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- 1. 39 Synergy (July, 2011), Vol. IX No. I I Financial Inclusion : Options for Micro, Small and Medium Enterprises Madhavi A Lokhande 1 Abstract India is fast moving towards becoming a developed country. History proves that the Small and Medium Enterprises, now called the Micro, Small and Medium Enterprises in India have always been given the required thrust; however, with regard to the capital needs of these small units, there has been a gap between the needs and the available resources. Micro credit has emerged as the new poverty reduction tool which can contribute towards the financial freedom of the SMEs in India. Of all the elements that go into a business, credit is perhaps the most crucial. The best of plans can fail if adequate finance is not available at the right time. MSMEs need credit support not only for running the enterprise but also for diversification and expansion. In general, MSMEs operate on tight budgets, often financed through owner's own contribution, loans from friends and relatives and some bank credit. Also, the information asymmetries associated with lending to small scale borrowers have restricted the flow of finance to the micro enterprises. This study was conducted to highlight the options available for financial inclusion in India and to understand the success factors of the new financing tools along with its limitations. Key Words Micro enterprises, credit needs of MSMEs, small units funding, financial inclusion 1. Introduction 1.1 Financial Inclusion Financial Inclusion is the delivery of financial services at affordable costs to sections of disad- vantaged and low income segments of society. Unrestrained access to public goods and ser- vices is the performance measure of an open and efficient society. The term "financial inclu- sion" has gained importance since the early 2000s, and is a result of findings about financial exclusion and its direct correlation to poverty. Financial inclusion is a common objective for many central banks amongst the developing nations. It denotes the delivery of credit and other financial services at an affordable cost to large sections of the disadvantaged and low income groups of people. As banking services are in the nature of public good, it is essential that availability of bank- ing and payment services to the entire population without discrimination is the prime objec- tive of public policy. This means that those who want credit should not be denied the same provided they are bankable. Therefore, the objective of financial inclusion is to extend the scope of activities of the organized financial system to include within its ambit people with low income. Outreach to the unbanked is an attempt to include the unbankable - both as productive segment and as public policy. 1 Prof.Madhavi Lokhande, faculty of finance and academics, Welingkar Institute of Management Development and Research, Bangalore, India, madhavial@yahoo.com, madhavi.lokhande@welingkar.org
- 2. 40 Synergy (July, 2011), Vol. IX No. I I 1.2 Objective The objective of this paper is to study the financing options available to the MSME sector. As a part of the study, the author has included some of the initiatives taken in the past and the shortcomings of some of the schemes of funding. 2. Literature Review To evaluate the financial options available to Micro, Small and Medium Enterprises in India, the author has studied the past and existing schemes, initiatives of the government and other financial institutions. Using the literature and documents available on the subject and other secondary data sources, the author has collated the findings under the sections as below: Section 2 deals with definition of micro loans, and importance they hold as a source of funding for micro businesses. Section 3 discusses some past financing initiatives for the MSME sector. The conclusions and inferences from the study have been summarized in Section 4. 2.1 Definitions Forming Part of the Study There is no universal definition of SMEs. Some countries made the classification based on certain objective standards, while few other countries used turnover of the company to determine the size of the enterprise. The size is also a relative phenomenon with reference to the local economies, since a large company in a small country could possibly be considered as a small company in a larger country. 2.2 Indian SME Definition In the Indian context, the concept of Small Scale Industry had been in vogue and the Me- dium Enterprise definition is of recent origin. A Small Scale Industry was defined on the basis of limit of historical value of investment in plant and machinery, which is up to INR10 million. However, in respect of some specified items, this investment limit had been hiked to INR 50 million. For the Small and Medium Enterprises Fund, the Government of India had approved the limit of investment in plant and machinery above INR 10 million and up to INR 100 million for defining a unit as a medium enterprise. Amongst the developing coun- tries, India had been the first to display special consideration to Small Scale Industries and basic focus has been to make economical use of capital and absorb the abundant labor supply in the country. (Definition of small-scale industry and small business enterprises for purposes of inclusion in priority sector has been changed in alignment with the definition adopted in the Micro, Small and Medium Enterprises Development Act, 2006) Definitions of size of the small firms sector vary a great deal, whether measured in terms of fixed investment, or turnover or the number of employees. For purposes of access to fi- nance, micro enterprises may be restricted to the band of enterprises employing less than 10 persons, though this need not be taken as a rigid boundary. It is in the nature of Micro Enterprises that the variation renders rigid thresholds in any one measure both unhelpful and misleading. Many Micro Enterprises highlight certain common problems: undercapitalization and low ability to command loan finance due to insufficient collateral, track record or financial expertise, lack of broad-based management skills, inadequate under- standing of cash flow management and heavy dependence on local markets and a limited number of customers (Bradford, 1993).
