numbers firms term loan was for the period of 4-6 years with 60% while least was more
than 8 years with 1% firm.

71

Q-8 (a) what is the purpose of taking loan?

Table no. - 7.8.a
Particulars
Start up
business

Frequency

Percentage

Cumulative %
40%

40

40%

Working
capital
Requirement

15

15%

55%

Expansion

4%

59%

Technology
Up gradation

40

40%

99%

Others

1%

100%

Total

100

100%

Chart No. -7.8.a

Purpose of taking loan

45
40
35

30
25
20
15
10
5
0
Start Up Bussiness Working Capital
Requirement

Expansion

Technology
Upgradation

Others

Interpretation
From the above chart, maximum number of firms (40%) purpose of availing the loan was to start
the business while the TUF Loan was also. Only 4% firms had applied for expansion.
72

Q-8 (b) how was your experience related loan procedure?

Table no. - 7.8.b
Particulars
Lengthy
Adequate
Total

Frequency
65
35
100

Percentage
65%
35%
100%

Cumulative %
65%
100%

Chart No. -7.8.b

Experience related loan procedure

70
60
50
40
30
20
10
0
Lengthy

Adequate

InterpretationFrom the chart it can be interpreted that 65% firms feel that the loan procedure to avail the loan is
lengthy.

73

Q-9 in how many days did you get the amount of loan?
Table no. - 7.9
Particulars
LESS THAN 30

Frequency
56

Percentage
56%

Cumulative %
56%

31-45 DAYS

36

36%

92%

46-60 DAYS

8%

100%

61-75 DAYS

100%

MORETHAN 75

100%

100

100%

DAYS

DAYS
Total

Chart No. -7.9

No. of days taken to sanctioning the

loan
60
50
40
30
20
10
0
Less Than 30
days

31-45 days

46-60 days

61-75 days

More Than 75
days

InterpretationSUDICO Bank has disbursed maximum number of loan in less than 30 days. 36% loans
assessment was completed in 30-45 days while only 8% loan has taken 46-60 days, it may be
loan amount was bigger and required detail procedures. 0% firm was at 60+ days as bank itself
not want to take more time of firms, if there are eligible provide loan or reject it.

74

Q-10 Rank the obstacles that are faced by your enterprise in its growth from 1
to 5; 1 being the biggest
Table no. - 7.10
Obstacles

Rank1

Rank2

Rank3

Rank4

Rank5

The frequent need to renew

the equipment
Instability of demand for
product or service
Obtaining adequate
financing
Low profitability of the sector

12

19

28

24

17

16

16

28

33

40

27

17

11

12

21

29

27

Taxation levels

16

14

19

29

22

InterpretationFrom the above table, it can be seen that obtaining adequate finance was biggest obstacle in the
growth while the low profitability of MSME Sector was smallest.

75

Q-11 What are the most common reasons given to your enterprise by the
SUDICO bank for rejecting an application for Loan?
Table no. - 7.11
Particulars
The management team of

Frequency
10

Percentage
10%

Cumulative %
10%

37

37%

47%

The application was not

correctly completed

1%

48%

Poor credit history

25

25%

73%

The enterprise could not

17

17%

90%

Not a profitable venture

10

10%

100%

Total

100

100%

borrower firm is too

inexperienced

The application did not

meet the criteria

provide enough
guarantees

InterpretationFrom the above table, the reason of rejecting the loan is researched. It was found that 37% loans
were rejected because it doesnt fulfill the required criteria. While only 1% loan was rejected
because applicant has not filled it completely.

76

Q-12 Are you aware about Govt. providing subsidy?

Table no. - 7.12
Particulars
YES
NO
Total

Frequency
94
6
100

Percentage
94%
100%

Cumulative %
94%
100%

Chart No. -7.10

Awarness about government provide subsidy

100
90
80
70
60
50
40
30
20
10
0

yes

no

InterpretationFrom the above chart, 94% knows about that government provide subsidy to firms while 6% firms
are not aware about it.

77

Q-13 (a) Have you ever got subsidy?

Table no. - 7.13.a
Particulars

Frequency

YES
NO
Total

Percentage

64
36
100

Cumulative %

64%
36%
100%

64%
100%

Chart No. -7.11

Firms got subsidy

70
60
50
40
30
20
10
0
Yes

No

InterpretationFrom the above chart, it can be concluded that 94% firms know about the government subsidy but
64% firms gets the benefits of subsidies.

78

Q-13 (b) If yes, then what is the rate of subsidy?

