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This document discusses a project report on lending processes and credit services offered to small and medium enterprises by Indian Overseas Bank. It provides background on SMEs and their importance to the Indian economy. It also defines SMEs and discusses the classification system. The methodology section outlines the use of primary and secondary data collection for the project. It analyzes various government support programs and guidelines from institutions like RBI and SEBI regarding SME financing.

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PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
PROJECT REPORT ON “STUDY OF LENDING PROCESS AND CREDIT SERVICES OFFERED TO SMALL AND MEDIUM ENTERPRISES”WITHIOBBY - PANKAJ KUMARR.NO:36PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
INTRODUCTIONSMEs a part of PRIORITY sector
GOVT. support has been started from 1967 -68 but attention given from 1971.
RBI issued guide line modified
All advances has been increasing year by year and contributes 40% of gross mfg. to the Indian economy.
Employment generates by SMEs in A.P is 7.5% (approx) of total employments.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
DIFINIATION OF SMEUnder the MSME act 2006,Enterprises has been classified into two categories, namely – enterprises engaged in the mfg./production of goods pertaining to any industry, & enterprises engaged in providing of services. Enterprise have been defined in term of investment in plant and machinery/equipment(excluding land and building) PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
DIFINIATIONInvesting in plant and machinery / equipment (excluding land and building)PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
REVIEW OF LITERATUREBRAHMANANDAM, G, N., RAI, H.L., DAKSHINA MURTHY, “Financing Small Scale Sector”. The Role of Banks” INDIAN BANKING TODAY AND TOMORROW, MAY 1981-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. BRAHMANANDAM, G, N., RAI, H.L., DAKSHINA MURTHY, has focused on role of banks in financing SMEs. He also focused on how economic reforms have changed the bank role in extending credit to SMEs. They also focused on the credit facilities available to the SMEs in the wake of MSME act 2006. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
JAILAL SAAW,” Growth of small scale industries in India” JOURNAL OF INDUSTRY AND TRADE, April -2005- 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. This article is focusing on the one problem that is financial problems faced by the SME segment. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
PROBLEMS SME is one of the growing sectors of the country even though they are facing so many problems which restrict the growth1.Under-utilization of Capacities.2.Inadequate and Untimely Credit Flows.3.Inability in Technology up gradation. 4.Inefficient raw material procurement.5.Poor financial situations and low levels of R&D6.Inability to Market Finished Goods.7.Ineffective monitoring and feedback mechanism.8.Shortage of power9.Lack of awareness of credit facilities available10.Lack of knowledge about various credit schemes11.Overdependence on purchases by government etc…………  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
NO. OF SME UNITSPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
PRODUCTION GROWTHThe above dig. says that in FY 07 growth in production is by 18% against 15.8% in the previous yearPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
COMPANY PROFILEChairman and Managing Director : Shri S.A.BhatEstablished in 1937 in Chennai by Shri M..CT.M. Chidambaram Chettyar.1847 branches in INDIA and 6 branches overseas and 500 ATMs all overAN ISO certified Rating for IOB – AA+/ stable (Based on the services offered and market performance)Recent happening-Take over, Shree Suvarna Sahakari Bank LTD in May 2009.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
OBJECTIVE OF THIS STUDYTo examine the growth of SME industries.The study about credit facilities offered to the SMEs by the banks. To analyze government’s support in obtaining credit facilities.To study about financial problems of SMEs regarding loan.RBI guide line and SEBI guide lineHow working capital financed to SMEs i.e. the main source of finance available for SMEs.To study about working capital.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
GUIDE LINES FOR BANKS REGARDING SME FINANCINGFinancial decisions are taken at various levels from the branch to Management Committee of the Board. if it falls under their powers and if it is beyond their powers forward the same to the Regional Offices for their consideration and regional office will take decisionSame with regional office – than transfer to central officeIf decision not taken by the central office then RBI rules is followed by the banks is mandatoryPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
RBI GUIDE LINEEvery Bank is required to set up its own policies for providing monetary assistance to the SMEBank should adopt a transparent rating system by which eligible SME should get the credit facilities.Credit facilities must be offered to an average of at least 5 micro, small and medium enterprises in every quarterTo some extent bank can grant collateral free loans to SMEsPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
RESEARCH METHODOLOGYRESEARCH DESIGN:Study is all about the research & analysis of credit services offered to small and medium enterprises Study is being made for the purpose of analysis of credit services and relief to the borrowers by the bank (IOB) that predicts the future growth of the bank by providing better services by bank can earns more profitStudy will be carried out at Hyderabad.Secondary data is required for analysis of report.Period of the study is limited to 45 days.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
METHOD OF DATA COLLECTION PRIMARY DATA - Information has also been gathered through discussions with the employees of IOB and visiting the IOB branches (R.P. ROAD branch, HIMAYATNAGER branch and REGIONAL OFFICE.) SECONDARY DATAThe secondary data collected from the already sanctioned loan files. Collection of secondary data from Management journals.Bank and Borrower’s Annual Report.Project proposal.Respective Banks Web Sites other sitesReference from Management Books.Newspapers and ArticlesAlready researched data (Which turned into information based on analysis)  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
LIMITATIONSThe study is limited to the period of 45 days. Due to time constraints we covered only limited no. of SMEs Since banks have some confidential reports which cannot be handover to the outsiders, so in-depth research and analysis is not possible.There is lots of no. of SMEs which is unregistered; due to this proper data’s are not covered.The financials of the firms, were not available, as most of the firms are worried about disclosing their financials, thus for the industry analysis and other qualitative research, we had to rely on the secondary data sources. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
