Various

Committees

Narasimham2
Committee

Verma
Committee

Taraporeon
Convertibility

Kapoor
Committee

Narasimham1
Committee

HOMEPAGE

Nayak Committee on SSIs

ConsideringthecontributionoftheSSIsectortotheoverallindustrialproduction,exportsandemploymentand
also recognising the need to give fillip to this sector, a special package of measures was devised by RBI
(duringApril1993)toensureadequateandtimelycredittothissector.Whiledoingsotherecommendationsof
thePRNayakcommitteeweretakenintoaccount.Examinationofbankfinanceprofileofworkingcapitaltothe
small scale sector by the committee has revealed that this sector as a whole received a level of working
capital which was only 8.1% of the its output. The village industries and the smaller tiny industries among
themcouldgetworkingcapitalfinancetotheextentofonlyabout2.7%oftheiroutput.
Thesalientfeaturesofthepackagearesetoutbelow:
Bankshavebeenadvisedtogivepreferencetovillageindustries,tinyindustriesandothersmallscaleunitsin
thatorder,whilemeetingthecreditrequirementsofsmallscalesector.
ThebanksshouldstepupthecreditflowtomeetthelegitimaterequirementsoftheSSIsectorinfullduringthe
8th5yearplan.ForthispurposethebanksshoulddrawupannualcreditbudgetfortheSSIsectoronabottom
upbasis.Eachbranchofthebanksshouldprepareanannualbudgetinrespectofworkingcapitalrequirements
ofallSSIsbeforethecommencementoftheyear.Suchbudgetingshouldcover(a)functioningunitswhich
alreadyhaveborrowinglimitswiththebranch(b)newunitsandunitswhoseproposalsareunderappraisaland
(c)sickunitsundernursingandalsosickunitsfoundviableafterdiscussion/feedbackreceivedfromthe
borrowingunits.Thebudgetshouldtakeintoaccount,amongotherrelevantaspects,normalsalegrowth,price
riseduringthepastyear,anticipatedspurtinbusinessetc.
Itisdesirablethatasinglefinancingagencymeetsboththerequirementoftheworkingcapitalandtermcredit
forsmallscaleunits.TheSingleWindowSchemeofSIDBIenablesthesameagencySFCorcommercialbank,
asthecasemaybe,toprovidetermloansandworkingcapitaltoSSIunitshavingaprojectoutlayuptoRs.20
lacandworkingcapitalrequirementuptoRs.10lac.Thebankshavebeenadvisedtoadoptthisapproach.
Atpresentnormsforinventoryandreceivableareapplicabletoallunitsenjoyingaggregatefundbasedworking
capitalcreditlimitsofRs.10lacandabovefromthebankingsystem.UnitsenjoyinglimitofRs.10lacand
abovebutuptoRs.50lacaresubjecttothe1stmethodoflending.Henceforthforthecreditrequirementsof
villageindustries,tinyindustriesandotherSSIunitshavingaggregatefundbasedworkingcapitalcreditlimits
uptoRs.50lac(subsequentlyraisedtoRs.1croreandRs.200lacduringApril1997,toRs.400lacduring
August1998andfurthertoRs.500lacduringMay1999)fromthebankingsystem,thenormsforinventoryand
receivablesandalsothe1stmethodoflendingwillnotapply.Insteadsuchunitsmaybeprovidedworking
capitallimitscomputedonthebasisofaminimumof20%oftheirprojectedannualturnoverfornewaswellas
existingunits.
Thebanksmaysatisfythemselvesaboutthereasonablenessoftheprojectedannualturnoveroftheapplicant
onthebasisofannualstatementsofaccountoranyotherdocumentssuchasreturnsfiledwithsales
tax/revenueauthoritiesandalsoensurethattheestimatedgrowthduringtheyearisrealistic.TheseSSIunits
wouldberequiredtobringin5%oftheirannualturnoverasmarginmoney.Incaseswhereoutputexceedsthe
projectionsorwheretheinitialassessmentofworkingcapitalisfoundinadequate,suitableenhancementinthe
workingcapitallimitsshouldbeconsideredbythecompetentauthorityasandwhenthisisdeemednecessary.
Drawalsagainstthelimitsshouldbeallowedagainsttheusualsafeguardssoastoensurethatthesameare
usedforthepurposeintended.Bankswillhavetoensureregularandtimelysubmissionofmonthlystatements
ofstocks,receivablesetc.andalsoperiodicalverificationofsuchstatementsvisavisphysicalstocks.
Thebankscanlendonthebasisof1stmethodoflendingtothoseunits(companies/organisations)whichare
engagedinmarketing/tradingofproductsofSSI,villageandcottageandtinysectorunits.Thiswouldbesubject
totheconditionthat100%dealingiswiththeabovementionedproducts.Iftherearedealingswithother
productsalso,thentherelaxationofapplicationof1stmethodoflendingwillbeonlytothatportionofthe
marketingbusinessrelatingtoproductsmanufacturedbyabovecategoryofunits.Itisalsoaconditionthat
duesofsuchunitsaresettledbysuchborrowerswithinamaximumperiodof30daysfromdateofsupplyandit
istobecertifiedbythestatutoryauditorsoftheborrowingunitsonaquarterlybasis.
ActiononNayakCommitteerecommendationsbyRBI:
Banksshouldtakeimmediatestepstoensurefulladherenceinletterandspiritbyalltheirbranchesand
controllingofficestotheRBIguidelines.Withaviewtoascertainingthepositionregardingimplementationof
theseguidelinesbythebranches,banksthemselvesshouldcarryoutspecialstudiesonanannualbasisonas
largeasampleorbranches,aspossible.ThefindingsofthethesestudiesshouldbereportedtoRBIperiodically