Table no. - 7.13.b
Particulars
Below 5%
5-10%
10-15%
15-25%
Total

Frequency
29
22
11
2
64

Percentage
45.31%
34.38%
17.19%
3.12%
100%

Cumulative %
45.31%
79.69%
96.85%
100%

Chart No. -7.12

Government Interest Subsidy

35
30
25
20
15

10
5
0
BELOW 5%

5-10%

10-15%

15-25%

InterpretationFrom the above chart, it can be concluded that maximum firm gets less than 5% subsidy on paid
interest. While very less number of firms get 15-25% subsidy on the paid interest.

79

Q-14 (a) Do you get rebate on the interest amount at SUDICO?

Table no. - 7.14.a
Particulars

Frequency

Percentage

Cumulative %

YES

67

67%

67%

NO
Total

33
100

33%
100%

100%

Chart No. -7.13

Rebate from SUDICO Bank on loan

Interest
80
70
60
50
40
30
20
10
0
Yes

No

InterpretationFrom the above chart, 67% firms got rebate on interest amount while 33% was not provided rebate
benefits.

80

Q-14 (b) if yes, at what rate?

Table no. - 7.14.b
Particulars

Frequency

Percentage

Cumulative %

1%

40

59.70%

59.70%

2%

27

40.30%

100%

Total

67

100%

Chart No. -7.14

Interest Rebate given by SUDICO

Bank
60
40
20
0
Interest rebate @ 1%

Interest rebate @ 2%

InterpretationFrom the above chart, it can be seen that maximum firms, 59.70% firms got 1% interest rebate
while 40.30% got 2% interest rebate.

81

Q-15 Please indicate your level of satisfaction with various aspects of

obtaining finance from SUDICO bank. Kindly rate them on 5-point scale basis;
5 being strongly satisfied and 1 being strongly dissatisfied:
Table no. - 7.15

Various

Strongly

Aspects

dissatisfied

11.1) The

Dissatisfied

Neutral

satisfied

Strongly
satisfied

12

15

18

31

26

15

52

28

12

56

amount
granted by
the bank
relative to
the amount
requested
11.2) The
simplicity of
the
application
form
11.3)

24

Interest
rate
11.4)

12

24

39

24

10

34

42

16

21

36

27

Service
fees
11.5) Time
to obtain
approval
11.6)
Guarantees
required by
the
institution

82

11.7)

19

30

46

Behavior of
the bank
staff

InterpretationFrom the above table, it can be seen that the behavior of bank staff is ranging very satisfied to
neutral while least was for the sanctioned of loan against actual amount applied for

83

Q-16 Are you export oriented unit?

Table no. - 7.16
Particulars
YES
NO
Total

Frequency
1
99
100

Percentage
1%
99%
100%

Cumulative %
1%
100%

Chart No. -7.15

Export oriented Unit

150
100
Export oriented Unit

50
0
Yes

No

InterpretationOnly 1% firms is export oriented applied for finance at SUDICO Bank.

84

Q-17 Will you recommend SUDICO Bank finance for business loan to your friends or
relatives?
Table No. 7.16.a
Particulars
Frequency
Percentage
Cumulative %
YES
75
75%
75%
NO
25
25%
100%
Total
100
100%

Chart No. 7.16

Recommending bank to others

80
70
60
50
40
30
20
10
0
Yes

No

InterpretationWe can analyze from the chart that 75 % of customers are ready to recommend the SUDICO bank
to others and 25 % of customers refuse to recommend the bank to others.

85

Test Application
Chi Square Test:
Pearson's chi-squared test (2) is the best-known of several (Yates, likelihood ratio, portmanteau
test in time series) chi-squared tests statistical procedures whose results are evaluated by
reference to the chi-squared distribution. Its properties were first investigated by Karl Pearson in
1900. In contexts where it is important to make a distinction between the test statistic and its
distribution, names similar to Pearson X-squared test or statistic are used.

It tests a null hypothesis stating that the frequency distribution of certain events observed in a
sample is consistent with a particular theoretical distribution. The events considered must be
mutually exclusive and have total probability 1. A common case for this is where the events each
cover an outcome of a categorical svariable. A simple example is the hypothesis that an ordinary
six-sided die is fair, ie., all six outcomes are equally likely to occur.

Weightage Average Method:

The term weight stands for relative importance of different items. W eights have been
assigned to various ranks. The weighted score is calculated by multiplying the number of
respondents in a cell with their relative weights and the whole number is summed up to give the
weighted score for that factor. In this method weights are assigned to the items.
The formula for computing weighted average is
X= WX/ W
Where X is weighted arithmetic mean X = the variable value i.e. x, x1, x2..x n W= weight
attached to the variable value i.e. w1, w2 wn

86

Q-1 Rank the obstacles that are faced by your enterprise in its growth from 1
to 5; 1 being the biggest obstacle.
Table no. - 7.17
Obstacles

Rank

Rank

Rank

Rank

Rank

Weighted

-Average
Score

1. The frequent

12

19

28

24

17

315

16

16

28

33

364

40

27

17

217

11

12

21

29

27

349

16

14

19

29

22

327

need to renew
the equipment
2. Instability of
demand for
product or
service
3. Obtaining adeq
uate financing
4. Low profitability
of the sector
5. Taxation levels

Analysis and InterpretationIn 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 MSME enterprises in their growth are being
ranked. The obstacle of obtaining adequate finance is ranked first with summated score of 217.
Third rank is given to the taxation levels; tax charged by the government and second 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 MSMEs in their growth, need to upgrade the equipment 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 MSMEs in India.
87

Q-2 Is there any key relation between type of loan applied for and customer
experience with loan procedure?

