FINAL REPORT BANK OF BARODA roll no.910

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History of Bank:

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Without a sound and effective banking system in India it cannot have a healthy

economy. The banking system of India should not only be hassle free but it should be able

to meet new challenges posed by the technology and any other external and internal factors.

The first bank in India, though conservative, was established in 1786. From 1786

till today, the journey of Indian Banking System can be segregated into three distinct

phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

New phase of Indian Banking System with the advent of Indian Financial &

Banking Sector Reforms after 1991.

Phase-I

The General Bank of India was set up in the year 1786. Next came Bank of

Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809),

Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it

Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of

India was established which started as private shareholders banks, mostly

Europeansshareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians,

Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906

and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian

Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced

periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly

small. To streamline the functioning and activities of commercial banks, the Government

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of India came up with The Banking Companies Act, 1949 which was later changed to

Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve

Bank of India was vested with extensive powers for the supervision of India as

CentralBankingAuthority. During those day’s public has lesser confidence in the banks. As

an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided

by the Postal department was comparatively safer. Moreover, funds were largely given to

traders.

Phase-II

Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalized Imperial Bank of India with extensive banking

facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of

India to act as the principal agent of RBI and to handle banking transactions of the Union

and State Government all over the country.Seven banks forming subsidiary of State Bank

of India was nationalised in 1960 on 19th July, 1969, major process of nationalization was

carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi.14

major commercial banks were nationalized.

Second phase of nationalisation Indian Banking Sector Reform was carried out in

1980 with seven more banks. This step brought 80% of the banking segment in India under

the Government. The following are the steps taken by the Government of India to Regulate

Banking Institutions in the Country

1. 1949: Enactment of Banking Regulation Act.

2. 1955: Nationalization of State Bank of India.

3. 1959: Nationalization of SBI subsidiaries.

4. 1961: Insurance cover extended to deposits.

5. 1969: Nationalization of 14 major banks.

6. 1971: Creation of credit guarantee corporation.

7. 1975: Creation of regional rural banks.

8. 1980: Nationalization of seven banks with deposits over 200 crore.

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After the nationalization of banks, the branches of the public sector bank India rose

to approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and

immense confidence about the sustainability of these institutions.

Phase-III

This phase has introduced many more products and facilities in the banking sector

in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee

was set up by his name which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to

give a satisfactory service to customers. Phone banking and net banking is introduced. The

entire system became more convenient and swift.

The financial system of India has shown a great deal of resilience. It is sheltered

from any crisis triggered by any external macroeconomics shock as other East Asian

Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves

are high, the capital account is not yet fully convertible, and banks and their customers

have limited foreign exchange exposure.

General Information of Bank of Baroda

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Bank of Baroda is founded by Maharaja Sayajirao Gaekwad in the 20th July,

1908 under the Companies Act, 1897. Bank of Baroda has its corporate centre in Mumbai.

Today it has its spread in almost 25 countries.

Bank‘s mission statement:

To be a top ranking National Bank of International Standards committed to

augmenting stake holders' value through concern, care and competence.

Bank logo

Banks new logo is a unique representation of a universal symbol. It comprises dual

‘B’ letterforms that hold the rays of the rising sun. It is called the Baroda Sun.

The single-color, compelling vermillion palette has been carefully chosen, for its

distinctiveness as it stands for hope and energy.

Board of director:

Shri.M.D.Mallya

(Chairman & Managing Director)

Global presence:

In the following countries Bank of Baroda have its branches:

Australia, Bahamas, Bahrain, Belgium, Botswana, China, Fiji Islands, Ghana, Guyana,

Hong Kong, Kenya, Mauritius, Malaysia, Seychelles, South Africa, Singapore, Sultanate of

Oman, Tanzania,Trinidad & Tobago, Uganda, United Arab Emirates, United Kingdom,

Zambia.

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No. of branches network:

Metro: 676

Urban: 580

Semi-urban:721

Rural: 1128

Extension counters: 26

Total in India: 3131

Overseas: 80

Organizational Structure:

The Bank has a four tier structure – i.e.:

Baroda Corporate Office / Head Office

Zonal Offices

Regional Office

Branches

The Bank is headed by Chairman & Managing Director, supported by two

Executive Directors. The Supreme Authority is vested in the Board of Directors which is

having 14 members (including CMD and both the Executive Directors)

Gujarat Operations:

Gujarat Zone is the biggest of all the zones in the whole country. It is having operation

in all the 26 districts of Gujarat state i.e. this zone covers the entire state of Gujarat. Prior to

restructuring, Gujarat region was divided in 3 zones only. They were –

ERSTWHILE – North Gujarat zone

Centre Gujarat zone

South Gujarat zone

These zones were restructured and were formed as Gujarat Operation on 10 th Aug,

2006. These zones are as follows:

Gujarat Regions:

1. Ahmedabad

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2. Baroda

3. Surat

4. Rajkot

5. Balsar

6. Anand

7. Mehsana

8. Panchmahal

9. J,J & K – Junagadh, Jamnagar and Kachchh

10. Bharuch

This zone is having a business share of above 1/6th of the total business in the country.

Presently, in Gujarat Operations, there are 701 branches which are bifurcated as follows –

Metros: 142

Urban: 065

Semi-Urban: 161

Rural: 333

Total: 701

Presently, the no. of employees in Gujarat Operations is 8621 which are categorized as

follows – Officers: 2857

Clerks: 3820

Sub – Staff: 1944

Total: 8621

Bharuch Region:

The Bharuch regional bank was established on 2nd April, 1984. Bharuch Region

comprises of 2 districts: 1st is the Bharuch District and the 2nd is the Narmada District.

Bharuch district is the front-runner in Industrialization and agricultural aligned activities.

However, Narmada district is one of the most backward districts in Gujarat.