- 3. 41 Synergy (July, 2011), Vol. IX No. I I 2.3 Micro, Small and Medium Enterprises Development Act, 2006 1. The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 sought to facilitate the development of the enterprises and also enhanced their competitiveness. It pro- vided the first ever legal framework for recognition of the concept of 'enterprise' which comprised both manufacturing and service entities. It defined medium enterprises for the first time and sought to integrate the three tiers of these enterprises namely micro, small and medium. The act also provided for a statutory consultative mechanism at the national level with balanced representation of all sections of stakeholders, particularly the three classes of enterprises; and with a wide range of advisory functions. Establishment of specific funds for the promotion, development and enhancing competitiveness of these enterprises, notifica- tion of schemes/programmes for this purpose, progressive credit policies and practices, pref- erence in Government procurements to products and services of the micro and small enter- prises, more effective mechanisms for mitigating the problems of delayed payments to mi- cro and small enterprises and assurance of a scheme for easing the closure of business by these enterprises were some of the other features of the Act. 2. The Ministry of MSME has also took a view, in the light of the liberalized provisions of the MSMED Act 2006, to do away with the restrictive 24% ceiling prescribed for equity holding by industrial undertakings, whether domestic or foreign, in the erstwhile Small Scale Industries (now MSEs).This coupled with an expected legislation on Limited Liability Part- nerships (introduced in the Parliament by the Ministry of Corporate Affairs) paved the way for greater corporatization of the Small and Medium Enterprises thereby enhancing the access to equity and other funds from the market of these products in keeping with the global standards. The Ministry of Micro, Small and Medium Enterprises drew up a road map and held detailed consultations with stakeholders to generate consensus on further trimming this list. 2.4 Definition of MSMEs in India Enterprises are broadly classified into 2 categories: i. Manufacturing ii. Those engaged in providing and rendering of services Both categories of enterprises have been further classified into micro, small, medium and large enterprises based on their investment in plant and machinery (for manufacturing enter- prises) or on equipments (in case of enterprises providing or rendering services). The present ceiling on investments to be classified as micro, small or medium enterprises is as under: Table 1: Classification of MSMEs based on the MSMED Act 2006 Classification Investment ceiling for Plant, Machinery or Equipments Manufacturing enterprises Service enterprises Micro Upto USD 62500 Upto USD 25000 Small Between USD 60000 to Between USD 25000 and USD 1.25 million USD 0.5 million Medium Between USD 1.25 million & Between USD 0.5 million and USD 2.5 million USD 1.25 million Source: Website of Development Commissioner, Ministry of MSME accessed on 15.12.2010
- 4. 42 Synergy (July, 2011), Vol. IX No. I I Table 2: Definition of MSMEs before 2006 Classification Investment ceiling for Plant, Machinery or Fixed Assets* Manufacturing enterprises Service enterprises Micro Upto USD 62500 Small Between USD 60000 to Upto USD 25000 USD 0.25 million Medium Not defined Not defined Excluding Land and Building $1=Rs 40 (Oct 2007) Source: Website of Development Commissioner, Ministry of MSME accessed on 15.12.2010 Table 3: Micro, Small and Medium Enterprises (MSME) Sector Profile Old Definition New Definition No. of Micro and Small Enterprises 12.8 million 13.0 million* Employment 31.0 million 41.0 million Production (at current prices) USD 140 billion NA Exports (USD) USD 33 billion NA Share in GDP 6% 8-9%* Share in manufacturing output 39% 45%* Share in exports 33% 40%* * The statistics relating to Micro and Small Enterprise are based on 3rd All India Census conducted during 2001-02 when the old definition was invoked. Source: Website of Development Commissioner, Ministry of MSME, accessed on 15.12.2010 