H0: There is no significant relation between type of loan applied for and customer
experience with loan procedure
H1: There is significant relation between type of loan applied for and customer
experience with loan procedure

Term loan
Working capital
finance
Composite loan
TUF loan
Doctor plus loan
Other
Total

Table No. 18
Lengthy
Adequate
19
10
9
12
3
32
2
1
65

1
8
2
1
35

0.001194
1.584066
0.061538
1.384615
0.138462
0.069231

Total
29
21
4
40
4
2
100

0.002217
2.941837
0.114286
2.571429
0.257143
0.128571

Solution Chi-square value (calculated) = 9.2546

Chi-square value df (Table) = (R-1) (C-1) = 11.070 (At 5% level of significance)

p value is 0.09933

11.070 > 9.2546 (0.09933>0.05)

So, H0 is accepted and H1 is rejected.

88

It can be concluded that there is no significant relationship type of loan applied for
and customer experience with loan procedure. Bank has different policies and
procedure for appraising the loan. TUF loan procedure more lengthy than term or
other financial products.

Q-3 Please indicate your level of satisfaction with various aspects of obtaining
finance from these SUDICO bank. Kindly rate them on 5-point scale basis; 5
being strongly satisfied and 1 being strongly dissatisfied

Table no. - 7.19

Various

Strongly

Aspects

dissatisfied

11.1) The

Dissatisfied Neutral satisfied Strongly Summated

satisfied

Score

12

15

18

31

26

350

15

52

28

402

12

56

amount
granted by
the bank
relative to
the amount
requested
11.2) The
simplicity of
the
application
form
11.3)

24

393

Interest
rate
11.4)

12

24

39

24

373

10

34

42

398

16

21

36

27

374

Service
fees
11.5) Time
to obtain
approval
11.6)

89

Guarantees
required by
the
institution
11.7)

19

30

46

417

Behavior of
the bank
staff

Interpretation:
Number of respondents -100
Maximum Score - 500
Minimum Score 100

Analysis and Interpretation-

As from the above table 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 393. 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 350 but was more close to satisfied. So, respondents
are satisfied with the interest rate and the amount sanctioned.

The behavior of bank staff is rated satisfied as maximum rate ranging from very satisfied to neutral
with summated score of 417. In this least rank is given to sanction of loan against the amount of
loan applied for with the summated score of 350.

90

Q-4 Is there any significant relation between customer satisfaction level and
their recommendation about bank to others?
H0: There is no significant relationship between customer satisfaction level and
their recommendation about bank to others
H1: There is significant relationship between customer satisfaction level and their
recommendation about bank to others
Table No. 20
Recommendations to others

Customer
Satisfaction
Level

Highly
Dissatisfied
Dissatisfied
Natural
Satisfied
Highly
satisfied
Total

Total

Yes

No

7
11
29
26

2
6
11
5

9
17
40
31

75

25

100

0.027778 0.083333
0.009259 0.027778
0.240196 0.720588
0.033333

0.1

0.325269 0.975806
SolutionChi-square value (calculated) = 2.5433
Chi-square value df (Table) = (R-1) (C-1) = 9.488 (At 5% level of significance)
p value is 0.6369
9.488 > 2.5433 (0.6369>0.05)
So, H0 is accepted and H1 is rejected.

It can be concluded that there is no significant relationship between customer

experience and their recommendations to others. Customer were provided the best

91

services from bank and also providing complete solution of customer problems at
their best efforts.
Q-5 Is there any key relation between type of loan applied for and rebate
received on interest of the loan?

H0: There is no significant relation between types of loan applied for and rebate will
be received on interest of the loan
H1: There is significant relation between types of loan applied for and rebate will be
received on interest of the loan
Table No. 21
YES
NO
Total
Term loan
20
9
29
Working capital
8
13
21
finance
Composite loan
3
1
4
TUF loan
33
7
40
Doctor plus loan
2
2
4
Other
1
1
2
Total
67
33
100

0.016722
2.618685
0.038209
1.434328
0.172537
0.086269

0.03395
5.316724
0.077576
2.912121
0.350303
0.175152

Chi-square value (calculated) = 13.2526

Chi-square value df (Table) = (R-1) (C-1) = 11.070 (At 5% level of significance)

p value is 0.02112

11.070 < 13.2526 (0.02112<0.05)

92

So, H1 is accepted and H0 is rejected.