Total no. of branches in the Bharuch region – as on date is

Urban - 05

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Semi-Urban - 12

Rural - 28

Total: 45

Total No of employees in Bharuch region are – 416 categorized as follows :

Officers: 163

Clerks: 171

Sub – Staff: 082

Total 416

Bank of Baroda Bharuch region has 13 on-site ATMs and 3 off-site ATMs.

Business Details of Bharuch Region as on 31-03-2010:

Ankleshwar region:

The Ankleshwar Industrial Estate Branch is having large number of transaction.

The main focus this branch is advances and credit lending. There is special attention is to

be given to the SMEs sector. SMEs sector is headed by Mr. Devandra Gandhi, Seinor

Manager of SMEs. The whole branch is headed by the respected Chief Manager,

Mr. V .V. Rao.

Type Rs. In cores

Deposits 1791.57

Advances 811.29

Total 2602.86

Profit 42.86

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Topic undertaken for summer internship programme:

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“Credit Flow To MSMEs Sector Whether It Is Adequate Or Not? Suggest

Remedies.”

General understanding of the topic:

Preamble:

The Micro, Small and Medium Enterprises (MSMES) segment has been a vital

component of Indian economy. This sector accounts for around 40.0% of total industrial

production, 34.0% of industrial exports, 95.0% of industrial units and 35.0% of total

employment in manufacturing and service sectors of India. The unorganized sector which

forms a major component of the MSE segment comprises almost 95.0% of total industrial

units and employs over 65 million people.

The contribution of Services Sector within the SMES segment is quite significant;

especially IT enabled services, hospitality services, tourism, couriering, transportation, etc.

The SMEs have also been playing a vital role in the job creation process.

Formerly, both government and RBI credit policy has given emphasis to broaden

the size the concept of SSI sector by including services and medium enterprise in a

composite of “Small and Medium Enterprise”.

Subsequently, MSMESD Act was operationalised with effect from 2nd October

2006, which defines an enterprise” instead of “industry” to give recognition to service

sector and also defines a “medium enterprise” to facilitate technology up gradation and

graduation.In order to address the issue of SMEs Sector and ensure growth of credit to this

sector, Hon’ble Union Finance Minister unveiled package for SMEs Sector in August,

2005.

To give a focused attention to emerging SMEs in India, the Bank has been

considering other commercial units with a turnover up to Rs 150 crores at par with the

SMEs.

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To promote the growth of SMEs Sector, the Bank has launched a special and novel

delivery model, viz. SMES Loan Factory, which at present, is operationalised in 36 Centers

of the Bank and well accepted in the marketplace. The SMES Loan Factory is an

innovative model for streamlining processes and for timely sanctions of SMES loan

proposals

Objectives:

The SMEs loan policy is framed with the following objectives:

1. To improve flow of credit to SMEs Sector so as to double the credit to the Sector in

5 years, i.e. by the year 2010.

2. To formulate liberal norms of lending to SMEs Sector, to ensure availability of

adequate and timely credit to the sector.

3. To provide guidelines to the branches to dispense credit to SMEs Sector on

liberalized terms.

4. To devise an organizational structure at all levels for handling SMES credit

portfolio in a more focused manner.

5. To comply with terms of Policy package announced by Hon’ble Union Finance

Minister on 10.08.2005 and further guidelines received from Reserve Bank of India

from time to time for implementation of the Policy Package.

Scope of the policy:

1. Composition of SMEs Sector

2. Broad guidelines on lending to SMEs Sector

3. SMES Loan Factory Model

4. Pricing Policy

5. Identifying Thrust Industries

6. Discretionary lending powers

7. Reporting and Monitoring system

What is small and medium enterprise sector?

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Manufacturing Industries:

1. Micro Enterprise is an enterprise where investment in plant and machinery (original cost

excluding land and building and the items specified by the erstwhile Ministry of Small

Scale Industries) does not exceed Rs. 25.00 Lacs.

2. Small Enterprise is an enterprise where the investment in plant and machinery (original

cost excluding land and building and the items specified by the erstwhile Ministry of

Small Scale Industries) is more than Rs. 25.00 lacs but does not exceed Rs. 5.00 crores.

3. Medium Enterprise is an enterprise where the investment in plant and machinery (original

cost excluding land and building and the specified items) is more than Rs.5.00 crores but

does not exceed Rs.10.00 crores.

Service Sector :

1) Micro Enterprise is an enterprise where the investment in equipment does not exceed

Rs. 10.00 lacs;

2) Small Enterprise is an enterprise where the investment in equipment is more than

Rs.10.00 lacs but does not exceed Rs. 2.00 crores and

3) Medium Enterprise is an enterprise where the investment in equipment is more than

Rs. 2.00 crores but does not exceed Rs. 5.00 crores.

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1948-1991 : The MSME development organization was set up in 1954 as an apex body to

sustain the growth of SMEs sector. Within next two years National Small Industries

Corporation, the khadi and village industries commission and the coir industries was set up.

1991-1999:

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i. Testing centre and tools room was set up for quality certification

ii. The Small Industries Development Bank of India (SIDBI) and technology up

gradation measure were created to accelerate finance to MSMEs sector

1999 onwards:

i. A credit linked capital subsidy was launched to encourage technological up

gradation

ii. Credit guarantee scheme was launched to give collateral free loan.

iii. The exemption limit for payment of excise duty was raised to Rs. 1 crore.

The MSMESD Act, 2006 seeks to facilitate to facilitate the development of this

enterprise. It provides the exact definition of “enterprise” for service and manufacturing

sector. This act has given the exact definition of what is “MSME”.

Definition of MSMEs

Manufacturing Industries:

1. Micro Enterprise is an enterprise where investment in plant and machinery (original cost

excluding land and building and the items specified by the erstwhile Ministry of Small

Scale Industries) does not exceed Rs. 25.00 Lacs.