GOVT. SUPPORTThe way forward would be to create an environment of risk -taking by the government for providing a start-up capital to SMEs and to facilitate technology transfers and training in skill development. The Micro, Small and Medium Enterprises Act, 2006 is a legal framework for more capital investment in the SME sector. Under this Act -The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was launched by the Government of India to make availablecollateral-free credit to the micro and small enterprise sector. Both the existingand the new enterprises are eligible to be covered under the scheme.  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
The scheme was formally launched on August 30, 2000 and isoperational with effect from 1st January 2000. The corpus (principle sum) of CGTMSE isbeing contributed by the Government and SIDBI in the ratio of 4:1 respectivelyand has contributed Rs.1346.54 crore till 2007, After it is raised to RS2500 crores, which is provided by SIDBI and other specialized Govt. banks.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
GOVT.SUPPORT WITH STATE GOVT.Small scale industries need credit support on a continuous basis forrunning the enterprise as well as for its diversification and modernization.Recognizing the need for a focused financial assistance to such industries,the Government of India, together with the State Governments, hasformulated several policy packages including schemes and funds for theirgrowth and development. Most of these programmes of the Central Government are implemented through two principal organizations are as followes:PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
SMALL INDUSTRIES DEVELOPMENT ORGANIZATION (SIDO) is an apex body for promotion and development of small scale industries in the country. SIDO promotes axillaries units to public sectors enterprise ,acts like model agencies for coordinating, monitoring policy and programme.2. NATIONAL SMALL INDUSTRIES CORPORATION LTD (NSIC), has been established with the objective of promoting, aiding and fostering the growth of small scale industries in the country. It has been assisting small enterprises through a set of specially tailored schemes which facilitate marketing support, credit support, (Equipment financing ,Financing for procurement of raw material ,Financing for marketing activities , Financing through syndication with banks ) , technology support etc. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
SEVEN POINT ACTION PLAN ANNOUNCED BY GOVT. OF INDIATime bound action for setting up specialized SSI branches in 85 identified districts of high small industry density. Adequate delegation of powers at the branch and regional level. Banks to conduct sample surveys of their performing SSI accounts to find out whether they are getting adequate credit. Steps to be taken to see that as far as possible composite loans (covering both term loans and working capital) are sanctioned to SSI entrepreneurs. Regular meetings by banks at Zonal and Regional levels with SSI entrepreneurs. 6. Simplification of procedural formalities by banks for SSI entrepreneurs. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
IOB CREDIT FACILITIES FOR ELIGIBLE SMEsIn this regard they need to submit some documents are as follows:1.SSI Registration Certificate 2.Partnership Deed / Memorandum & Article of Association 3.Authority letter to sign the application 4.List of all partners / directors with their age, address, certified Net Worth / Income Tax returns, qualifications and experiencePANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
5.Copy of the audited accounts for the last three years (where accounts for the last year have not been audited, provisional accounts duly certified by a Chartered Accountant, along with two years audited accounts, are to be submitted) 6.In case of new project/expansion, copy of the project report containing a brief project profile, cost of project, source/means of finance 7.Brief write-up about the products manufactured, end users, marketing tie-up and orders in hand 8.Details of subsidy, tax concession available to the applicant9.Quality certificates, export awards won, membership of any associationsPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
10.Any other information that would enable us to understand your business better 11.Details about group companies (names, constitution, net worth, turnover etc.) 12.Contact details of Bankers, key suppliers & key customers 13.Insurance details of plant & machinery 14.Rating report 15.Clear vision of the customers 16.Project proposal reportPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
BASIC NEED OF SMEsWORKING CAPITAL-Working capital refers to the funds invested in current assets, i.e. investment in stocks, sundry debtors, cash and other current assets. Current assets are essential to use fixed assets profitably. For example, a machine cannot be used without raw material capital. The investment on the purchase of raw material is identified as working capital. Working Capital Management, also known as short-term financial management involves the management and control o f the Gross current assets so that a satisfactory level of Working Capital (Net Working Capital requirement), needed to carry out day -to-day activities, is maintained and the current liabilities are discharged as and when they fall due. Working Capital Management involves cash flows within the Operating Cycle of the Company, usually not exceeding the period of one year, unlike long -term financial management where cash flows extend for more than one year.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
Theoretically, there are two concepts of Working CapitalGross working capital: The gross working capital refers to investment in all the current assets taken together. The total of investments in all the current assets is known as gross working.Net working capital: The term net working capital refers to excess of total current assets over total current liabilities. It may be noted that the current liabilities refers to these liabilities which are payable with in a period of 1 year. And also there are two types of working capital are as follows :PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
PERMANENT & TEMPORARY WORKING CAPITAL: The overall Working Capital requirement does not stay constant and keeps fluctuating. However, to carry on business, a certain minimum level of Working Capital is required on a regular basis which is referred to as “Permanent or Fixed Working Capital”  Any amount over and above the permanent Working Capital is known as the “Temporary or seasonal Working Capital” requirement. It is also known as variable working capital.  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
The Operating Cycle creates the need for Current Assets or Working Capital. The Working Capital need of a Company does not come to an end once an Operating Cycle is completed. As it is a cyclical process, the need continues to exist even after the Company has realised cash against its credit sales. Thus, there should be continuous supply of Working Capital for the Company to carry on its business activity.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