It can be concluded that there is significant relationship between types of loan

applied for and rebate received on interest of the loan.

93

CHAPTER-8
FINDINGS

94

Results & Findings

Following are the data gathered through primary research carried out on the project Problems of
Micro, Small and Medium Enterprises (MSME) borrowers, Government initiatives to support their
growth and steps taken by SUDICO bank to mitigate it

SUDICO Bank is offering finance to priority sector inform of Term Loan, TUF Loan, and
Working Capital Loan etc.

In Research, it was found that 65% of SUDICO Customers are in processing Manufacturing
Business, while only 1% firm is in Mining business. High number of manufacturing units is
because of Surat is Textile Hub.

There are 55% firms constitution is Partnership while second highest is Sole Owned Firms
are 43%. It shows that MSMEs are mostly one man show, so the business growth is
depend up on the owner and its knowledge.

In term of experience of business, 47% firms are new ventures and have little experience. It
shows SUDICO Bank promoting new firms to start their businesses.

In research, it was found that 40% of firms have applied for TUF Loan. As more number of
manufacturing units are there, that needs frequent technology up gradation.

Purpose of taking loan from SUDICO bank was start up of business and Technology up
gradation.

SUDICO Bank has good record of disbursement of loan application within 30 days of time
with 56%.

Appraisal of loan application require longer time to check, verify reports, valuation of assets
(if given as collateral), ratio analysis, financial analysis, market and management analysis
etc.
Detail analysis is to be made because of insufficient data and difficulty in projection which
requires expertise skills. Because of this 65% customer felt that loan disbursement process
is lengthy.

Biggest reason for rejecting the loan was that it doesnt match the criteria and standard
required to have. That is 37% of firms. Second biggest reason was poor credit history.

Most firms know about the government subsidy. But 64% firms get subsidy.

SUDICO Bank also providing rebate on interest to firms who have maintained the
continuous payment of loan installments and bank feel they need help and growth oriented.

By whole study it is clearly state that finance is the vital component of the business
operating cycle. If finance is timely available in the firm it will be beneficial for the firm.
95

It is found out from this research study that Micro, Small and Medium Enterprises (MSMEs)
are suffering from many problems that become obstacles in their growth.

At the time of peak season MSME have to keep their investment at the optimum level for
making good profit by maintaining the demand level, which also need more amount of
working capital.

Bank is taking minimum number of days to sanctioning the loan.

SUDICO Bank is strictly following the rules and regulation for sanctioning the loan.

Bank mostly providing the loan to their well known customers or through there references.

Only 1% firm is export oriented units who applied for finance at SUDICO Bank. It may be
reason that bank may not provide higher amount of loan that out of limit of banks finance.

The entrepreneurs have lack of knowledge regarding the credit facilities, different mode of
finance, schemes.

The capital base of MSME is very poor.

SUDICO Bank is encouraging the MSME Finance because they feel that they are growth
oriented sector with also provides employment to local peoples.

At last the inadequate and timely availability of finance is considered to be the biggest
problem responsible for obstacle in a growth business.

96

CHAPTER-9
CONCLUSION

97

 If India has to have a growth rate of 8-10 percent for the next couple of decades, it needs a
strong MSME sector, without which it cannot be achieved. There are approximately 3 crore
MSMEs in the country. The MSMEs have shown an average growth of 18 percent over the
last five years (2006-2011). Around 98 percent of the production units are in the MSME
sector. Only 4 to 5 per cent MSMEs are covered by institutional funding given that approx
95 per cent of villages are not covered by banks. There is, therefore, a need to bridge this
gap through enabling policies. While these can address some impending issues of MSMEs,
there is still a lot that needs to be done to develop the sector as a whole.
It can be concluded that MSMEs are growing and profitable sector for banks in terms of
money instrument. SUDICO Banks system of loan disbursement is very good, but felt quite
lengthy as requires all norms and documentation is to be followed which is acceptable.
MSMEs have the under utilization of capacity because of problems pertaining to finance,
raw material etc. It reduces its production of goods and also increases the cost. MSMEs
may have competition with big firms or established firm, to compete with them optimum
utilization of resources is required.
In the recent years some initiatives have been taken by both Government and Reserve
Bank of India to make more acceptable for funding the banks.
In regard to rate of interest, industrial owner feel that the rate of interest for working capital
finance to high. It is manageable in the time of peak season but not all time.
Nowadays credit guaranty and credit rating institution have floated to support the MSME by
providing services to them and assume risk in financing the MSMEs. MSME units are facing
other problems like lack of market knowledge, weak marketing and supply chain channels,
lack of technology up gradation, unable to afford skill full workers and employees, increased
cost of product because of low capacity utilization and less profit margins etc.
Bank customer are satisfied the product and services rendered to them. Bank staff behavior
also very positive to customers and provide effective solution of their problem. Based on the
chi square test its results are positive for banks and their services.

