“A STUDY TO EVALUATE BANKING SERVICES

PROVIDED TO SMALL AND MEDIUM SIZE

ENTERPRISES”

Project submitted in partial fulfillment of the requirement for the

award of Degree

MASTER OF BUSINESS ADMINISTRATION

OF

BENGALURU NORTH UNIVERSITY

Submitted by

ALAMEEN A

MB191609

Under the guidance of

PROF RAGHAVENDRA R

KOSHYS INSTITUTE OF MANAGEMENT STUDIES

BENGALURU NORTH UNIVERSITY

2019 - 2021
 DECLARATION

I, ALAMEEN A, Roll No: MB191609 of MBA 2019-21 batch of Koshys Institute of

management studies has undergone a Project for duration of 45 days on a project title “A
STUDY TO EVALUATE BANKING SERVICES PROVIDED TO SMALL AND MEDIUM
SIZE ENTERPRISES” The empirical findings in the report are based on the data collected by myself
and I have not copied from any report submitted to any University either this or in the previous years.

I understood that such copying is liable to be punished in a way the University authorities deem
fit.

Place BANGALORE ALAMEEN A

Date
 ACKNOWLEDGEMENT

A good start leads to a fine end. The ideal way to begin documenting this project work
would be to extend my earnest gratitude to everyone who have encouraged, motivated and
guided me to make a fine effort for successful completion of this project.

I express my deep sense of indebtedness to my institute Koshys Institute of

management studies, Bangalore for giving the unique opportunity of pursuing the project.

I express my heartfelt thanks to Department of Management, Koshys Institute of

Management Studies, for giving me the opportunity to undertake the study.

It gives me immense pleasure to acknowledge my sincere thanks to PROF

RAGHAVENDRA R, Koshys Institute of Management Studies, project guide, without whose
help, support and guidance the completion of this report was impossible.

A final word of thanks goes to my parents, friends and everyone else who made my
project possible.

ALAMEEN
 CONTENTS

Chapter No: Particulars Page No:

List Of Tables

List Of Charts

INTRODUCTION 1
I

REVIEW OF LITERATURE AND RESEARCH 9

II

OBJECTIVES AND HYPOTHESIS 16

III

DATA ANALYSIS AND INTERPRETATION 20

IV
V ANNEXURE 31

FINDINGS, RECOMANDATIONS AND

VI CONCLUSION 43

VII REFERENCE 45
 LIST OF TABLES

TABLE TABLE NAME PAGE

No. No.

1 Definition of MSME according to ministry of MSME 8

2 Performance of ssi/MSME units, employment, investments and 10

gross output
3 List of RESERVED ITEMS FORMSME PRODUCTION 28

LIST OF FIGURES

1 number of enterprises in MSME sector 11

2 employment in MSME sector 11
3 leading industries: MSME sector 12
4 contribution of MSME in totalindustrial production 12
5 the missng middle 13
6 credit requirement of MSME 18
7 factors affecting growth of manufacturing sector -MSME 23
8 factors affecting growth of servicessector -MSME 24
1. Introduction:

“Financing of Micro Small and Medium Enterprises by Banks – A Case Study of State Bank of
India”, is proposed to be conducted with a view to examine the constraints faced by MSMEs,while
raising finance from the banks, suggest strategiesfor financing, study products, services, schemes,
system and procedure of SMEs financing.

1.1 Background and Rationale:

In India, the Banking Industry comprising of Commercial Banks, Co-operativeBanks, Regional

Rural Banks, Development Banks and Private Banks is functioningunder the supervision and Control
of Reserve Bank of India. These banks are activelyinvolved in the socio economic development of the
nation and are performing numerous functions. With the introduction of economic reforms
particularly liberalization, privatization and globalization, the Banking Industry is under tremendous
pressure of transformation and changes. The exposure of the Banks to international standards like
assets classification, provisioning and capital adequacy has compelled the Banks to look for different
sectors and markets. Although financing of MSMEs (Micro, Small and Medium Enterprises) by Banks
is quite old,yet its share in total financing had not been encouraging in the past. Now, the Govt. of
India and Reserve Bank of India has emphasized the need for enhancing the financeextended by Banks
to MSMEs and have advised the Banks to devise their own policies and strategies for such financing
including the methodology for processing the credit proposals within the overall RBI and Govt.
broader guidelines.
1.2 MSMEs – Global Overview