SOURCE OF FINANCE FOR SMEsSMES are basically depends on the 2 types of source of finance Internal and (2) external  INTERNAL:-Paid up capital: Ordinary share, Preference share, deferred shares, and Forfeited shares.Reserve surplus: Capital reserve, Development rebate reserve, Other sources Provisions: Taxation (Net on advances on income tax), Depreciation, Bad debtsPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
EXTERNAL:- Borrowings: From Banks, from term lending institutions like IDBI, IFCI, SIDBI, ICICI, INDUSTRIAL DEVELOPMENT CORPORATION, etc.b)Trade dues and current liabilities: Sundry creditors, Other sources PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
OTHER INSTITUTIONS IN MARKET FOR SME’S LOANAs the small and medium enterprises (SME) sector is one of the fastest growing industrial sectors all over the world, initiatives are being taken by national, private and financial institutions. Among them are:-Indian overseas bank (IOB)State bank of India (SBI) Bank of Baroda (BOB) HDFC bankICICI bank Small industries development organization (SIDO)National small industries corporation (NSIC)SIDBINABARD(10) IDBI PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
PROBLEMS OF SMEs-FINANCIAL PROBLEMS OF SMEs REGARDING LOANPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
FROM THE BAR DIG. ANALYSISRELUCTANCE TO LEND BY BANK: Sometimes banks are hesitating in giving the loan. Due to this nearly 27% SMEs are not getting the finance facilities. This is happening mostly with the new clients.COLLATERAL REQUIREMENTS OF BANK/ FINANCIAL INSTITUTIONS: Because of the collateral requirements of bank nearly 54% SMEs are not getting the loan facilities. They are not able to show the collateral money or assets.BANK/ PAPERWORK BUREAUCRACY: Due to huge demand of documentations 43% SMEs are not getting loan facilities.HIGH INTEREST RATES: Due to high competition with the big firms small firms are not able to make a sufficient profits and they are not able to pay the interest rate properly. So considering these banks are not providing the loan to the new clients. Due to this nearly 55% SMEs are not able to get the loan from the banks.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
5. TIME TAKEN BY BANKS TO CLEAR LOAN APPLICATION: Due to some verifications banks are taking time in clearing the loan. This time constraints are big obstacles for them in production parts which restrict the 42% SMEs growth.6. DELAYED PAYMENT: 38% growth is less because of delayed payment from the market which affect the whole process of the SMEs like production to interest and till loan payment.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
TYPES OF INDUSTRIAL FINANCE PROVIDED BY IOBSHORT TERM: Less than 1 year to meet variable, seasonal or temporary capital requirement.MEDDIUM TERM: 1 to 5 year for permanent working capital, small expansion replacement, modification etc.3. LONG TERM FINANCE: Period more than 5 years. It is required for procuring Fixed Assets for establishing new branches or new business for substantial expansion of existing business modernizationPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
AT THE OF LENDING SOME RELEVANT RATIOS ARE COVERED BY THE BANKLiquidity Ratios: Current Ratio=(current Assets / current liabilities) Acid Test Ratio (quick ratio) = (Current Assets- Inventory / Current Liabilities) According to this ratio bank is testing the liquidity position of the client by the liquidity ratio because that they are able to pay or not their short term liabilities. 2. Activity ratios: Average Collection Period= (A/c Receivable/ Daily Average Sales) Capital turnover ratio= (Sales/ Capital Employed) Fixed Assets turnover Ratio= (Sales/ Capital Assets)  Activity ratios are also called Turnover ratios or performance ratios. These ratios are to evaluate the efficiency with which firm manages and utilizes its assets. These ratios usually indicate the frequency of sales. It is helpful for the bank that they can estimate the paying capacity of the borrowers. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
3.Leverage Ratios:Debt Ratio= (Total liabilities/ Total Assets) Debt Equity = (Total liabilities/ Share Holders Equity)Banks are very keen to know about this ratio because it shows relative weights of debt and equity. These ratios indicate the proportion of debt fund in relation to equity. It covers share holders fund (equity) and long term borrowed fund (debt).4.Net Profit Margin: (Net Profit/ Net Sales)This ratio measures the profitability of the firm in terms of assets employed in the firm. Banks are also keen interested to know the profits of the borrowers that they are able to pay their interest and dues on time.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
5.Debtors’ Turnover Ratio:Credit Sales Average Accounts receivable For the cash cycling banks wants to know about the collection and credit policies of the firm. The speed with which credit receivables are collected affects the liquidity position of the firm. 6.Return On Investment: (ROi)= (Net Profit/ Total Assets)It measures the profitability or the operational efficiency of the firm. This is very essential for the banks. 7.Dividend Per Share =(Total profits available to Equity Share Holders/ No. of Equity Shares) This ratio indicates the amount of profit distributed to shareholders per share.  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
RATE OF INTEREST CHARGED ON AMOUNT SANCTIONED BY IOB FOR SMEsFOR MICRO AND SMALL ENTERPRISES:For credit limits up- to RS 2 lakhs - 9.50%Above RS2 lakhs and up- to RS 25 lakhs -10.50%Above RS 25 lakhs and below RS 1 crore-11.00%1 crore and above up-to RS 10 crore:For mfg. units (depending on ratings)-11.00% to 13.50%Other then mfg.(depending on ratings)-12.25% to 15.50%PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
MEDIUM ENTERPRISESFor credit limits up-to RS 25,000/- --9.50%Above RS 25,000/- and up-to RS 2 lakhs--11.00%Above Rs2 lakhs and upto Rs25 lakhs(based on ratings)--11.75% to 15%Above Rs25lakhs and below Rs1crore(based on ratings)-12.25% to 15.50%1 crore and above upto Rs 10crores For mfg. units(depending on ratings)--12.25% to 14.75%Other than mfg. units(depending on ratings)--12.25% to 15.50%PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
FINANCING OF WORKING CAPITAL BY IOB IN THE FOLLOWING FORM:1. CASH CREDIT: This type of credit is provided mainly to individuals or enterprises engaged in manufacturing & trading activities to enable them to carry on their activities. The amount of cash credit facility to be sanctioned to a units need based and is worked out as per well defined parameters in each bank. The guide line of RBI may also affect the quantum of facility in some cases. This facility is generally granted against the security of stocks of goods, bills/ book debts representing sales. 2.LETTER OF CREDIT: A letter of credit is the guarantee provided by the buyer’s banker to the seller that in the case of default or failure of the buyer, the bank shall make the payment to the seller.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
3. BILLS FINANCE: The bank extend assistance to the borrowers against the bills. The finance against bills is meant to finance, the actual sale transactions. The finance against bills can take three forms.Purchase of bills by the bank if these are payable on demand.
Discounting of bills by bank if these are usance bills (or time) bills.