98

CHAPTER-10
RECOMMENDATIONS

99

 Government providing the finance under the various schemes to MSMEs which is good but
it is not useful as getting finance or rebate involves cumbersome procedures which require
more time that available opportunity will be missed because of delays. MSME needs
finance; Government is providing it but need on time.
Product innovations in banks have set the rule of the game Innovate or perish. The same
rule applies to MSME segment. At present, there is a vast gap between requirements of the
MSME customer and availability of suitable/matching products and services in the Cooperative sector bank. New credit products may be developed to take care of the diverse,
unexpected and short-term requirements of the MSME customers in a hassle free manner
and in a short time.
As far as credit appraisal is of loan application is concerned, Bank provide loan on the basis
of only re-payment capacity of the borrower and it considers only DSCR to appraise the
loan to the business which is not enough to check the feasibility of the project and
appraising such high amount of loan. Therefore the bank should also consider various
capital techniques like payback period, NPV, IRR, PI etc. along with DSCR and debt equity
ratio.

As There are different tools in financial analysis, different budgeting tools are also need to
be analysis instead of only some ratios, BEP analysis, because they are also important
criterias which may be give good result from the different point of view.
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
Timely working capital finance should be made available to the small units keeping in view
their needs.
The re-orientation program, workshops and seminars should be organized at district level to
provide latest information about various schemes to the small entrepreneurs.
100

 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.
SUDICO Bank 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.
As 95.8% of MSME (all over India) 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)
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.
Bank should have to create risk management model exclusively for MSMEs for risk
reduction and bring down NPA of company.

101

ANNEXURE

102

Questionnaire
We, Mehta Kiran and Patel Denish, MBA Student of S R Luthra Institute of Management are
conducting a research on Problems of Micro, Small and Medium Enterprises borrowers,
Government initiatives to support their growth and steps taken by SUDICO Bank to mitigate
it. So, we request you to spare a few minutes from your busy schedule and fill this form. We
assure you that the information provided by you will be kept confidential.

Q-1 what is the nature of your business?

A. Processing Manufacturing
B. Ancillary Service
C. Mining
Q-2 what is the constitution of your firm/business?
A. Sole Owner
B. Partnership
C. Joint Stock Company
Q-3 how many years of experience firm/business have?
A. 0-3
B. 4-7
C. 8-11
D. 12-15
E. 15 and More
Q-4 is your firm/business registered?
A. YES
B. NO
Q-5 which type of loan you have taken or applied?
A. Term Loan
B. Working Capital loan
C. Composite Loan
D. TUF Loan
E. Doctor Plus Loan
F. Project Finance
G. Export Finance
Q-6 what is the amount of loan taken by your firm?
A. Below Rs. 5,00,000
B. Rs. 5,00,001-25,00,000
C. Rs. 25,00,001-50,00,000
D. Rs 50,00,001-1,00,00,000
E. Rs 1,00,00,001-5,00,00,000
103

F. MORE THAN 5 CR.

Q-7 what is the term of Loan?
A. 0-2 YEARS
B. 2-4 YEARS
C. 4-6 YEARS
D. 6-8 YEARS
E. More than 8 years
Q-8 (a) what is the purpose of taking loan?
A. Start up business
B. Working capital Requirement
C. Expansion
D. Technology Up gradation
E. Any_________
Q-8 (b) how was your experience related loan procedure?
A. Lengthy
B. Adequate
Q-9 In how many days did you get the amount of loan?
A. Less than 30 days
B. 30-45 days
C. 46-60 days
D. 61-75 days
E. More than 75 days

Q-10 Rank the obstacles that are faced by your enterprise in its growth from 1 to 5; 1 being
the biggest
A. The frequent need to upgrade the equipment
B. Instability of demand for product or service
C. Obtaining adequate financing
D. Low profitability of the sector
E. Taxation levels

Q-11 what are the most common reasons given to your enterprise by the SUDICO bank for
rejecting an application for Loan?
A. The management team of borrower firm is too inexperienced
B. The application did not meet the criteria
C.The application was not correctly completed
D.Poor credit history
E.The enterprise could not provide enough guarantees
104

F.Not a profitable venture

Q-12 Are you aware about Govt. providing subsidy?