2. Small Enterprise is an enterprise where the investment in plant and machinery (original

cost excluding land and building and the items specified by the erstwhile Ministry of

Small Scale Industries) is more than Rs. 25.00 lacs but does not exceed Rs. 5.00 crores.

3. Medium Enterprise is an enterprise where the investment in plant and machinery (original

cost excluding land and building and the specified items) is more than Rs.5.00 crores but

does not exceed Rs.10.00 crores.

Service Sector :

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1) Micro Enterprise is an enterprise where the investment in equipment does not exceed

Rs. 10.00 lacs;

2) Small Enterprise is an enterprise where the investment in equipment is more than

Rs.10.00 lacs but does not exceed Rs. 2.00 crores and

3) Medium Enterprise is an enterprise where the investment in equipment is more than

Rs. 2.00 crores but does not exceed Rs. 5.00 crores.

Equity investments could be useful for SMEs provided the fact that successful exit

strategies are laid down,Penetration of e-financing in the newer market, Transformation,

modernization, integration and clusterization of SMEs lead to more amount of

accountability and minimizes cost of raising capital. ( Prabal dutta) in his research paper

“strategies to increase credit flow in SMEs sector”Accordingly, an ‘Internal Group’ was

constituted on

February 2, 2005 under the Chairmanship of Shri C.S.Murthy, Chief General Manager-in-

Charge, Rural Planning & Credit Department, Reserve Bank of India, Central Office,

Mumbai.The main committees were set up to monitor the credit flow in SMEs sector the

committees are Nayak Committee , Kapur Committee,Ganguly committee

Reserve bank of India have issued guidelines to sanction credit free loan up to 5

lakhs the target adopted for the future in to increase the flow of credit to micro enterprises

all scheduled commercial banks should lend 60% of their MSE lending to micro enterprises

in stages viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in 2012-13.

The paper ( Mr. Aryan Banerjee) reinforces the significance of SMEs, the need to

setup capital market access for SMEs and delves particularly into the case for equity

market access. A solution is sought to reinvent the equity market access for SMEs the

benefit obtained here is disbursement of risk, and can be withstand the competition

The implementation of knowledge management can lead to the enhanced growth and

competitiveness , as put forward by ( Rekman Ahmad Kamil,Amir amin Malaysia.) this

paper had analysed twelve key result areas to focus with. Are Top Management Support,

Knowledge Friendly Culture, Financial Resources, Technological Infrastructure,

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Communication between all Levels of Management, HRD, Hiring and Retention of

Knowledgeable People, Strategy for KM, Rewards to Encourage KM Practices, Systematic

KM Processes and Activities, Core Values of Business and Organizational Infrastructure.

According to Alibaba.com-Synovate SME Outlook 2010 survey are highly optimistic

about 2010 bringing in better overall business activity and profitability. whopping 92 per

cent believe revenues will increase in 2010 and revenue growth will be around 6-15 per

cent.

Present policy and focus areas:

Micro, Small and Medium Enterprise Development Act, 2006 .

i. The MSMESD Act, 2006 seeks to facilitate to facilitate the development of this

enterprise. It provides the exact definition of “enterprise” for service and

manufacturing sector. This act has given the exact definition of what is “MSME”.

Credit /Finance:

i. Priority sector lending

Credit to SMEs sector is considered as Priority sector lending.40% of the net bank

credit is made available to Priority sector lending. This facility is being developed

by SIDBI.

At the state level State Financial Corporation (SFC) are considered as the major

source of long term finance.

Performance & credit rating scheme :

i. This scheme was launched in the year 2005. The objective is to assist the SMEs in

obtaining the performance cum credit rating which would help them in improving

the performance and also accessing the credit in better terms if rating is high.

ISO 9000/14000certifaction fee reimbursement scheme:

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i. The scheme covers the fees up to 75% subject to maximum Rs. 75000 to acquire the

“quality management system, ISO 9000” or “environment management system ISO

14000” certificate.

Credit linked credit guarantee scheme:

i. The programme is to assist the SMEs to upgrade their existing technology with

modern technology with State assistance of 15% of the bank credit to purchase the

equipments. More than $50 million has been committed to this route.

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Introduction:The financing options that are available to SMEs presently can be listed as:

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1. Long – Term:

a. Capital Market: Equity Shares, Preference Shares, Non- voting Shares.

b. Quasi Capital: Investment Subsidiaries, Soft loans/ Equity Fund Loans, VC.

c. Debts: Term Loans, Non-convertible Debentures, Leasing and Hire Purchase,

Floating Rates Notes, Structured Obligations, Bonds, Technology Up-gradation

and Modernization Credit from FIs, Development Institutions.

2. Short – Term

Working Capital, Commercial Paper, Inter- corporate Deposits, Trade Credit

Factoring, FCNR, Bills Discounting, and Public Deposits.

3. Foreign Funding

4. Miscellaneous:

Term loan assistance, refinances, loans for leasing and hire purchase, bill

discounting, foreign currency loans, and venture capital loan.

Background of SMES financing:

In 1957, ‘Liberalized Scheme of Assistance to SSI’ was launched where,

security oriented approach was given a go-by and viability became the sole

criteria.

In 1978, ‘Equity Fund Scheme’ was formulated to give the newly

established units operational freedom to work at the optimum level.

History of SMES in India:

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With the advent of planned economy from 1951 and the subsequent industrial

policy followed by Government of India, both planners and Government earmarked a

special role for small-scale industries and medium scale industries in the Indian economy.

Due protection was accorded to both sectors, and particularly for small-scale industries

from 1951 to 1991, till the nation adopted a policy of liberalization and globalization.