Advance against bills under collection from the drawees, whether sent for realization through the bank or sent directly by the drawer to the drawees. 4. WORKING CAPITAL DEMAND LOAN: In compliance of RBI directions , banks presently grant only a small part of the fund- based working capital facilities to a borrower by the way of running case credit account ; a major portion is in the form of working capital demand loan. This arrangement is presently applicable to borrowers having working capital facilities of RS. 10crores or above. The minimum period of working capital demand loan which is basically non- operable account keep on changing. The working capital demand loan is granted for a fixed term on the carrying of which it has to be liquidated, renewed of rolled over.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
5. OVERDRAFT FACILITY: Under this arrangement the borrower is allowed to withdraw the amount upto a certain limit from this current account over and above his actual credit balance. Within the stipulated limits any numbers of withdrawals are permitted by the bank.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
DATA ANALYSIS THROUGH BAR DIAGRAMES(All data taken from discussion with employees and customers)PERCENTAGE OF BANK CREDIT INVESTED IN PRIORITY SECTORSINTERPRETATION:From the above graph we observe that IOB rate of investment into Priority sectors is 40% according to the guide lines provided by the RBI, which also covers the advances to Agriculture, SHG, Education, housing and SSI. The basis of 40% is based on the bank credit capacity.And the other 60% is invested in many other areas. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
NO. OF SMEs THAT ARE REGISTEREDINTERPRETATION:In the above diagram it can be observed that only a small no. of SMEs are registered i.e. 2mn.Maximum no. of units are still unregistered i.e.10.80mn, because they have problem of financing and they are not able to maintain proper documentation. The reason for non registration of SME’s is the notion that the costs would be increased.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
CONTRIBUTIONOF SME’s IN TOTAL EXPORTINTERPRETATION:SME Sector plays a major role in India's present export performance. From the above fig. we can know about the contribution part of SMEs in the total export i.e. 35%.Whole sectors are contributing 65% and SME sectors alone are contributing 35%, which also helps in generating the foreign revenuePANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
PERCENTAGE OF SMEs PREFERRED TO TAKE LOAN FROM VARIOUS BANKSINTERPRETATION:From the above analysis we know that SMEs give 1st preference to the Govt. specialized bank for taking the loan because of easy process rather than the private sector banks.SMEs less prefers the private sector banks because of the heavy documentation work which is needed.  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
PERCENTAGE OF LOAN SANCTION BASED ON AREAINTERPRETATION:The above analysis shows the loan sanctioned percentage area wise. This show that the banks are focusing more on urban area i.e. 60% and semi urban it is 39% .They have neglected the rural area .It is because that most of the SMEs are in urban area and it is easy for the bank to keep in touch with them. Lack of awareness among rural SME’s is the reason for non sanction of loans in this area.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
AWARENESS ABOUT THE LENDING FACILITIESINTERPRETATION:Maximum no. of SMEs are aware about the facilities provided by the bank but no. of SMEs who are taking loan from the bank is quite very less only because of huge paper work from the bank side. They are not interested to maintain the maximum no. of paper work which is difficult for them and high interest rate will cost them, and cannot afford because it increases their product prices. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
CREDIT SERVICES OFFERED TO SMEs IN TERMS OF WORKING CAPITAL REQUIREMENTSINTERPRETATION:Bank is offering 5 types of finances to SMEs working capital needs. From the above analysis it is observed that cash credit is very popular source for taking working capital loan. It is because in cash credit facilities there is interest charged by the bank only on the withdrawn amount by the person or borrower. The amounts are withdrawn only when it is required and the interest is paid only on enjoying part of the amount.Other facilities are only utilised by them along with the cash credit when they require the additional money for their business. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
TERM OF LOAN INTERPRETATION:As discussed earlier that mostly less then5 crores or 5 crores amount loan is taken by most of the SMEs .This amount is used by them for working capital requirements. And the term for which the loan amount is taken by them is for long term. It can be renewed by them from time to time.Banks are providing the loan on long term credit based on the going concern concept of accounting i.e. that the firm will run for an indefinite period of time and also the firms past, present and future projection of their accounting procedures are taken into consideration for term of loan. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
PERCENTAGE OF CREDIT FACILITIES SANCTIONED TO SME’sINTERPRETATION:From the above analysis we observe that 82% of SMEs are sanctioned the credit from IOB and rest 18% are not availing these facilities only because of not fulfilling the norms and the criteria of the bank as discussed earlier in list of documents required by the bank and other qualitative part which must be fulfilled by the borrowers. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
TIME TAKEN BY THE BANK FOR SANCTIONING OF THE LOAN INTERPRETATION:From the above analysis it can be observed that 49% of SMEs are sanctioned the loan within one month because of fulfilling all the requirements and norms of the bank in time.26% are delayed due to failure in complying with the documentation, for which the sanction period takes more than one month.7% are those who applied for the big amount for which sometimes it takes more than 2 months but not always.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
PERCENTAGE OF INVESTMENT IN VARIOUS SECTORSINTERPRETATION:IOB is sanctioning loans more to the manufacturing sectors for the investment as manufacturers approach the bank for their credit requirements i.e. 85% and only 15% of the loan is sanctioned to service sectors as per the requirements.As per the RBI guide line banks have taken care of the manufacturing units because it constitute the 35% of total export and also providing the maximum no. of employment in country. Service sectors are very less in number. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
FINDINGSIOB is offering loan to priority sectors like housing, education, working capital loan, etc.By whole study it is clearly state that cash is vital component for the firms operating cycle. If cash is not generating properly in the firm it will be harmful for the firm i.e. they should maintain the appropriate liquidity.It is observed that SMEs are suffering from many other problems which hamper their growth.Time of peak season small industry have to keep their inventory at the optimum level for making good profit by maintaining the demand level. Which also need more working capital At the same time of sanctioning loans bank need huge no. of documents for safety of their bank.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)

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Iob Project Ppt

  • 2. PROJECT REPORT ON “STUDY OF LENDING PROCESS AND CREDIT SERVICES OFFERED TO SMALL AND MEDIUM ENTERPRISES”WITHIOBBY - PANKAJ KUMARR.NO:36PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 3. INTRODUCTIONSMEs a part of PRIORITY sector
  • 4. GOVT. support has been started from 1967 -68 but attention given from 1971.
  • 5. RBI issued guide line modified
  • 6. All advances has been increasing year by year and contributes 40% of gross mfg. to the Indian economy.