3. Micro Loans for Micro Businesses Micro loans are small business loans for up to $35,000. Micro loans are generally used for start-up cash but are sometimes given to newly launch small businesses for working capital. Micro loans can be used for many purposes including the purchase of equipment, inven- tory, machinery, fixtures, furniture, supplies, and even to purchase another business. Most of the world's poorest people often cannot find steady work and many who do are not paid a living wage (Bates & Servon, 1996). To feed their families, the poor often turn to self- employment in any way possible. They sell goods in the local market, stitch and sell clothes, run eateries and bakeries. For this vulnerable population of hard-working micro entrepre- neurs, micro loans can be instrumental in breaking the cycle of poverty. A small loan can be used to buy raw material in bulk or purchase important equipment. A loan can also help the poor cope with business emergencies or afford larger expenses such as expansions, diversifi- cations and restructuring their business. Small businesses and enterprises in India suffer from a great deal of indebtedness and are subject to exploitation in the credit market through high interest rates and lack of conve- nient access to credit. They need credit to fund their working capital needs on a day-to-day basis as well as long term needs like emergencies or other income related activities. They
- 5. 43 Synergy (July, 2011), Vol. IX No. I I need credit to smoothen out seasonal fluctuations in cash flow arising from business activi- ties and consumer demand. They also need credit as an insurance against minor spikes and troughs with respect to income and expenditure. Since cash flows for the majority of small businesses like vegetable vendors are small and savings are small as well, they typically tend to rely on credit for other consumption needs like education, food, housing, household functions etc. And this is backed by the fact that India has no social security net that will take care of basic amenities like health, education and so on for the poor. To meet these credit needs they need access to financial institutions that can provide them with credit at lower rates and at reasonable terms than the traditional money lender. The traditional source of lending in the formal sector i.e., public sector banks have been extending support to these businesses (Sabharwal, 2000). Table 4 and 5 below enumerates the number of small industries that were provided loans by public sector banks from March 2005 to March 2010 and the total credit provided by public sector banks to Industrial/Small and Micro Enterprises in India. Table 4: Number of Small Industries Provided Loans by Public Sector Banks in India March'05 to March'10 Year No. of Industries 2005 17.10 lakh 2006 17.28 lakh 2007 20.02 lakh 2008 22.10 lakh 2009 25.60 lakh 2010 28.20 lakh Source: Rajya Sabha Unstarred Question No. 776, dated 27.11.2007, updated 20.09.2010. Table 5: Total Credit Provided by Public Sector Banks to SMEs and Industrial Sector 2005 to 2010 Year SME Sector Industrial Sector (Rs. in Crore) 2005 68000 438503 2006 82434 556357 2007 127322 731157 2008 176890 997682 2009 232789 1342456 2010 298768 1278960 Source: Lok Sabha Unstarred Question No. 1180, dated 24.10.2008, updated 30.10.2010. The total credit provided to SME sector as compared to the total credit to the Industrial sector was around 15% in 2005 and 2006 and there was a marginal increase to 17% in 2007 (as per Table 5 above).There has been further increase till 2010. If access to finance is broadly interpreted as the ability of economic participants to obtain a broad range of financial ser- vices to manage price and other risks, with ease and at reasonable prices, then improving such access can have a strong welfare impact on the poor. These financial services allow participants to smooth consumption across time and help them tide over the impact of