Certain products were reserved for small-scale units for a long time, though this list of

products is decreasing due to change in industrial policies and climate. SMEs always

represented the model of socio-economic policies of Government of India which

emphasized judicious use of foreign exchange for import of capital goods and inputs; labor

intensive mode of production; employment generation; no concentration of diffusion of

economic power in the hands of few (as in the case of big houses); discouraging

monopolistic practices of production and marketing; and finally effective contribution to

foreign exchange earning of the nation with low import-intensive operations. It was also

coupled with the policy of de-concentration of industrial activities in few geographical

centers.

It can be observed that by and large, SMEs in India met the expectations of the

Government in this respect. SMEs developed in a manner, which made it possible for them

to achieve the following objectives:

High contribution to domestic production

Significant export earnings

Low investment requirements

Operational flexibility

Location wise mobility

Low intensive imports

Capacities to develop appropriate indigenous technology

Import substitution

Contribution towards defense production

Technology – oriented industries

Competitiveness in domestic and export markets.

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At the same time it has to be understood that SMEs in India suffers from the

following limitations:

Low Capital base

Concentration of functions in one / two persons

Inadequate exposure to international environment

Inability to face impact of WTO regime

Inadequate contribution towards R & D

Lack of professionalism

Own contribution in capital is too small

Lack of expertise

List is exhaustive add as and when I remember...

In spite of these limitations, the SMEs have made significant contribution towards

technological development and exports.

SMEs have been established in almost all-major sectors in the Indian industry such

as:

Food Processing Agricultural Inputs Chemicals & Pharmaceuticals Engineering; Electricals; Electronics Electro-medical equipment Textiles and Garments Leather and leather goods Meat products Bio-engineering Sports goods Plastics products Computer Software, etc.

Those SMEs who have strong technological base, international business outlook,

competitive spirit and willingness to restructure themselves shall withstand the present

challenges and come out with shining colors to make their own contribution to the Indian

economy.

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Role of SMEs for various stakeholders:

Important of SME sector for the growth of India:

The SME sector plays a vital role in the growth of the country.

Small and Medium Enterprises (SMEs) are a key factor in the economic development and

innovation. The core of the political and economic transformation of any country is the

creation of the private sector, the development of entrepreneurship and creation of SMEs. It

contributes almost 40% of the gross industrial value added in the Indian economy. It has

been estimated that a million Rs. of investment in fixed assets in the small scale sector

produces 4.62 million worth of goods or services with an approximate value addition of ten

percentage points.

Education institutionEducation institution

NGOsNGOs

Internal BuyersInternal Buyers

Machines Providers

Machines Providers

LocalCommun

i-ties

LocalCommun

i-ties

Financial institutions/Banks

Financial institutions/Banks

SMEs Credit Rating Agencies

SMEs Credit Rating Agencies

Large BuyersLarge Buyers

Raw materials provider

Raw materials provider

StakeHoldersStakeHolders

MSMEs

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By its less capital intensive and high labour absorption nature, SME sector has

made significant contributions to employment generation and also to rural industrialization.

This sector is ideally suited to build on the strengths of our traditional skills and

knowledge, by infusion of technologies, capital and innovative marketing practices.

Global comparison:

In the global scenario SMEs have always played a crucial role in their respective

country’s economy. International comparisons reveal that SMEs create the majority of jobs.

In the USA, nearly half of the private workforce is employed in small firms, of which

three-fifth have less than five employees. In Japan, 78 percent of jobs are generated by

SMEs. The same sector in Korea accounts for 99 percent of all manufacturing enterprises

and 69 percent of employment in this sector. Therefore, SMEs must play a central role in

the country’s employment strategy. This will require modification of policies and

programmes to level the playing field, improve availability of credit, increase productivity,

raise quality consciousness and competitiveness, and enhance job quality.

Recent experiences of different countries in the context of globalization also

demonstrate that SMEs are better insulated from the pressures generated by the volatility of

world trade and capital markets. They are more resistant to the stresses, and more

responsive to the demands of the fast-changing technologies and entrepreneurial responses.

Indeed, they are observed to be a very important vehicle for new technology adoption and

entrepreneurial development. Ensuring the competitiveness of the SMEs is important as it

would help in overall growth of manufacturing sector as also the national economy.

Opportunities for SMEs in India:

Due to global financial crisis and economic slowdown, many companies are

affected in different degrees. But, with their inherent strength and resilience SMEs can

weather adverse situations, as they are not dependent on public money. Many overseas

companies are approaching Indian SME to outsource their manufacturing activities. In

service sector too, many are setting up BPO and KPO in India, which are a real boon for

the Indian SME sector.

Unless and until the SMEs equip themselves with the latest technologies, processes

and machinery, they will not be in a position to meet the stringent quality standards set out

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by the buyers. Even if they are exploring new markets, the products and services have to be

suitably modified to meet the market requirements with innovative designs and features. It

is an excellent opportunity for the Indian SMEs to convert the present global melt down

condition to their advantage by catering to the needs of the markets, which are already

reeling under the recession.

Fact Sheet - Indian SMEs Sector:

14 Million MSME Units

Contribute 45% of Industrial Output

Employ 60 Million People

Produce more than 8000 products

Create 1.3 Million jobs per annum

Major role in industrial growth.

Contribute 40% of Export

Source for innovative products

Focus Sectors:

Focus sector for future perspective:

Capital Goods Agro & Food Processing Automobile & Auto Ancillaries Engineering Machinery, Equipments & Hand Tools Electrical& Furniture &Furnishings IT Hardware &Peripherals Pharmaceutical &Chemicals Packaging ,Paper, Plastic &Rubber Textile & Garments Power and Energy Tours& Travels Service Sectors Water Equipments Machinery, Equipments &Hand Tools.

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Electronics.