  • 7. Employment generates by SMEs in A.P is 7.5% (approx) of total employments.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 8. DIFINIATION OF SMEUnder the MSME act 2006,Enterprises has been classified into two categories, namely – enterprises engaged in the mfg./production of goods pertaining to any industry, & enterprises engaged in providing of services. Enterprise have been defined in term of investment in plant and machinery/equipment(excluding land and building) PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 9. DIFINIATIONInvesting in plant and machinery / equipment (excluding land and building)PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 10. REVIEW OF LITERATUREBRAHMANANDAM, G, N., RAI, H.L., DAKSHINA MURTHY, “Financing Small Scale Sector”. The Role of Banks” INDIAN BANKING TODAY AND TOMORROW, MAY 1981-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. BRAHMANANDAM, G, N., RAI, H.L., DAKSHINA MURTHY, has focused on role of banks in financing SMEs. He also focused on how economic reforms have changed the bank role in extending credit to SMEs. They also focused on the credit facilities available to the SMEs in the wake of MSME act 2006. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 11. JAILAL SAAW,” Growth of small scale industries in India” JOURNAL OF INDUSTRY AND TRADE, April -2005- 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. This article is focusing on the one problem that is financial problems faced by the SME segment. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 12. PROBLEMS SME is one of the growing sectors of the country even though they are facing so many problems which restrict the growth1.Under-utilization of Capacities.2.Inadequate and Untimely Credit Flows.3.Inability in Technology up gradation. 4.Inefficient raw material procurement.5.Poor financial situations and low levels of R&D6.Inability to Market Finished Goods.7.Ineffective monitoring and feedback mechanism.8.Shortage of power9.Lack of awareness of credit facilities available10.Lack of knowledge about various credit schemes11.Overdependence on purchases by government etc…………  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 13. NO. OF SME UNITSPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 14. PRODUCTION GROWTHThe above dig. says that in FY 07 growth in production is by 18% against 15.8% in the previous yearPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 15. COMPANY PROFILEChairman and Managing Director : Shri S.A.BhatEstablished in 1937 in Chennai by Shri M..CT.M. Chidambaram Chettyar.1847 branches in INDIA and 6 branches overseas and 500 ATMs all overAN ISO certified Rating for IOB – AA+/ stable (Based on the services offered and market performance)Recent happening-Take over, Shree Suvarna Sahakari Bank LTD in May 2009.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 16. OBJECTIVE OF THIS STUDYTo examine the growth of SME industries.The study about credit facilities offered to the SMEs by the banks. To analyze government’s support in obtaining credit facilities.To study about financial problems of SMEs regarding loan.RBI guide line and SEBI guide lineHow working capital financed to SMEs i.e. the main source of finance available for SMEs.To study about working capital.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 17. GUIDE LINES FOR BANKS REGARDING SME FINANCINGFinancial decisions are taken at various levels from the branch to Management Committee of the Board. if it falls under their powers and if it is beyond their powers forward the same to the Regional Offices for their consideration and regional office will take decisionSame with regional office – than transfer to central officeIf decision not taken by the central office then RBI rules is followed by the banks is mandatoryPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 18. RBI GUIDE LINEEvery Bank is required to set up its own policies for providing monetary assistance to the SMEBank should adopt a transparent rating system by which eligible SME should get the credit facilities.Credit facilities must be offered to an average of at least 5 micro, small and medium enterprises in every quarterTo some extent bank can grant collateral free loans to SMEsPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 19. RESEARCH METHODOLOGYRESEARCH DESIGN:Study is all about the research & analysis of credit services offered to small and medium enterprises Study is being made for the purpose of analysis of credit services and relief to the borrowers by the bank (IOB) that predicts the future growth of the bank by providing better services by bank can earns more profitStudy will be carried out at Hyderabad.Secondary data is required for analysis of report.Period of the study is limited to 45 days.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 20. METHOD OF DATA COLLECTION PRIMARY DATA - Information has also been gathered through discussions with the employees of IOB and visiting the IOB branches (R.P. ROAD branch, HIMAYATNAGER branch and REGIONAL OFFICE.) SECONDARY DATAThe secondary data collected from the already sanctioned loan files. Collection of secondary data from Management journals.Bank and Borrower’s Annual Report.Project proposal.Respective Banks Web Sites other sitesReference from Management Books.Newspapers and ArticlesAlready researched data (Which turned into information based on analysis)  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 21. LIMITATIONSThe study is limited to the period of 45 days. Due to time constraints we covered only limited no. of SMEs Since banks have some confidential reports which cannot be handover to the outsiders, so in-depth research and analysis is not possible.There is lots of no. of SMEs which is unregistered; due to this proper data’s are not covered.The financials of the firms, were not available, as most of the firms are worried about disclosing their financials, thus for the industry analysis and other qualitative research, we had to rely on the secondary data sources. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 22. GOVT. SUPPORTThe way forward would be to create an environment of risk -taking by the government for providing a start-up capital to SMEs and to facilitate technology transfers and training in skill development. The Micro, Small and Medium Enterprises Act, 2006 is a legal framework for more capital investment in the SME sector. Under this Act -The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was launched by the Government of India to make availablecollateral-free credit to the micro and small enterprise sector. Both the existingand the new enterprises are eligible to be covered under the scheme.  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 23. The scheme was formally launched on August 30, 2000 and isoperational with effect from 1st January 2000. The corpus (principle sum) of CGTMSE isbeing contributed by the Government and SIDBI in the ratio of 4:1 respectivelyand has contributed Rs.1346.54 crore till 2007, After it is raised to RS2500 crores, which is provided by SIDBI and other specialized Govt. banks.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 24. GOVT.SUPPORT WITH STATE GOVT.Small scale industries need credit support on a continuous basis forrunning the enterprise as well as for its diversification and modernization.Recognizing the need for a focused financial assistance to such industries,the Government of India, together with the State Governments, hasformulated several policy packages including schemes and funds for theirgrowth and development. Most of these programmes of the Central Government are implemented through two principal organizations are as followes:PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 25. SMALL INDUSTRIES DEVELOPMENT ORGANIZATION (SIDO) is an apex body for promotion and development of small scale industries in the country. SIDO promotes axillaries units to public sectors enterprise ,acts like model agencies for coordinating, monitoring policy and programme.2. NATIONAL SMALL INDUSTRIES CORPORATION LTD (NSIC), has been established with the objective of promoting, aiding and fostering the growth of small scale industries in the country. It has been assisting small enterprises through a set of specially tailored schemes which facilitate marketing support, credit support, (Equipment financing ,Financing for procurement of raw material ,Financing for marketing activities , Financing through syndication with banks ) , technology support etc. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 26. SEVEN POINT ACTION PLAN ANNOUNCED BY GOVT. OF INDIATime bound action for setting up specialized SSI branches in 85 identified districts of high small industry density. Adequate delegation of powers at the branch and regional level. Banks to conduct sample surveys of their performing SSI accounts to find out whether they are getting adequate credit. Steps to be taken to see that as far as possible composite loans (covering both term loans and working capital) are sanctioned to SSI entrepreneurs. Regular meetings by banks at Zonal and Regional levels with SSI entrepreneurs. 6. Simplification of procedural formalities by banks for SSI entrepreneurs. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 27. IOB CREDIT FACILITIES FOR ELIGIBLE SMEsIn this regard they need to submit some documents are as follows:1.SSI Registration Certificate 2.Partnership Deed / Memorandum & Article of Association 3.Authority letter to sign the application 4.List of all partners / directors with their age, address, certified Net Worth / Income Tax returns, qualifications and experiencePANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 28. 5.Copy of the audited accounts for the last three years (where accounts for the last year have not been audited, provisional accounts duly certified by a Chartered Accountant, along with two years audited accounts, are to be submitted) 6.In case of new project/expansion, copy of the project report containing a brief project profile, cost of project, source/means of finance 7.Brief write-up about the products manufactured, end users, marketing tie-up and orders in hand 8.Details of subsidy, tax concession available to the applicant9.Quality certificates, export awards won, membership of any associationsPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 29. 10.Any other information that would enable us to understand your business better 11.Details about group companies (names, constitution, net worth, turnover etc.) 12.Contact details of Bankers, key suppliers & key customers 13.Insurance details of plant & machinery 14.Rating report 15.Clear vision of the customers 16.Project proposal reportPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 30. BASIC NEED OF SMEsWORKING CAPITAL-Working capital refers to the funds invested in current assets, i.e. investment in stocks, sundry debtors, cash and other current assets. Current assets are essential to use fixed assets profitably. For example, a machine cannot be used without raw material capital. The investment on the purchase of raw material is identified as working capital. Working Capital Management, also known as short-term financial management involves the management and control o f the Gross current assets so that a satisfactory level of Working Capital (Net Working Capital requirement), needed to carry out day -to-day activities, is maintained and the current liabilities are discharged as and when they fall due. Working Capital Management involves cash flows within the Operating Cycle of the Company, usually not exceeding the period of one year, unlike long -term financial management where cash flows extend for more than one year.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 31. Theoretically, there are two concepts of Working CapitalGross working capital: The gross working capital refers to investment in all the current assets taken together. The total of investments in all the current assets is known as gross working.Net working capital: The term net working capital refers to excess of total current assets over total current liabilities. It may be noted that the current liabilities refers to these liabilities which are payable with in a period of 1 year. And also there are two types of working capital are as follows :PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 32. PERMANENT & TEMPORARY WORKING CAPITAL: The overall Working Capital requirement does not stay constant and keeps fluctuating. However, to carry on business, a certain minimum level of Working Capital is required on a regular basis which is referred to as “Permanent or Fixed Working Capital”  Any amount over and above the permanent Working Capital is known as the “Temporary or seasonal Working Capital” requirement. It is also known as variable working capital.  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 33. The Operating Cycle creates the need for Current Assets or Working Capital. The Working Capital need of a Company does not come to an end once an Operating Cycle is completed. As it is a cyclical process, the need continues to exist even after the Company has realised cash against its credit sales. Thus, there should be continuous supply of Working Capital for the Company to carry on its business activity.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 34. SOURCE OF FINANCE FOR SMEsSMES are basically depends on the 2 types of source of finance Internal and (2) external  INTERNAL:-Paid up capital: Ordinary share, Preference share, deferred shares, and Forfeited shares.Reserve surplus: Capital reserve, Development rebate reserve, Other sources Provisions: Taxation (Net on advances on income tax), Depreciation, Bad debtsPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 35. EXTERNAL:- Borrowings: From Banks, from term lending institutions like IDBI, IFCI, SIDBI, ICICI, INDUSTRIAL DEVELOPMENT CORPORATION, etc.b)Trade dues and current liabilities: Sundry creditors, Other sources PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 36. OTHER INSTITUTIONS IN MARKET FOR SME’S LOANAs the small and medium enterprises (SME) sector is one of the fastest growing industrial sectors all over the world, initiatives are being taken by national, private and financial institutions. Among them are:-Indian overseas bank (IOB)State bank of India (SBI) Bank of Baroda (BOB) HDFC bankICICI bank Small industries development organization (SIDO)National small industries corporation (NSIC)SIDBINABARD(10) IDBI PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 37. PROBLEMS OF SMEs-FINANCIAL PROBLEMS OF SMEs REGARDING LOANPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 38. FROM THE BAR DIG. ANALYSISRELUCTANCE TO LEND BY BANK: Sometimes banks are hesitating in giving the loan. Due to this nearly 27% SMEs are not getting the finance facilities. This is happening mostly with the new clients.COLLATERAL REQUIREMENTS OF BANK/ FINANCIAL INSTITUTIONS: Because of the collateral requirements of bank nearly 54% SMEs are not getting the loan facilities. They are not able to show the collateral money or assets.BANK/ PAPERWORK BUREAUCRACY: Due to huge demand of documentations 43% SMEs are not getting loan facilities.HIGH INTEREST RATES: Due to high competition with the big firms small firms are not able to make a sufficient profits and they are not able to pay the interest rate properly. So considering these banks are not providing the loan to the new clients. Due to this nearly 55% SMEs are not able to get the loan from the banks.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 39. 5. TIME TAKEN BY BANKS TO CLEAR LOAN APPLICATION: Due to some verifications banks are taking time in clearing the loan. This time constraints are big obstacles for them in production parts which restrict the 42% SMEs growth.6. DELAYED PAYMENT: 38% growth is less because of delayed payment from the market which affect the whole process of the SMEs like production to interest and till loan payment.