A. YES
B. NO
Q-13 (a) Have you ever got subsidy?
A. YES
B. NO
Q-13 (b) If yes, then what is the rate of subsidy?
A. Below 5%
B. 5-10%
C. 10-15%
D. 15-25%
Q-14 (a) Do you get rebate on the interest amount at SUDICO?
A. YES
B. NO
Q-14 (b) if yes, at what rate?
A. 1%
B. 2%

Q-15 Please indicate your level of satisfaction with various aspects of obtaining finance
from SUDICO bank. Kindly rate them on 5-point scale basis; 5 being strongly satisfied and 1
being strongly dissatisfied:
Particulars

Strongly Satisfied Neutral Dissatisfied

Strongly
Satisfied
Dissatisfied

15.1) The amount

granted by the bank
relative to the amount
requested
15.2) The simplicity of the
application form
15.3) Interest rate
15.4) Service fees
15.5) Time to obtain
approval
15.6) Guarantees
required by the institution
15.7) Behavior of the
bank staff
Q-16 is your firm export oriented?
A. Yes
B. No
105

Q-17 Will you recommend SUDICO Bank finance for business loan to your friends or
relatives?
A. Yes
B. NO
Personal Details:Name of the company

Location

Age:
A.
B.
C.
D.
E.

18-25 years
26-33 years
34-41 years
42-49 years
50 and above

Education Qualification:
A. SSC
B. HSC
C. Graduate
D. Post Graduate
E. PhD

106

Monthly Income:
A. Below 50,000
B. 50,000-1,00,000
C. 1,00,000-1,50,000
D. 1,50,000-2,00,000
E. 2,00,000-2,50,000
F. More than 2, 50,00

Risk Management in MSMEs

Risk is omnipresent and all pervasive in any walk of life. It is more so in the business sectors,
particularly in Micro, Small and Medium Enterprises (MSMEs). The etymology of the word Risk
may be traced to the Latin word Rescum, which means Risk at Sea. In business, risk is always
measured against capital and therefore the Capital to Risk-weighted Assets Ratio (CRAR) is much
in vogue.
Risk is the potentiality that both expected and unexpected events may have an adverse impact on
the capital and earnings. When we use the term Risk, we all mean financial risk or uncertainty of
financial loss. If we consider risk in terms of occurrence frequency, we measure risk on a scale,
with certainty of occurrence at one and certainty of non-occurrence at the other end. When the
probability of occurrence or non-occurrence is equal, risk is the greatest. Risk can be broadly
defined as any issue that can impact the objectives of a business entity, be it financial service or
commercial. Risk Management is an ongoing process that can help improve operations, prioritise
resources, ensure regulatory compliance achieve performance targets, improve financial stability
and ultimately, prevent loss/damage to the entitys.
Every enterprise, be it Micro,

small or medium, has its own objectives and mission. Risk

Management plays a key role in protecting its assets and resources and ensuring that risks are
reduced to an acceptable level. The essence of risk management is to reduce the risks to a
reasonable and manageable level, on an on-going basis.

Risks Specific To MSMEs

No doubt any business entity needs robust risk management systems but the SMEs need much
more than that as they may not have wherewithal to manage and control risks due to their very
size and several limitations. This is not true in the case of large corporate entities where
professional personnel take care of many aspects pertaining to risk. All risk taking units must
operate within approved procedures, limits and controls. There is no specific definition for MSMEs,
which normally cover closely held or unlisted companies, partnership firms, proprietor concerns,
etc.
There exists fundamental difference between the way they function and the way they will be
served in the financial market, as the character and integrity of the promoter/ owner are the key
and critical credit indicator and hence play a large role. In SME business, the gut feeling, which is
subjective, is more relied upon than the pure analysis that are more objective-oriented. Hence,
both the business and professional relationships are rolled into one. Therefore credit rating or for
that matter risk rating may not make a material difference to MSME sectors. Certain
misconceptions such as MSMEs may get low rating, provide unreliable information, may not afford
107

the fees for getting them rated, etc. will have to be dispelled first. However, rating agencies with
specialised teams with analytical tools customised to MSME sector will go a long way in putting in
place proper mechanism in this regard.
The MSME sectors are exposed to some specific risks, some of which are discussed below:

(a) Constitution of business entity

(b) Leverage on financial structure
(c) Tough competition and Inadequate margin
(d) Low collection in Account Receivables
(e) Incapacity to go for technological advancement
(f) High employee turnover
(g) Micro Finance
(h) Collateral Security
(i) Bank Lending To MSMEs

By virtue of the fact that most of the entities in SME sector are small players in their field, they may
have to encounter tough competition from the bigger players