- 6. 44 Synergy (July, 2011), Vol. IX No. I I adverse shocks during their life cycle. Access to financial services allows the participants to invest in and benefit from their skill sets. Presence of well functioning financial markets permits participants to generate surpluses for future investments by eliminating the need to self-insure and over-diversify. However, the scenario of supply of formal financial services within India is that, only less than 20% of population have a bank account, against a total of over 600,000 villages, there are barely 30,000 bank branches and while products such as health insurance are completely inaccessible to the poor, even the most basic life insurance products remain out of reach (as per India Vision 2020 report). 4. Some Past Financing Initiatives to SME Sector While several structural reforms have been initiated since 1991 and the economic and finan- cial policies had undergone significant transformation, provision of adequate credit to the MSME sector continued to be an element of banking policy. Bank credit to Small units had increased from Rs.168 billion in March 1991 to Rs.583 billion in 1999 in respect of public sector banks. An amount of INR. 2, 56128 crore that consti- tuted for 11.4 percent of the Adjusted Net Bank Credit was provided by all Scheduled Com- mercial Banks (SCBs) to the MSME sector. A double rate of credit flow was observed from INR 1, 27,000 crore in 2006-07 to INR 2, 57,000 crore in 2008-09. The credit flow to the sector was INR 2, 13,000 crore in 2007-08. There was an increase in the credit flow to INR 369866 crore in February 2010 (Indian MSME Report). In the policy context, the Govern- ment of India introduced a comprehensive policy package for SMEs, which included fiscal, credit, infrastructural and technological measures. An exclusive Ministry dedicated to Small Scale Industries (SSIs) was created by the Government in 1999 to provide more focused attention to the sector. A well structured institution was set up both in the public and private sectors to cater to the credit needs of Small and Medium Enterprises (SMEs). The Small Industries Development Bank of India (SIDBI) was set up in April 1990, as the principal financial institution for financing and development of SSIs and coordination of institutions engaged in similar activi- ties. A fair code of practices was also adopted by the bank in its day-to- day operations while functioning as an apex financial institution for the sector. Various steps that had been taken by the Government of India and Reserve Bank of India to enhance the flow of credit to SMEs in the past included: (i) Increase in the loan limit of composite loan scheme for SMEs up to Rs.5 million (ii) Providing loans to SSIs within the interest rate band of 2 percent above and below the respective bank's Prime Lending Rate (PLR) (iii) Setting up of Technology Bureau for Small Enterprises (TBSE) to address the technology related needs of SSIs and proposal to convert TBSE into a full fledged Technology Bank (iv) Opening of specialized SSI branches throughout the country (v) Introduction of Laghu Udyami Credit Card for SME borrowers with satisfactory track record (vi) Identification of 60 clusters for focused development by including their credit requirements in the respective State Credit Plans (vii) Setting up of a Credit Guarantee Fund Trust for Small Industries
- 7. 45 Synergy (July, 2011), Vol. IX No. I I Government undertook a lot of measures to boost investment in SSIs. The Table 6 below shows the budget allocations to SSIs in the last 10 years. The budget estimates, the revised estimates and the actual expenditures under the various schemes of the government have been compiled in the table. In order to boost investment in SSI sector, the benefits of exemptions of capital gains arising from the transfer of long term capital assets were allowed, if such capital gains were invested in the bonds issued by SIDBI. However, it is important for the policy of directed lending to small firm (the targets for priority sector lending) to shift from targets or quotas to incentives to banks for lending to small firms. Only then the responsible risk taking in lending would re-emerge. State Finance Corporations which could play a crucial role in financing of SMEs would have to go through quick restructuring and refocus on promotion of new enterprises typically where vast positive external effects are anticipated, such