Stages of financial demands:

1. Start up: Own savings and venture capital.

2. Normal operations: Working capital financing, Equipment leasing,

discounting receivables and trade credit.

3. Expansion plans: Reinvestment of surplus funds, term lending and equity

investments.

Emerging financial products for SMEs:

1. Banks facilitating formation of self-help groups amongst industrial clusters.

2. Industrial clusters collectively offered funding

3. Line of credit on credit/ hire purchase basis.

4. Equity support products

Financial products for SMEs offered by Bank of Baroda:

1. Baroda Vidyastahli loan2. Baroda Arogyadham loan3. Baroda laghu udhyami credit card 4. Baroda artisan credit card 5. Technical up gradation fund scheme for textile and jute industries6. Credit linked capital subsidy scheme for SSI units7. Composite loans8. SMES short term loans9. SMES medium term loans10. Baroda SMES gold card11. Scheme for financing energy efficient projects12. Baroda overdraft against land and building

13.Baroda SMES loan pack

Challenges for Banks: In making SME advances:

1. Weak Financial Statements and Financial Irregularities.

2. Concealment of background or other operational details

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3. Disproportionate Requirement of Financial Assistance

4. Competition Amongst Banks and Financial Institutions.

RESEARCH METHODOLOGY

Problem identification :

Problem indentified is “Credit flow to MSMEs sector. Whether it is adequate or

not, suggest remedies”

Objective of the study:

Following are the objective of the study:

a) To study the degree of financing done to SMEs sector in Ankleshwar.

b) To study the procedure adopted by the bank in sanctioning the loan

c) To study and analyze the problems faced by SMEs other than financial

aspects

d) To study the general working of the bank.

Research design :

Since the study aimed to know the adequacy of credit flow to smes sector the

Descriptive Study was undertaken for the purpose. With reference to the topic and in order

to find out the reason for inadequate flow of credit survey was conducted for the smes

industries with regard the following justification.

To know whether the borrowers company is adequately financed or not?

To know and understand the problems faced by the firm in accessing the credit

with bank

To know and understand the hurdles faced by the firm other than financial

aspect.

To know the familiarity aspect with regards to the government guidelines and

various promotional scheme.

To put forward the problems and suggestions expressed by the borrowers to the

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higher authority of the bank for its efficient functioning.

Population:

The population size of SMEs in the Ankleshwar GIDC Industrial Estate is 300 of

which I have drawn sample size of 25 industries for the study purpose. The method adopted

for sampling is non probability sampling method i.e. convenient sampling method.

Research plan:

Types of research study:

There are two types of research study that is census study and sample study. I have

adopted sample study for SMEs industries.

Data collection:

Sources of data:

The data collected for the purpose of study is of primary nature. The response of

the industries has been taken through the questionnaire. The questions include both type of

questions i.e. open ended and close ended.

Tool for data collection:

A Questionnaire was designed keeping in view all the aspects of SMEs.

Questionnaire was used as an interview sheet to collect data from the financial executive

of respective SMEs. Interview & observation technique was used to scrutinize the

responses.

Data analysis:

Once the data was collected proper editing was done so as to screen out the

irrelevant information and filling up the blank questions if any is forgotten to ask. After

editing, all the information was arranged in Tabulated form & results was calculated

using frequency/percentage method. For statistical analysis purpose and for better

representation of the result in more appropriate manner Charts & Graphs have been used

wherever required.

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Data analysis and interpretation:As mentioned earlier the study was carried out to know whether

adequate credit is flowing to SMEs sector or not in the Ankleshwar region , the data was

collected through questionnaire by undertaking sample survey at Ankleshwar GIDC

Industrial Estate.

The analysis and interpretation of response obtained are shown below:

1) Sources of financing the firm:

Interpretation:

Sources Frequency Percentage

Own capital 25 48

Money lender 1 1.92

Borrowed funds from bank 26 50

Public money 0 0

During the survey process and looking to the responses of the financial executive of the

respective industry, I found that;

48% of the firm is financed through own capital.

2% of the firm is financed through money lender

50% of the firm is financed through borrowed funds from bank.

Analysis: It is concluded that bank and other financial institutions are playing

pivotal role in financing SMEs. All though, people do invest their own capital too.

Table no 1.1

Graph 1.1

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2) Cheapest source of finance:

Interpretation:

Sources Frequency Percentage

Public money 5 13.88

Borrowed fund from bank 15 41.67

Own capital 16 44.44

Approach to other bank 0 0

During the survey process and looking to the responses of the financial executive of

the respective industry, I found that;

14% of the firm believes that public money is the cheapest source of finance.

44% of the firm believes that own capital is the cheapest source of finance.

42% of the firm believes that bank loan is the cheapest source of finance.

Analysis: It is concluded that investing own capital is the cheapest source of finance

because for investing own capital there is no any requirement of payment of

interest, dividend or so. Even though bank borrowing is also the economical way of

financing because the risk aspect is less and firm can avail better credit

enhancement for future. MSEs primarily rely on bank finance for a variety of

Table 1.2

Graph 1.2

53

purposes including purchase of land, building, plant and machinery as also for

working capital, etc.

3) Types of banks and financial institutions with which SMEs are dealing:

Interpretation:

During the survey process and looking to the responses of the financial executive of

the respective industry, I found that;

44% of the firm is engaged with Bank of Baroda.

40% firm is engaged with State Bank of India.

16% firm have opted the credit facility from G.S.F.C (Gujarat State Financial Corporation).

Analysis: Since the financial institutions are divided in to two category i.e. public

sector and private sector banks. Majority of the SMEs have taken the financial

accessibility from public sector banks only, like Bank of Baroda, State Bank of

India, Bank of Maharashtra etc.The main advantage they are getting is reduction in

rate of interest, security, low risk, and many other exemptions. Private players like

Name of the bank Frequency Percentage

Bank of Baroda 8 32

State Bank of India 7 28

H.D.F.C. 02 8

I.D.B.I 04 16

Other 4 16

Total 25 100

Table 1.3

Graph 1.3

53

H.D.F.C charge more rate of interest and give less encouragement to small

enterprise.