108

Chart on MSME Risk

Enterprise Wide Risk Management

Enterprise Wide Risk Management is the latest trend and buzzword for an overall approach of the
management of risk as a whole in the business. All business entities accumulate resources viz.
men, material, money, technology, etc. and invest them in activities which are uncertain and hence
fraught with various kinds of risks. As whole is always bigger than sum of its parts, enterprise wide
risk management should be attempted instead of adopting silo-approach and handling risk of one
issue, in isolation and exclusion of other functions.
EWRM is a process through which a business entity optimises the manner in which it takes risks. It
is not seeking or avoiding risk, but optimising the risk. Hence putting in place an EWRM makes
good business sense. Any successful implementation of EWRM framework needs to take into
consideration the integration of Enterprise Resource Planning system (ERP) so as to effectively
manage the risk across the organisation facilitating the integration of the various roles to manage
the same efficiently. In the light of advancement in information technology, power of computation
and sophistication of risk analysis on interest rate, market fluctuations, availability of extensive
database as well as information flow, the scope for putting in place an enterprise wide risk
management framework has become more a necessity than a luxury for all the business
enterprises. Basel II and SME Sector Under the new Capital Accord, popularly known as Basel II,
the regulatory capital is more closely associated with risk implying that lending to lower risk
borrowers will attract lower capital requirements.
109

Those banks which are likely to employ IRB approach should be better placed to avoid overpricing good risks and under pricing bad risks. By deduction, it means that there may be some
migration of higher risk SME loans to those banks which do not adopt IRB approach and which the
banks, by implication, rely on less sophisticated and more standardised measures of risk. Any
enhanced sensitivity of regulatory capital requirements to risk may be doing nothing more than
aligning the regulatory environment with current practice.

110

Sr.

Particulars

Government Initiatives

Bank Initiatives

No.
1

Technology up

Under

TUF

gradation

Central

Scheme

Government,

by SUDICO

bank

can working as agent on

avail finance to upgrade the behalf of borrowers to

machineries etc.

avail benefit of TUF

Scheme and transfer
the rebate & subsidy
on same.

Collateral

Business Unit/Firm, who has Bank

Requirement

growth

potential &

sanction

the

under

this

good loan

financial strength but has scheme

lack of collateral security,
can

get

under

loan

the

approved

scheme

of

CGTMSE.
3

Working

Capital Units/Firms can get working SUDICO

Finance

Bank

this

capital finance on the basis committees

of

recommendations

committees

like

Committee

of recommendation

Kannan sanction

(MBFP)

to

working

& capital finance to the

projected balance sheet firms.

method.
4

For Export Units

Government promote export SUDICO

Bank

has

business, for that special financed such export

finance

schemes

&

tax units.

reliefs are available to such

export oriented units.
5

Marking Channels

To

improve

marketing -------

channels, SME Chambers

and Government
111 promote

their business in regular fair

and summits.
6

Quality Certification

The Micro, Small & Medium -----Scale Sector has emerged

as

dynamic

and

vibrant

sector of Indian Economy

and it has been making
significant

contribution

to

industrial production, export

and employment generation.
The process of economic
liberalization

and

market

reforms has opened up the

Indian small scale sector to
the global competition. In
order

to

enhance

the

competitive strength of the

small

scale

sector,

the

Government introduced an
incentive scheme for their
technological

up

gradation/quality
improvement

and

environment management.

The

scheme

incentive

to

provides

those

small

scale/ ancillary undertaking

who

have

9000/ISO

acquired

ISO

14001/HACCP

certifications. The scheme

for ISO 9000 reimbursement
in operation since March,
1994

has

now

been

enlarged so as to include
reimbursement of expenses
112

for acquiring ISO 14001

certification also vide this
Office Administrative Order
No.41

(8)/ISO/Electx./2002

dt. 28th October, 2002. Upto

31st march 2009, 18778
Micro & Small units have
been benefited from the
scheme.
7

Credit Rating

SMERA

(SME

Rating SUDICO

Bank

Agency of India) accredited approaching

to

in September 2012 for the SMERA for Rating of

purpose of risk weighting, Units or Firm with loan
the banks claims for capital amount
adequacy
addition

purposes
to

domestic

existing
credit

more

than

in 100 Lacs.
five

rating

agencies.
8

Interest Rebates

Government of Gujarat is SUDICO Bank also

giving

rebate

on

paid providing

interest on loan.

rebate

to

borrowers who repays

loan

instalment

regularly and on the

growth cycle.
9

Interest on Loan

On the basis of Rating of ------SMERA

or

any

reputed

rating agencies rating, can

get finance on lower interest
rate if rating is high
10

SICK MSME Unit

Reserve Bank has provided -------setting up a rehabilitation

fund for reviving sick micro,
small

and

medium

enterprises (MSMEs) in the

wake of rising number of
such

units.
113

India

Opportunities Venture Fund

with

SIDBI

to

enhance

availability of equity to the

SME sectors
12

Infrastructure
development

Cluster Development-

SURAT

CITY

has

and The development of Small following clusters-

business growth

and

Medium

has

taken

place in the form of different

industrial cluster. There are,

Textiles-Powerlooms

all 83 industrial cluster in Textile stores

state for different industrial
goups have been identified Textile-synthetic
in

state,

developed

at

Diamond processing

number of different location

in state. The approch of Data processing
cluster based development
has helped in improving cost
competiveness of industries,
by way of creating common
facilities,

finance

centres,

and

opportunities.

brand

promotion

of

skills.