as in technology based small firms, promising industries, nodal industries, industrial estate corporations, in exchang- ing specific infrastructural support to existing clusters of small firms, etc. Investments in infrastructure especially general roads, power, railways, and water supply would help to improve the performance of small firms significantly. Financial institutions could usefully develop strong venture capital arms to finance innovative small firms that have a good po- tential to emerge in the near future in many industries. Merging of the umpteen laws and regulations into one wherever feasible could reduce the currently large costs of SMEs in dealing with government. Table 6: Budget Utilization of Ministry of Small Scale Industries (SSIs) in India from 2002-03 to 2006-07 Item 2002-03 2003-04 2004-05 2005-06 2006-7 Total (Rs in Crore) Small Industries Development Organisation (SIDO) Budget Estimates 313 298.31 315.55 360.69 381.71 1669.26 Revised Estimates 256.85 301.45 312.4 356.34 396.31 1623.34 Expenditure 249.3 294.27 307.05 349.32 396.31 1596.25 Ministry of Small Scale Industries (SSI) (Proper) Budget Estimates 32 40 40 42 44.95 198.95 Revised Estimates 28 40 40 41 44.95 193.95 Expenditure 25.65 38.13 33.87 41.8 44.95 184.4 National Small Industries Corporation (NSIC) Budget Estimates 11.15 11.69 10.45 9.57 43.27 86.13 Revised Estimates 11.74 8.94 9.85 11.57 24.97 67.07 Expenditure 8.61 7.21 9.98 9.83 24.97 60.6 Total Mo Small Scale Industries (SSI) Budget Estimates 356.15 350 366 412.26 469.93 1954.34 Revised Estimates 296.59 350.39 362.25 408.91 466.23 1884.36 Expenditure 283.56 339.61 350.9 400.95 466.23 1841.25
- 8. 46 Synergy (July, 2011), Vol. IX No. I I Khadi and Village Industries Commerce (KVIC) Budget Estimates 394.67 392 437 587 592.93 2403.6 Revised Estimates 394.67 444.75 462 560.82 592.93 2455.17 Expenditure 340.55 423.6 460.99 558.56 592.93 2376.63 Coir Board Budget Estimates 15.6 18 18 23 23 97.6 Revised Estimates 15.6 15.85 18 35.51 23 107.96 Expenditure 13.77 14.52 16.8 35.43 23 103.52 Primary Ministry Rozgar Yojana (PMRY*) Budget Estimate 169.73 170 219 219 325.1 1102.83 Revised Estimate 169.73 169.4 219 273.69 250 1081.82 Expenditure 168.1 168.01 218.19 272.54 250 1076.84 Scheme of Funds for Regeneration of Traditional Industries (SFURTI**) Budget Estimate - - 100 30 25.97 155.97 Revised Estimate - - 1 1.5 25.97 28.47 Expenditure - - - 1.5 25.97 27.47 Total Ministry of Agriculture (Agriculture and Rural Industries) Budget Estimate 580 580 774 859 967 3760 Revised Estimate 580 630 700 871.52 891.9 3673.42 Expenditure 522.42 606.13 695.98 868.03 891.9 3584.46 Source: Compiled from the statistics released by: Lok Sabha Unstarred Question No. 4143, dated on 22.04.2008. In the Table SFURTI was introduced on 3 October, 2005. 4.1 Instruments of SME Financing In spite of various initiatives taken by the Government, banks and Financial Institutions, SMEs faced certain challenges, which were universal in nature. These problems relate to the issue of collaterals, cost of loans, delay in receivables, obsolete technology, marketing, etc. In order to address the above problems in the Indian context, some innovative instruments of financing have been introduced and institutional set up created. Some of the major initia- tives include - a) Credit Guarantee Fund Trust for Small Industries Government of India, in association with SIDBI, has set up a Credit Guarantee Fund Trust for Small Industries (CGTSI) to implement the guarantee scheme. The corpus of the Trust was proposed to be enhanced from the level of Rs.7 billion to Rs.25 billion. The main objec- tive of the Trust was to facilitate hassle free credit to the SSI sector and encourage banks to shift from security based lending to merit based lending. SSI loans up to Rs.2.5 million were eligible to be covered under the scheme and CGTSI has so far extended guarantees to mem- ber lending institutions for around 18,000 units in the last three years of its operations, covering a loan amount of Rs.3 billion. The CGTSI contemplates to triple its business in the current year, as compared to the previous year. Some new guaranteeing techniques like '