4) Number of years the firm is dealing with bank:

Interpretation:

No. of years Frequency Percentage

0-5 years 8 32

5-10 years 6 24

10-15 years 5 20

15-20 years 5 20

20> years 1 4

Total 25 100

During the survey process and looking to the responses of the financial executive of

the respective industry, I found that;

32% of the firms are engaged with the bank recently

24% of the firms are accessing facility since last 5 to 10 years

20% of the firms are dealing with bank since last 20 years.

Analysis: It can be concluded that more encouragement are given recently so many

SMEs are developing. Banks have become more competitive and timely credit is

Table 1.4

Graph 1.4

53

availed as compared to past. Many recent new policies are framed by the

government to increase an easy availability of credit flow.

Many schemes like

ISO 9000 and 14000 fee reimbursement scheme. Credit linked capital subsidy scheme. Infrastructure development. Export promotion Technological up gradation fund scheme As per the extant Reserve Bank guidelines, banks are required to

extend at least 60% of their advances to the MSE sector to Micro Enterprises.

5) Services opted from bank:

Interpretation:

Services Frequency Percentage

Cash credit 20 40

Letter of credit 5 10.20

Term loan 24 48.98

Table 1.5

Graph 1.5

53

6) Stages of taking financial support from financial institutions:

Interpretation:

During the survey process and looking to the responses of the financial executive of

the respective industry, I found that;

28.57% of the firms have asked for finance before creating the company.

31.43% of firms have asked for finance support during the process of company set up.

17.14% of the firms asked for finance support when their company started to grow.

22.86% of the firms have taken support when they have less cash on their hand.

Analysis: It is found that many enterprise have seek support during the process of their company set up the reason behind this is that, in order to attain the specific

Stages Frequency Percentage

Before creating a company 20 28.57

During the process of company set up 22 31.43

When my company started to grow 12 17.14

When my company started having problems 16 22.86

Table 1.6

Graph 1.6

53

predetermined goal they need working capital requirements which is successfully accomplished by banks. It is also observed that bank has also given support to SMEs when they are lacking of finance.

7) Problems of taking finance Interpretation:

During the survey process and looking to the responses of the financial executive of

the respective industry, I found that;

10.71% of the firms have faced insufficient collateral

89.28% of the firms have experienced small portion of own

contribution.

Analysis: It is observed that as 89.28% of the firms do not had their own capital and

therefore they had to appear to the financial institution to have an access and banks

have successfully sanctioned. Less number of firms has suffered from insufficient

collateral because the limit of collateral free loan has extended.

Problems Frequency PercentageInsufficient collateral 3 9.09Project proposal not accepted 3 9.09

Previous negative credit record 2 6.06Own contribution too small 25 75.75others 0 0

Table 1.7

Graph 1.7

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Presently, Bank’s guidelines for providing collateral free loans are as under:

a) Collateral free loan up to Rs.5.00 Lacs to Micro & Small Enterprises.

b) Collateral free loans (including third party guarantee/ security) upto a

limit of Rs. 25.00 lacs to units having satisfactory dealings with the branch

for last 3 years and having sound and healthy financial position.

It is also decided to dispense with collateral security including third party guarantee

for loans to Medium Enterprises up to a limit of Rs. 25.00 lacs as in case of loans to

Micro & Small Enterprises in manufacturing activities

All the collateral free loans up to Rs.50.00 lacs sanctioned to Micro & Small

Enterprises are eligible for cover under the Scheme.

8) The organizations/schemes supporting SMEs :

Interpretation :

Organizations Frequency Percentage

Banks 25 32

Other financial institutions 0 0

District Industries Centre 25 32

Technological up gradation fund

scheme

12 15.38

Credit linked capital subsidy

scheme

13 16.67

others 3 3.85

Table 1.8

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During the survey process and looking to the responses of the financial executive of

the respective industry, I found that;

32% of the firms are being supported by bank and district industries

centre

For accessing the benefit of schemes it depend upon the nature and

type of industries.

Analysis: It is observed that all industries have taken support from banks as finance

is the life line of business.

9) Familiarity of government programs by SMEs:

The entire sample unit which is selected for the study has not responded this question

at all. So there is 0% awareness of the government programs that have an effect on the

SMEs.

Analysis: It is observed that there is no clear instructions from the Reserve

Bank of India (RBI) and the Ministry of Finance to encourage flow

of funds (through what is called achieving ‘priority sector’ lending

targets) from the commercial banks to small enterprises. There is

no transparency regarding the facilitation programs of

government.

Graph 1.8

53

10) View on expansion of the regulatory definition of SMEs:

Interpretation:

During the survey process and looking to the responses of the financial executive

of the respective industry, I observed that;

92% of firms believe that the regulatory definition of SMEs should be expanded.

Only 8% are satisfied with the existing definition of SMEs. Analysis: It was observed from the response of the respondent that as per the

increase in the price level and change in the market condition the regulatory

definition should be expanded to make the micro and small enterprise more

competitive, to increase the sanction limit, to increase the investment in plant and

machinery, to make it globally competitive.

11) Issues in registering the firm or procuring license: Interpretation:

Option Frequency Percentage

Yes 23 92

No 2 8

Total 25 100

Table 1.9

Graph 1.9

53

During the survey process and looking to the responses of the financial

executive of the respective industry, I observed that;

8% of the firms got registered their within 8 months.

32% of the firms were registered within 2 months.

52% of the firms were registered within 3 months

8% of the firms were registered within 4 months.