13

Marketing Support

DC

(MSME)

has

providing

been -----------

Marketing

Development

Assistance

Scheme to MSMEs in order

for them to get exposure in
the international market, and
with

the

objective

exploring

the

of

possible

export opportunities for their

products by exhibiting them
through

participation

International

Trade
114

in
Fairs

to

get

advantage of available

developing

marketing
name

SUDICO Bank provide

under

MSME-India

umbrella. KVIC has been

granted

the

status

of

deemed Export Promotion

Council

(EPC)

by

the

Department of Commerce,
Ministry of Commerce and
Industry,

Government

of

India, for availing support

under Market Development
Assistance (MDA) / Market
Access Initiative (MAI) on
the pattern of an umbrella
EPC, like Federation of
Indian Export Organisations
(FIEO), for participation in
international
exhibitions/fairs,
organization of buyer-seller
meets, etc.
Vendor

Development

Programmes

(VDPs)

being

are

organized

by

MSMEDIs in every nook and

corner of the country to
provide common platform
for MSEs as well as large
public sector enterprises to
interact with each other with
a view to identifying
emerging demands of the
buyer

organizations,

and

simultaneously providing an
opportunity for displaying
the

capabilities

of

the

MSMEs and their industrial

115

ventures. Such programmes

have proved to be of
immense use in locating
suitable entrepreneurs by a
number

of

buying

organizations including the

Public Sector Enterprises,
Government

departments

such as Defence, Railways,

in indigenising a number of
products which hitherto had
been imported.
14

Entrepreneurship

MSME-DIs

are

Development

varieties

of

Support

programmes

imparting SUDICO
training been
for

generation

first NABARD

with
for

existing programme for firms.

workers

and

managers. The ultimate aim

is to promote the MSME
sector of the country by
inculcating

entrepreneurial

culture in the respective

area as well as to enhance
Productivity of the existing
industries of that State/Area.
Different types of
training

programmes

conducted for
entrepreneurship
development and
promotion

working

has

potential Entrepreneurship

entrepreneurs,
industrial

Bank

are:

Industrial

Motivation
Campaigns

(IMCs),

Entrepreneurship
Development

Programmes
116

(EDPs),
Entrepreneurship

Skill

Development
Programme

(ESDPs),

Management
Development
(MDPs),

Programmes

Business

Skill

Development
Programme

(Tailor

made

Course), and Entrepreneurcum-Skill

Development

Programme

(ESDP)

on

Biotechnology.
The

Ministry

of

MSME

initiated the Small Industry

Clusters

Development

Programme (SICDP) which

is

broad

based

programme for holistic and

integrated development of
micro and small enterprises
through
interventions

such

as

capacity building, marketing

development,

export

promotion, skilldevelopment,
technology

up

gradation,

exposure visits, etc. and for

setting

up

of

common

facilities.
15

Policy of reservation

Reservation of items for ---------exclusive

MSME

manufacture
sector

in

statutorily

provided for in the Industries

(Development

and

Regulation) Act, 1951, has

117

been one of the important

policy

measures

for

promoting this sector.

The

issue

of

reservation/dereservation of
product is examined on a
continual

basis

by

an

Advisory

Committee

on

Reservation

constituted

under the I(D&R) Act 1951,

which is presently headed
by the Secretary (MSME) as
Chairman. Other Members
of

the

Committee

Secretary

are

(Commerce),

Secretary (IP&P), Advisor

(VSI) Planning Commission
with Additional Secretary &
DC(MSME)

as

Secretary.

118

Member

BIBLIOGRAPHY

119

BooksKishore, Ravi. Strategic Financial Management, New Delhi: Taxmanan, 2011, page no 73-74
Bhaskar, B. and Saruvanan,I. SME Entrepreneurs challenges & opportunities, Mumbai, 2010
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Khan, Y.M. and Jain, P.K. Financial Management, New Delhi: Tata McGraw Hill Publishing Co.
Ltd.
Pandey, I.M. Financial Management, Hyderabad: Vikas publishing housing ltd

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Their Attitudes, Procedures. Journal of Industry and Trade, 34(3).

Mercieca, S. and Scheack, C. (2009). Bank Market Structure, Competition And SME Financing
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Popli, G.S. and Rao, D.N. (2009). An Empirical Study Of Smes In Electronics Industry In India:
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120

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Report (Hard Copy referred)1. 103rd Annual Report of The Surat District Co-operative Bank
2. NABARD Regional Training Annual Report (2010) on Financing MSMEs

121