- 9. 47 Synergy (July, 2011), Vol. IX No. I I mutual credit guarantee scheme on the lines of similar schemes in Italy and other European countries are also being developed (Poddar 2010). b) Risk Sharing Facility While the CGTSI extended guarantee cover for the loans up to Rs.2.5 million, there was a need to offer guarantees for loans extended by banks beyond the above limit. Under a World Bank led project on 'Financing and Development of SMEs', a possibility of introducing a Risk Sharing Facility for the SME sector was being examined, wherein the risk in lending by banks to SMEs could be shared on pari passu basis between the originating banks and the suggested entity. This facility would be available at a cost. This mechanism, as and when in place, would mitigate the credit risks of the banks and upscale SME financing. c) Venture Capital Funding With regard to new sources of financing, many countries were considering liberalizing the rules regarding venture capital investments. In India also, various measures had been taken in this direction. SIDBI, along with some other institutions, had taken a lead in promoting venture capital funding in the country. The bank had contributed in setting up of 16 State level / Regional level funds. SIDBI had also set up a National Fund for Software and IT Industry with a corpus of Rs.1 billion and launched a new SME Growth Fund of Rs.1 billion corpus. The fund would focus on units in pharma, biotech, light engineering, soft- ware and other knowledge based industries (KBIs). The SME Growth Fund corpus was contemplated to be enhanced to Rs.5 billion. d) Micro Credit Realizing the potential of micro finance in stimulating economic growth, SIDBI had laid emphasis on increasing the capacity of the sector to handle credit and growth in the dis- bursements of micro finance. SIDBI Foundation for micro credit, functioning as a depart- ment of SIDBI, had sanctioned an aggregate financial assistance of Rs.710 million in FY 2004. The cumulative number of beneficiaries assisted under the program in the last 4 years aggregated over 1 million, mostly women. The outstanding portfolio under the program as at end-March 2004 increased from a level of Rs.910 million to about Rs.2 billion by the end of this year (based on NABARD report). e) Small and Medium Enterprises Fund The most important amongst the sectoral initiatives taken by the GOI and SIDBI was launch- ing of an SME Fund of Rs.100 billion, with a view to give impetus to the fund flow to the SME sector. SIDBI had been advised to structure the fund and its operations had commenced with effect from April 2004. Under the Fund, assistance is being provided to SMEs at an interest rate of 200 basis points below the Bank's PLR. Direct assistance is being extended to SMEs through SIDBI's own offices at 9.5 percent rate of interest as also by way of providing refinance to the primary lending institutions. Refinance to SFCs was available in the interest rate band of 7.5 percent to 8 percent. The SME Fund provided for routing of assistance, besides SFCs, through commercial banks as well. The Fund, besides up scaling the flow of assistance to SMEs, addressed the issue of cross sector parity in the cost of loans. f) Setting up of a Dedicated Credit Rating Agency for SMEs In order to address the demand side issues of credit and provide comfort to the bank officials, initiatives had been taken to support the mechanisms of information sharing and credit rating. With a view to providing credit enhancement and comfort to the bank officials at the
- 10. 48 Synergy (July, 2011), Vol. IX No. I I field level in their taking bona fide credit decisions, SIDBI decided to launch a dedicated credit rating agency for SMEs in association with leading public sector banks. SIDBI in dialogue with select public sector banks and credit rating agencies commenced its operations under the Small and Medium Enterprises Rating Agency (SMERA). g) Portfolio Purchase Scheme / Asset Securitization With a view to widen the scope of assistance to SMEs, the process of asset securitization offered opportunities to purchase the SME portfolio from originators and channelize funds to the sector. The portfolio so purchased was either