indicatingamongothers,thestepstakenforrectifyingthedeficiencies,ifany,observedintheprocess.
TheprocedureandtimeframelaiddownfordisposalofloanapplicationreceivedfromSSIborrowersshouldbe
strictlyenforced.Wheneverapplicationforfreshlimits/enhancementofexistinglimitswasnotconsidered
favourablybythesanctioningofficialorwherethelimitsappliedforareproposedtobecurtailed,thesame
shouldbereferredtothenexthigherauthoritywithallrelevantparticulars,toensurescrutinybyanyindependent
authorityandthelattershouldconfirmthedecisionofthesanctioningofficialorotherwisedisposeofthesame,
withinatimeboundmanner.Anotheralternativewhichwouldalsohelpeliminatedelaysinherentinthe
considerationoftheproposalbythesuccessivetiersinthehierarchyandfacilitatetimelydecisionsoncredit
proposalsitwouldbeforbankstoadoptasystemofCommitteeapproach,inwhichdecisionsaretakenbythe
competentauthorityafterastructureddiscussionswiththebranchmanagersandalsotheauthoritiesatthe
interveninglevels.
ProblemsfacedbytheSSIsectorinregardtobankfinance,toalargeextentcouldbesolvedifthebranchlevel
officialshavetherightaptitude,skillsandorientation.Inunderstandingtheirrole,thebranchmanagers/officials
atthebranchesshouldbemadeawareoftheimportanceofsmallscalesectorfromthepointofviewofcreation
ofadditionalemploymentopportunities,exportsetc.Ahealthygrowthofthesectorwillfacilitatesmoothloan
recoveryintheSSIborrowalaccounts.Further,timelyassistancewillpreventtheseaccountsfrombecoming
sticky.Theaforesaidaspectsshouldtherefore,formpartoftheinputsinthetrainingimpartedtothebanks
staff.ThereshouldaninteractionbetweenthebanksstaffandtheSSIborrowersaspartofthetraining
programmes.Banksmayalsoconsiderawardingtrophiestobranchesfortheoutstandingperformancein
financingSSIunitsasamarkofpublicrecognition.
OneofthecomplaintsfrequentlyvoicedbytheSSIunitspertainstoinsistencebysomebanksoncompulsory
depositmobilisationasaquidproquoforthesanctionofcreditfacilitiestotheunits.Whileenlistingthe
cooperationofbankscustomersfordepositmobilisationcannotbefaulted,insistingondepositmobilisationof
stipulatedamountsasapreconditiontothesanctionofcreditorotherwise,hasnojustification.
The2ndAllIndiaCensusofSSI(1988)carriedoutbytheDevelopmentCommissioner(SSI),Govt.ofIndia,has
revealedthattherewere85districtinthecountyeachwithmorethan2000registeredSSIunitswithIndustries
Deptt.oftheStateGovt.andanother110districtseachhavingbetween1000to2000registeredSSIunits.RBI
decidedduringJuly1993thatwhileSFCswouldactastheprincipalfinancingagencyforSSIsin40outofthe
85districtsreferredtoabovetotakecareofboththetermloanandworkingcapitalrequirementsofallnewSSI
unitswhichcanbefinancedunderSingleWindowScheme(SWS)ofSIDBI,thecommercialbanksshouldact
astheprincipalfinancingagencyundertheSWSintheremaining45districts,aswellasinrestofthecountry.
BanksshouldalsoconsiderconvertingsuchofthebranchesashavingafairlylargenumberofSSIborrowal
accounts,intospecialisedbranches.
ImportantbankingoperationalclarificationonNayakCommitteeRecommendations
TheimplementationofrecommendationsofNayakCommittee,relatingparticularlytotheassessmentofworking
capital,gaverisetocertainoperationalproblems.ReserveBankhasclarifiedtheseissuesonthefollowing
lines:
Theassessmentofcreditlimitsforallborrowersenjoyingaggregatefundbasedworkingcapitallimitsofless
thanRs.1crorefromthebankingsystem,istobedonebothasperthetraditionalmethodandontheturnover
basisandthehigherofthetwolimitsistobefixedasthepermissiblebankfinance.However,theneitherthe
inventorynormsstipulatedunderTandonCommitteeapplynorthePBFissubjecttoceilingasperthefirst
methodoflending.Incaseswherethelimitsdeterminedbythetraditionalmethodarelessthan20%ofthe
turnover,theassessmentwillhavetobereexamined.NayakCommitteehasstatedthattheworkingcapital
belowtheminimumlevelof20%maybejustifiedunderspecialcircumstancesinwhichtherequirementis
demonstrativelylowerthantheminimumlevelasinthecaseofancillaryunits.
Wheretheworkingcapitalcycleisshorterthan3months,theworkingcapitalrequiredwouldbelessthan25%
oftheprojectedturnover.InsuchcaseitisnotrequiredtostillgivePBFat20%oftheturnover.
Iftheliquidsurplusavailablewiththeborrowerishigherthan5%oftheturnover,asstipulatedunderthe
recommendations,thelimitscanbefixedatalowerlevelthan20%oftheturnoverkeepinginviewthatthe
genuinerequirementsoftheunitaremetadequately.Ifaunithasbeenmanagingitsworkingcapitalefficiently,
thelimitscanbesetatalowerlevel.
Theunitshavinglongeroperatingcycleforworkingcapitalthanthreemonths,shouldbeprovidedproperlimits
tooperateataviableleveltakingintoaccounttherecommendationthat20%oftheturnoveristheminimum
stipulationandnotthemaximum.
Incaseofseasonalindustriesthedistinctionbetweenthepeakandnonpeaklevelofturnoverhastobe
consideredinsteadofannualturnover.
Thecreditorsandothercurrentliabilitiesareamongthesourcesoffundsrequiredforbuildingupthecurrent
assetsandwillbetreatedinthesamemannerasinthetraditionalmethod.
Theborrowerscontribution(margin)willbe5%oftheturnoverinallcasesexceptwheretheworkingcapital