Analysis: Looking to the response of the respondent, the registration process carried

on by the Ankleshwar GIDC estate is so long which give discouragement to the

upcoming enterprise. Looking to the results obtained, 52% of the firms had to wait

to up to 3 months to procure license. Paper work is too complicated which is very

tedious. This type of adverse circumstances gives birth to corruption and red

tapism.

12) Satisfaction and dissatisfaction level of the firm with their existing bank:

Duration of getting license

Frequency Percentage

Less than 1 month 2 81-2 month 8 322-3 month 13 523-4 month 2 8Longer than 4 month 0 0Total 25 100

Table 1.9

Graph no 1.9

53

Interpretation:

During the survey process and looking to the responses of the financial

executive of the respective industry, I observed that;

68% of the firms are satisfied with their existing bank.

32% of the firms are dissatisfied with their existing bank.

Analysis: It is observed that majority of the firms are satisfied with their existing

bank for financing. It can be concluded that banks are taking care of the

requirements generated by the firms. So it can be known that firms are enjoying

every limits prescribed by their respective banks. However 32% of the firms are not

satisfied with their banks because either there are facing the problems or not having

enough collateral, previous negative credit record, not providing required

documents to the bank at time to get the sanction, or providing falsified balance

sheet.

Level Frequency Percentage

Satisfaction 17 68

Dissatisfaction 8 32

Total 25 100

Table no 2.1

Graph no 2.1

53

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From the above observation it is found that;

Since the objective of the project involves of studying whether enough credit is

granted to the SMEs sector or not? Looking to the trends adequate and sufficient credit is

flowing to the SMES sector. But however not only finance support helps on growing the

SMEs there are very other burning issues which are taken care of.

The findings are:

i. SMEs are typically set up as proprietorships, partnerships, or private limited

companies. These companies are required to follow all the rules of the Companies

Act, 1956.

ii. It is found out that bank and other financial institution are playing key role in

enhancing credit to SMEs sector. Looking to the trend of past years , enough credit

is flowing to the SMEs sector.

iii. Year/month iv. Amount

v. 2006-07 vi. Rs 1,27,000 crore

vii. 2007-08 viii. Rs 2,13,000 crore

ix. 2008-09 x. Rs. 2,56128 crore

xi. 2009-10 xii. 323565 crore

xiii. February 2010 xiv. Rs 369866 crore.

xv. The hurdles procedural issues faced in raising loans include lot of paperwork,

collateral security and high processing fees and prepayment charges. This is

because the document which is required to submit to the bank to sanction the credit

is too much. The time taken by Government officials to process the request of legal

document is adversely affecting the growth in this sector.

xvi. Majority the firms are not familiar with the government programmes and other

subsidized scheme which may help them to get subsidy.

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xvii. No special concentration is given to SMEs sector since the applicability of the rules

is same for large scale and SMEs type of industry.

xviii. What the SMEs lack is funds for technical up gradation. The government policies in

providing training and technical knowledge to SMEs are not enough. Owing to this

fact, SMEs are finding it difficult to upgrade their skills to enhance their

manufacturing output.

xix. Moreover, the SMEs lack the knowledge of safety measures and hygiene for

workers and pollution-control.

xx. SMEs' usually feel that non-financial services such as training or consultancy are

not directly linked to their business enhancement and can raise their productivity

and growth. This is mainly because they lack in information provided by the

government

xxi. The fixed cost of acquiring information creates serious cost disadvantage to this

sector. The ability of these firms to enter and compete effectively in export markets

is discouraged by the high cost of acquiring information on foreign buyers,

distribution channels, quality standards etc.

xxii. Another hurdle faced by the SMEs is low levels of research and development

(R&D), limited access to technology and product innovations

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Recommendation: Government should take initiative to operationalised the SMEs related transaction

in a large scale and professionally run rather than bureaucratically.

Adoption of “Single Window Clearance” of the documents required to get

sanctioning of loan should be carried out in order to avoid delays.

Less paper work and doing away with multiplicity of inspections by large number

of inspector.

Re-shaping of the existing policy framework is required.

The coverage of Technology Up Gradation Fund Scheme (TUFS)is needed to be

broaden

Enhance managerial skill and knowledge to access capital market to distribute risk,

improved capital allocation.

separate stock exchange for the sector to help them increasingly move towards a

strong financial situation

Implementation of Knowledge management to enhance growth more effectively

with improved knowledge.

There is a need for greater participation of banks in the affairs of their constituents

by convergence of credit services and non credit services. The banks should not

only provide differentiated products for MSMEs, but also provide counselling &

guidance to new and established businesses, extending marketing support etc.

Lastly, adoption of cluster approach to avail benefits like availability of low cost

finance, competition, market linkages, product quality management etc.

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Conclusion:

As much number of SMEs are expanding and newly setting up in

Ankleshwar, Ankleshwar GIDC would be the biggest cluster of SMEs in future. In order

to attain the desired growth rate of 12 %, and increase the GDP contribution (to 7%+) of

this sector to the national economy future focus has to be in areas of Cluster development,

Finance, Technology, Operating Environment & the implementation of the Micro, Small &

Medium Enterprises Development (MSMED) Act 2006.