retained by the purchaser or sold to the investors in the capital markets through structuring of suitable instruments. SIDBI, permit- ted by the Government of India undertook business through asset securitization. h) Priority Sector Lending Provision of finance to the sector is a part of the 'Priority Sector Lending Policy' of the banks (both domestic and foreign banks operating in India). For the public and private sector banks, 40% of the net bank credit (NBC) is earmarked for the priority sector. For the foreign banks, 32% of the NBC is earmarked for the priority sector, of which 10% is ear- marked for the small scale sector. In the case of foreign banks operating in India which fail to achieve the priority sector lending target or sub-targets, an amount equivalent to the short- fall is required to be deposited with SIDBI for one year at the interest rate of 8 percent per annum. (as per RBI policy) The Table 7 below as compiled from annual report of SIDBI for the years 2001 to 2006 shows that neither the public sector, private nor the foreign banks were just around the targets that had been specified for them in the Priority Sector Lending Policy. Table 7: Flow of Credit to SSI Sector by Public, Private Sector and Foreign Banks in India 2001 to 2006 Balance Outstanding as at End-March Banks 2001 2002 2003 2004 2005 2006 Amt % Amt % Amt % Amt % Amt % Amt % Share Share Share Share Share Share of NBC of NBC of NBC of NBC of NBC of NBC Public Sector Banks 48400 14.2 49743 12.5 52988 11.1 58799 13.6 65789 15.2 68976 16.5 Indian Private Banks 8096 14.4 8613 13.7 6857 8.3 8790 9.2 9876 10.4 10567 11.9 Foreign Banks 3646 11 4561 12 3809 8.7 4570 9.3 5980 9.9 6759 11.8 Total 60142 14 62917 11.8 63654 10.3 72159 11.4 81645 13.6 86302 14.2 Source: 16 Annual Report, 2005-2006, Small Industries Development Bank of India. i) Small Industries Development Bank of India (SIDBI) SIDBI had been set up with the mission to empower the Micro, Small and Medium Enter- prises (MSME) sector with a view to contribute to the process of economic growth, em- ployment generation and balanced regional development. It is the principal financial institu- tion responsible for promotion, financing and development of the sector. Apart from ex- tending financial assistance to the sector, it coordinates the functions of institutions engaged in similar activities. The four basic objectives of SIDBI for orderly growth of industry in the
- 11. 49 Synergy (July, 2011), Vol. IX No. I I small scale sector are: 1. Financing 2. Promotion 3. Development 4. Co-ordination SIDBI's major operations are in the areas of (i) refinance assistance (ii) direct lending and (iii) development and support services. Taking into account the fact that a majority of such enterprises which are at the lower-end of the sector are outside the ambit of institutional finance, concerted efforts have been made by SIDBI to promote micro finance across the country to enable the unemployed people to set up their own ventures. There are more than 100 Micro Finance Institutions (MFIs) de- veloped by SIDBI that are engaged in implementation of its micro finance programme. SIDBI has disbursed about Rs.1700 crore (cumulative) under its programme, benefiting around 50 lakh beneficiaries (Rangarajan 2008). j) At the State level, State Financial Corporations (SFCs) along with the State Industrial Development Corporations (SIDCs) are the main sources of long-term finance for the sec- tor. State Financial Corporations, the state-level institutions have always played an impor- tant role in the development of small and medium enterprises in their respective states with the main objectives of financing and promoting these enterprises for achieving balanced regional growth, catalyze investment, generate employment and widen the ownership base of industry. k) Credit Guarantee Cover Fund Scheme for Small Industries was launched jointly by the Government of India and SIDBI (on a 4:1 contribution basis) in August 2000, with a view to ensure greater flow of credit to the sector without collateral security. It picked up during the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and guarantee covers for Rs 1705 crore were issued. During