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 40. TYPES OF INDUSTRIAL FINANCE PROVIDED BY IOBSHORT TERM: Less than 1 year to meet variable, seasonal or temporary capital requirement.MEDDIUM TERM: 1 to 5 year for permanent working capital, small expansion replacement, modification etc.3. LONG TERM FINANCE: Period more than 5 years. It is required for procuring Fixed Assets for establishing new branches or new business for substantial expansion of existing business modernizationPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 41. AT THE OF LENDING SOME RELEVANT RATIOS ARE COVERED BY THE BANKLiquidity Ratios: Current Ratio=(current Assets / current liabilities) Acid Test Ratio (quick ratio) = (Current Assets- Inventory / Current Liabilities) According to this ratio bank is testing the liquidity position of the client by the liquidity ratio because that they are able to pay or not their short term liabilities. 2. Activity ratios: Average Collection Period= (A/c Receivable/ Daily Average Sales) Capital turnover ratio= (Sales/ Capital Employed) Fixed Assets turnover Ratio= (Sales/ Capital Assets)  Activity ratios are also called Turnover ratios or performance ratios. These ratios are to evaluate the efficiency with which firm manages and utilizes its assets. These ratios usually indicate the frequency of sales. It is helpful for the bank that they can estimate the paying capacity of the borrowers. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 42. 3.Leverage Ratios:Debt Ratio= (Total liabilities/ Total Assets) Debt Equity = (Total liabilities/ Share Holders Equity)Banks are very keen to know about this ratio because it shows relative weights of debt and equity. These ratios indicate the proportion of debt fund in relation to equity. It covers share holders fund (equity) and long term borrowed fund (debt).4.Net Profit Margin: (Net Profit/ Net Sales)This ratio measures the profitability of the firm in terms of assets employed in the firm. Banks are also keen interested to know the profits of the borrowers that they are able to pay their interest and dues on time.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 43. 5.Debtors’ Turnover Ratio:Credit Sales Average Accounts receivable For the cash cycling banks wants to know about the collection and credit policies of the firm. The speed with which credit receivables are collected affects the liquidity position of the firm. 6.Return On Investment: (ROi)= (Net Profit/ Total Assets)It measures the profitability or the operational efficiency of the firm. This is very essential for the banks. 7.Dividend Per Share =(Total profits available to Equity Share Holders/ No. of Equity Shares) This ratio indicates the amount of profit distributed to shareholders per share.  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 44. RATE OF INTEREST CHARGED ON AMOUNT SANCTIONED BY IOB FOR SMEsFOR MICRO AND SMALL ENTERPRISES:For credit limits up- to RS 2 lakhs - 9.50%Above RS2 lakhs and up- to RS 25 lakhs -10.50%Above RS 25 lakhs and below RS 1 crore-11.00%1 crore and above up-to RS 10 crore:For mfg. units (depending on ratings)-11.00% to 13.50%Other then mfg.(depending on ratings)-12.25% to 15.50%PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 45. MEDIUM ENTERPRISESFor credit limits up-to RS 25,000/- --9.50%Above RS 25,000/- and up-to RS 2 lakhs--11.00%Above Rs2 lakhs and upto Rs25 lakhs(based on ratings)--11.75% to 15%Above Rs25lakhs and below Rs1crore(based on ratings)-12.25% to 15.50%1 crore and above upto Rs 10crores For mfg. units(depending on ratings)--12.25% to 14.75%Other than mfg. units(depending on ratings)--12.25% to 15.50%PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 46. FINANCING OF WORKING CAPITAL BY IOB IN THE FOLLOWING FORM:1. CASH CREDIT: This type of credit is provided mainly to individuals or enterprises engaged in manufacturing & trading activities to enable them to carry on their activities. The amount of cash credit facility to be sanctioned to a units need based and is worked out as per well defined parameters in each bank. The guide line of RBI may also affect the quantum of facility in some cases. This facility is generally granted against the security of stocks of goods, bills/ book debts representing sales. 2.LETTER OF CREDIT: A letter of credit is the guarantee provided by the buyer’s banker to the seller that in the case of default or failure of the buyer, the bank shall make the payment to the seller.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 47. 3. BILLS FINANCE: The bank extend assistance to the borrowers against the bills. The finance against bills is meant to finance, the actual sale transactions. The finance against bills can take three forms.Purchase of bills by the bank if these are payable on demand.
  • 48. Discounting of bills by bank if these are usance bills (or time) bills.
  • 49. Advance against bills under collection from the drawees, whether sent for realization through the bank or sent directly by the drawer to the drawees. 4. WORKING CAPITAL DEMAND LOAN: In compliance of RBI directions , banks presently grant only a small part of the fund- based working capital facilities to a borrower by the way of running case credit account ; a major portion is in the form of working capital demand loan. This arrangement is presently applicable to borrowers having working capital facilities of RS. 10crores or above. The minimum period of working capital demand loan which is basically non- operable account keep on changing. The working capital demand loan is granted for a fixed term on the carrying of which it has to be liquidated, renewed of rolled over.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 50. 5. OVERDRAFT FACILITY: Under this arrangement the borrower is allowed to withdraw the amount upto a certain limit from this current account over and above his actual credit balance. Within the stipulated limits any numbers of withdrawals are permitted by the bank.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 51. DATA ANALYSIS THROUGH BAR DIAGRAMES(All data taken from discussion with employees and customers)PERCENTAGE OF BANK CREDIT INVESTED IN PRIORITY SECTORSINTERPRETATION:From the above graph we observe that IOB rate of investment into Priority sectors is 40% according to the guide lines provided by the RBI, which also covers the advances to Agriculture, SHG, Education, housing and SSI. The basis of 40% is based on the bank credit capacity.And the other 60% is invested in many other areas. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 52. NO. OF SMEs THAT ARE REGISTEREDINTERPRETATION:In the above diagram it can be observed that only a small no. of SMEs are registered i.e. 2mn.Maximum no. of units are still unregistered i.e.10.80mn, because they have problem of financing and they are not able to maintain proper documentation. The reason for non registration of SME’s is the notion that the costs would be increased.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 53. CONTRIBUTIONOF SME’s IN TOTAL EXPORTINTERPRETATION:SME Sector plays a major role in India's present export performance. From the above fig. we can know about the contribution part of SMEs in the total export i.e. 35%.Whole sectors are contributing 65% and SME sectors alone are contributing 35%, which also helps in generating the foreign revenuePANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 54. PERCENTAGE OF SMEs PREFERRED TO TAKE LOAN FROM VARIOUS BANKSINTERPRETATION:From the above analysis we know that SMEs give 1st preference to the Govt. specialized bank for taking the loan because of easy process rather than the private sector banks.SMEs less prefers the private sector banks because of the heavy documentation work which is needed.  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 55. PERCENTAGE OF LOAN SANCTION BASED ON AREAINTERPRETATION:The above analysis shows the loan sanctioned percentage area wise. This show that the banks are focusing more on urban area i.e. 60% and semi urban it is 39% .They have neglected the rural area .It is because that most of the SMEs are in urban area and it is easy for the bank to keep in touch with them. Lack of awareness among rural SME’s is the reason for non sanction of loans in this area.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 56. AWARENESS ABOUT THE LENDING FACILITIESINTERPRETATION:Maximum no. of SMEs are aware about the facilities provided by the bank but no. of SMEs who are taking loan from the bank is quite very less only because of huge paper work from the bank side. They are not interested to maintain the maximum no. of paper work which is difficult for them and high interest rate will cost them, and cannot afford because it increases their product prices. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 57. CREDIT SERVICES OFFERED TO SMEs IN TERMS OF WORKING CAPITAL REQUIREMENTSINTERPRETATION:Bank is offering 5 types of finances to SMEs working capital needs. From the above analysis it is observed that cash credit is very popular source for taking working capital loan. It is because in cash credit facilities there is interest charged by the bank only on the withdrawn amount by the person or borrower. The amounts are withdrawn only when it is required and the interest is paid only on enjoying part of the amount.Other facilities are only utilised by them along with the cash credit when they require the additional money for their business. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 58. TERM OF LOAN INTERPRETATION:As discussed earlier that mostly less then5 crores or 5 crores amount loan is taken by most of the SMEs .This amount is used by them for working capital requirements. And the term for which the loan amount is taken by them is for long term. It can be renewed by them from time to time.Banks are providing the loan on long term credit based on the going concern concept of accounting i.e. that the firm will run for an indefinite period of time and also the firms past, present and future projection of their accounting procedures are taken into consideration for term of loan. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 59. PERCENTAGE OF CREDIT FACILITIES SANCTIONED TO SME’sINTERPRETATION:From the above analysis we observe that 82% of SMEs are sanctioned the credit from IOB and rest 18% are not availing these facilities only because of not fulfilling the norms and the criteria of the bank as discussed earlier in list of documents required by the bank and other qualitative part which must be fulfilled by the borrowers. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 60. TIME TAKEN BY THE BANK FOR SANCTIONING OF THE LOAN INTERPRETATION:From the above analysis it can be observed that 49% of SMEs are sanctioned the loan within one month because of fulfilling all the requirements and norms of the bank in time.26% are delayed due to failure in complying with the documentation, for which the sanction period takes more than one month.7% are those who applied for the big amount for which sometimes it takes more than 2 months but not always.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 61. PERCENTAGE OF INVESTMENT IN VARIOUS SECTORSINTERPRETATION:IOB is sanctioning loans more to the manufacturing sectors for the investment as manufacturers approach the bank for their credit requirements i.e. 85% and only 15% of the loan is sanctioned to service sectors as per the requirements.As per the RBI guide line banks have taken care of the manufacturing units because it constitute the 35% of total export and also providing the maximum no. of employment in country. Service sectors are very less in number. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 62. FINDINGSIOB is offering loan to priority sectors like housing, education, working capital loan, etc.By whole study it is clearly state that cash is vital component for the firms operating cycle. If cash is not generating properly in the firm it will be harmful for the firm i.e. they should maintain the appropriate liquidity.It is observed that SMEs are suffering from many other problems which hamper their growth.Time of peak season small industry have to keep their inventory at the optimum level for making good profit by maintaining the demand level. Which also need more working capital At the same time of sanctioning loans bank need huge no. of documents for safety of their bank.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 63. 6.Bank is taking maximum no. of days for sanctioning the loan.7.IOB is strictly followed the rules and regulations for sanctioning.8.Bank employees are using their exceptional powers regarding loan sanctioning.9.Bank mostly providing the loan to their well known customers.10.The entrepreneurs are lack of knowledge regarding the credit facilities.11.For promoting SMEs govt. also supporting them by providing schemes.12.The capital base of SMEs is very poor.13.The growth of SMEs in A.P. has been significant.14.IOB is encouraging the SME finance because they feel that they are able to repay their loan.15.A big no. of SME units are still unregistered Which is showing loss of Indian economy. But on the other part SMEs are big source of employments.16.At last shortage of finance is considered to be most important problem responsible for a host (maximum) of problems in SMEs.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 64. SUGGESTIONSThe bank should take care of the well being of SMEs and they should initiate such measures which would result in further promotion of SMEs.Timely finance should be provided to units keeping in view their needs.The borrowing should be made cheaper by lowering the rate of interest on lending of banks, which help the SMEs for coping with the high risk and costs to compete with their competitors.Bank should also provide consultancy services and professional guidance at the time of setting up for considering the long term and short term financial requirements of a small unit for lending purpose.Bank has to increase their credit limit and also decrease the installment amount.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 65. 6.SMEs are big source of revenue for banks, so bank should encourage also the unregistered units by providing more facilities like less paper work.7. The best way to encourage lending to SMEs is to improve the ability of existing institution to construct profitable and efficient lending programmes.8.Building awareness among small business people about the financial sources offering by bank. Especially in the case of SMEs is must. So there is mutual benefits are possible.9.While granting the loans the bank does not adhere with the margin.10.The process followed by the bank in sanctioning the loan is cumbersome (unmanageable), hence it is suggested to make the process easier in sanctioning the credit facilities to the SMEs.PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 66. CONCLUSIONIn recent years some initiatives have been taken by both govt. and banks of India to make more acceptable for funding by banks. My project report mainly involved the problems, opportunity, credit facilities to SMEs by the bank. The main purpose of the analysis is to know that how bank is providing loan to SMEs. We know that today SMEs are growing and profitable sectors for banks in terms of money investment. And IOB system of loan sanctioning is quite good. But it is very true, in terms of the paper work that most of the SMEs are enable to submit proper documents for approval of loan. It is also found that after sanctioning the credit facilities bank has maximum no. of paper works, which is creating problems for SMEs to maintain all of them.In regard to rate of interest industrial owners feel that the rate of interest for working capital is high. It is manageable at the time of pick season but not at all time. PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 67. It also found that some SME owners are not educated, so they are not aware about the benefits of the registration. Due to this they are not eligible for the financing, and lack of finance they cannot grow. Nower days credit guaranty and rating institutions have floated to support banks to assume risk unhesitatingly in financing SMEs. And also more appropriate credit instruments have been developed to help SMEs to have easy credit with less cost and collaterals.SMEs have other problems like underutilization of capacity which is happening of improper training and also less market share of their products. The reason for less market share is competition with the big firms in the market which also cuts their profit margin.  PANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)
  • 68. THANK YOUPANKAJ KUMAR(PGDM-FINANCE) ICBM-SBE,HYDERABAD(2008-10)