cycleisnottakenatthreemonths.Themarginwillproportionatelyincreasewiththeincreaseintheperiodof
operatingcycle.Careistobetakenthattheproportionofmargintobankfinanceshouldbemaintainedinthe
ratioof1:4orevenhigherincaseofavailabilityofhigherliquidsurplus.Iftheborrowerisnotabletobringin
minimumcontributionof5%,asageneralrule,nodilutionshouldbeallowedexceptinspecialcircumstancelike
sickunitsorwhenpermittedbeingdesirableduetopeculiarcircumstancesinthesanction.
Thesublimitsagainstthevariouscomponentsofstocksandreceivablesshouldbefixedtakingintoaccount
theexistingnormsofinventoryandreceivablesasbenchmarkandbankersshouldadoptflexibleapproachon
casetocasebasisinarealisticmannerwhileassessingthecreditneeds.Whileallowingdeviations,the
sanctioningauthoritymustensurethatproperjustificationisavailableandgiven.
Withregardtotheaspectslikeallowingdrawingpoweronthebasisofstocksandreceivablesstatementsor
callingdataonactualturnoveronamonthlybasisorcallingofcertificatefromauditorsevery6monthsin
respectofactualsales,ithasbeenclarifiedthatcallingforsalesdataonmonthlybasisandcomparingwiththe
drawingsintheaccountwouldbehelpfulparticularlyinthematterofarrivingateffectiveoperationallimitsas
alsointhemonitoringtheborrowalaccounts.Thedrawingpowerinanycaseistobeallowedonthebasisof
monthlystockstatement.
Inordertocheckthevalidityofprojectionsforturnover,incaseofexistingunitssalesdatapertainingtoactuals
oflastfiveyears,estimatesforthecurrentyearandprojectionsforthenextyeartogetherwiththetrueanalysis
oftheindustrytowhichtheborrowingunitbelongswouldalsobeuseful.Otherrelevantinformationi.e
modernisationorexpansionoftheexistingmanufacturingcapacity,Govt.policyontaxationandotherrelevant
internalandexternalfactorsalsoneedtobetakenintoaccount.
SevenPointActionplan
Govt.ofIndiainbudgetfor199596announceda7pointactionplanasunder:
TimeboundactionforsettingupspecialisedSSIbranchesin85identifieddistrictsofhighsmallindustry
density.
Adequatedelegationofpowersatthebranchandregionallevel.
BankstoconductsamplesurveysoftheirperformingSSIaccountstofindoutwhethertheyaregetting
adequatecredit.
Stepstobetakentoseethatasfaraspossiblecompositeloans(coveringbothtermloansandworkingcapital)
aresanctionedtoSSIentrepreneurs.
RegularmeetingsbybanksatZonalandRegionallevelswithSSIentrepreneurs.
NeedtosensitizebankmanagersandreorientthemregardingworkingoftheSSIsector.
SimplificationofproceduralformalitiesbybanksforSSIentrepreneurs.
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