the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and guarantee covers for Rs 1705 crore were issued. l) Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs) was launched with the objective of doubling the flow of credit to this sector within a period of five years. The measures in the policy package, inter alia, include banks to achieve a mini- mum 20% year-on-year growth in credit to the MSME sector and cover on an average at least 5 new MSMEs at each of their semi-urban/urban branches per year. 5. Result and Conclusion All kinds of business enterprises require sufficient funds in order to meet their fixed as well as working capital requirements. The same applies for the MSMEs - Finance is one of the critical inputs for growth and development of the MSMEs. They need credit support not only for running the enterprise and operational requirements but also for diversification, modernization/upgradation of facilities, capacity expansion, etc. Inadequate access to credit is a major problem facing micro, small and medium enterprises. Generally, such enterprises operate on tight budgets, often financed through owner's own contribution, loans from friends and relatives and some bank credit. They are often unable to procure adequate financial resources for the purchase of machinery, equipment and raw materials as well as for meeting day-to-day expenses. This is because, on account of their low goodwill and little fixed investment, they find it difficult to borrow at reasonable interest
- 12. 50 Synergy (July, 2011), Vol. IX No. I I rates. As a result, they have to depend largely on internal resources. In respect of MSMEs, the problem of credit becomes all the more serious whenever any difficult situation occurs such as a large order, rejection of consignment, inordinate delay in payment, etc. Sometimes, they have to close down their operations due to shortage of funds. Also, there is little or no scope for expansion and growth due to dearth of capital. Hence, economies of scale are not available. Recognizing the importance of easy and adequate availability of credit for ensuring sustain- able growth of the MSME sector, the government has undertaken several measures. The need of the hour is to ensure that these measures benefit the segment they have been de- signed for. References Banking for the poor, Micro credit gathers force, retrieved November 20, 2010, from www.indiatogether.org/2005/nov/eco-microfin.htm. Bates, T. and Lisa J. Servon (April, 1996). Why loans won't save the poor, in Commercial Wharf, Boston, Massachusetts.27-28. Bradford Jane, (1993). Banks and Small Firms: An Insight National Westminster Bank Quarterly Review, retrieved December 30, 2010 from ww.fao.org Development Commissioner, Ministry of MSME (MSMED Act 2006), accessed December 10, 2010, from http://dcmsme.gov.in/publications/msmed. Government of India (2002). India Vision 2020, Planning Commission India, retrieved January 15, 2011, from www.india.gov.in Government of India (2007). Industrial Policy and Promotion, Karve Report 10(3), Ministry of Commerce and Industry, retrieved January 15, 2011 from www.india.gov.in Poddar R Sandeep (2010). SMEs and their changing role in Indian Economy, APJRBM,1(3), December 2010, accessed January 29, 2011, from www.skirec.com Rangarajan (2008). Report on committee of financial inclusion, accessed December 20, 2010, from http://rbidocs.rbi.org.in/rdocs Report (2009), NABARD at a glance accessed December 28, 2010, from www.nabard.org/ File Upload/DataBank/AnnualReports Report of the India Micro, Small and Medium Enterprises 2010, retrieved January 20, 2011, from http://smb-trends.com/2011/02/indian-msme-report-2010 Report of A S Ganguly Committee (n.d), retrieved December 28 , 2010, from www.rbi.org.in/ Scripts/BS_SpeechesView. Report of the Development Commissioner, Ministry of MSME, retrieved February 5, 2011, from www.msme.gov.in Sabharwal, Gita (2000). From the Margin to the Mainstream. Micro-Finance Programmes and Women's Empowerment: The Bangladesh Experience, University of Wales, Swansea. Accessed December 1, 2010, available at http://www.gdrc.org/icm/wind/ geeta.pdf.
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