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A. Questionnaire

53

The SME Survey Questionnaire

1. COMPANY PROFILE 1.1 Company name :

__________________________________ Address:

__________________________________

Fax #________________________ Telephone#___________________

E-mail________________________

1.2 Person contacted______________ Person interviewed_____________

1.3 Legal status of your firm___________________________________________

1.4 Number of employees: A. <10 B. 10-49 C. 50-99 D. 100-149 E. 150-199 F. >200

1.5 Type of activity: A. manufacturing B. Service C. commerce & trade D. Others (specify):

1.6 Main products & Activities :

1.7 Investment in Plant & Machinery: A. up to 25 lakh (micro enterprise)

B. 25 lakh to 5 crores (small enterprise) C. 5 crores to 10 crores (medium enterprise)

1.8 Annual turnover :_____________________

2. THROUGH WHICH SOURCE YOUR FIRM IS FINANCED?

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A. Own capitalB. Money lenderC. Borrowed funds from bankD. Public money

3. ACCORDING TO YOU WHAT IS THE CHEAPEST SOURCE OF FINANCE?A. Public MoneyB. Borrowed funds from bankC. Own capitalD. Approach to other banks (why?)

4. PRESENTLY WITH WHICH BANK YOU ARE DEALING?A. Bank of BarodaB. State Bank of IndiaC. H.D.F.CD. I.D.B.I.E. Axis BankF. Other_________

5. SINCE HOW MANY YEARS YOUR FIRM IS ENGAGED WITH BANK?A. 0-5 yearsB. 5-10 yearsC. 10-15 yearsD. 15-20 yearsE. 20> years

6. WHAT TYPE OF SERVICE HAVE YOU OPTED FOR?A. Cash creditB. Letter of creditC. Term loansD. Any other specify________

7. AT WHAT RATE OF INTEREST?A. For CC _____B. For L.C._____C. Any other______

8. TOTAL AMOUNT OF FUNDS TAKEN FROM THE FOLLOWING IS:A. For C.C.___________B. For L.C.____________C. For term loan___________D. Any other___________

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9. AT WHAT STAGE HAVE YOU ASKED FOR SME SUPPORT? A. before creating a company B. during the process of company set up C. when my company started to grow D. when my company started to have problems

10. WHAT WERE YOUR PROBLEMS, IF ANY? A. Insufficient collateral

B. Project proposal not acceptedC. Previous negative credit recordD. Own contribution too small

E. Other (please specify)______________________________________

11. IN YOUR OPINION, WHICH OF THE FOLLOWING ORGANIZATIONS HAS SUPPORTED YOUR FIRM?

A. Banks

B. Other financial institutions.

C. District Industries Centre.

D. Technological Up gradation Funds Scheme (TUFS).

E. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

F. Others (Specified) _____________________.

12. PLEASE LIST THE GOVERNMENT PROGRAMS THAT YOU ARE FAMILIAR WITH THAT AFFECTS YOUR INVOLVEMENT WITH SMEs?

a)__________________________________________________b) __________________________________________________c) __________________________________________________d)___________________________________________________

13. IF YOU THINK THAT THE GOVERNMENT PROGRAMS AFFECT YOUR INVOLVEMENT IN SMEs?

A. Yes positivelyB. No negatively

14. DO YOU THINK THAT THE REGULATORY DEFINITION AFFECTS THE GROWTH OF YOUR FIRM?

A. Yes B. No

Please explain_____________________________________

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15. ARE THERE ANY ISSUES IN REGISTRING YOUR FIRM?A. Yes B. No

16. IF “YES” HOW LONG DID IT TAKE TO GET THE LICENSE? A. Less than 1 month;B. 1 – 2 months;C. 2 – 3 months;D. 3 – 4 months;E. Longer than 4 months.

17. ARE YOU SATISFIED WITH THE FACILITIES AVAILED FROM BANK? A. yes B. no

18. HOW YOU ARE SATISFIED? JUSTIFY.________________________________________________________________________________________________________

____________________________________________________

19. WHY ARE YOU NOT SATISFIED? JUSTIFY.____________________________________________________________________________________________________________________________________________________________

20. IN YOUR OPINION, WHAT MEASURES SHOULD BE TAKEN BY BANK TO INCREASE AN EASY AVALIABILITY OF CREDIT FLOW?

Thank you very much for your time.

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B. BIBLIOGRAPHY & REFERENCES

The circular on MSMEs by The Government of India. Research article on “ Strategies On Increasing The Credit Flow To SMEs Sector”

by Prabal Dutta MBA , Batch (2005) Faculty Management Studies , Delhi. Reading material provided to the staff of Bank of Baroda , Jaipur. Journal of Knowledge Management Practice, Vol. 11, No. 1, March 2010

Implementation Of Knowledge Management In Small And Medium Enterprises,Mobashar Rehman, Ahmad Kamil B Mahmood, Savita K Sugathan, Aamir Amin, Universiti Teknologi Petronas, Malaysia

Report on ” Global SMEs Technology Summit 2010”. Working Paper No. 2010/03 “Importance of Technological Innovation for SME

Growth” Evidence from India ,M. H. Bala Subrahmanya,1 M. Mathirajan,2 and K. N. Krishnaswamy3. www.rbi.gov./speeches/lendingtosmes RBI/2009-10/59 RPCD.SME & NFS. BC. No.10/ 06.02.31/ 2009-10. The Master

Circular on “ Lending to SMEs” www.sidbi.com/press K C Chakrabarty: Bank credit to Micro, Small and Medium Enterprises (MSMEs) –

present status and way forward www.bankofbaroda.co.in/smebanking www.dnb.com/emergingsme http://ssrn.com/abstract=962033 research article on capital access to SMEs sector. Mukesh Tiwari ([email protected]) IIM Lucknow research article on “ stratigies

to increasing credit flow”. www.global-innovation.net paper on “Barriers to Innovation in SMEs” Rajnish

Tiwari Stephan Buse www.rbi.gov./internalgroupreview/sme . www.cgtmse.com/products www.sbi.co.in/smebanking

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Limitation of the study:

The main limitation faced was time constraints. Since there was less time available, sample size taken is not ideal to represent the whole population.Complication of the topic has taken more time to take further steps.Hesitation of the respondent.Lack of literature available on SMEs sector.The non- availability of quality data at the firm and lack of resources is also another problem.