The definition of SMEs is not uniform in various countries of the world. The SMEshave been
defined differently in different nations depending upon the broad policy purposes and stage of
economic development in the concerned nations. The most widely and commonly used definitions
of SMEs pertain to the size of employment,the quantum of capital investment and fixed cost of the
industrial concerns.
In the European Union, Industrial Enterprises now MSMEs are defined as which employ less
than five hundred employees in their units. In Europe, the micro entities employ up to 10
employees, small companies employ up to 50 employees and medium enterprises employ up to 250
employees in their units. In Poland, SMEare defined in terms of employment of less than fifty
employees and net revenue from the sale of products, goods, services, outputs and financial
operatives not exceeding seven million European Currency Units. In majority of the East Asian

1
nations, the SMEs are defined in terms of employment to industrial employees between fifty to one
hundred. In India, the Small Scale Industry (now MSME) weredefined in terms of the initial cost of
plant and machinery up to Rs. one crore.
The United Nations Industrial Development Organization defined SMEs as per size, technology
and location. The large enterprises using modern technology and mainly urban have been defined as
Modern manufacturers. The small and medium enterprises with intermediate technology and mainly
urban and rural have been defined as Modernizing manufacturers. The small firms, artisans
workshops, traditional and upgraded technology, mainly rural and some urban have been definedas
Non-Modern manufacturers. Staley and Morse define small enterprises as subsistence manufacturer,
artisans working at home, artisan working at workshop, industrial home workers and paid wages
workers. The SMEs have been perceived asper policy framework and purposes for which the definition
is used. There have beenthe structural changes in the global economies. This resulted into a shift in
industrialproduction by MSMEs from construction. There were shifts from low tech to high tech
industries. Viewing the purposes and usefulness of MSMEs, the nations world over have initiated
policy decisions to encourage MSME growth.

In European Union, MSMEs account for 40 percent of employment. In Germany, MSMEs

contribute about 50 percent of the Gross National Product. Italy has promoted growth of MSME sector
through cluster development and mutually supporting group of industries. The capability of MSMEs
have been enhanced and expanded to generate employment, encourage export, promote new skills
and facilitate technologies.

1.3 MSMEs – Indian Perspective

The concept of Industrial Enterprises is quite old in India. The Harappa civilization shows the
evidence of weaving, pottery and metal processing which reveals that the industries have been an
integral part of the Indian Economy (Jaypalm, 2008, MC Intosh, 2008; Majumdar, 2012).
The definition and concept of MSMEs have remained changing over the years in Indian Perspective.
In India, the units registered under the Factories Act 1948constituted organized small scale sector
which covered the units employing less thanten workers in power used units and less than 20 workers
in non power used units. The term Small Scale industry was defined under the industries
(Development and Regulation)Act 1951, according to which power units employing less than 50
workers and non power units employing less than 100 workers were classified in thesmall scale sector
and were exempted from registration. The capital investment (1960) was introduced with a limit of
Rs. 5 lakh for SSI and Rs. 10 lakh for ancillarySSI unit.

Small Scale Enterprise (1996) were defined as those having investment in fixed assets not exceeding
Rs. 7.5 lakh and not exceeding Rs. 10 lakh in ancillary units. The limit was enhanced to Rs. 60 lakh
for SSI, Rs. 75 lakh for ancillary units in 1991 as per industrial policy of Govt. of India. These limits
were again increased toRs. 3 crore for all industrial units in 1997 but reduced to Rs. 1 crore for SSI
units inthe year 1999.
2
 Small Scale Industry (SSI) was defined as industrial (manufacturing, processing, and preservation)
unit in which the investment in plant and machinery does not exceed Rs.100 lakh. The GOI has
enhanced this investment limit to Rs.500 lakh in

respect of certain specified items under hosiery, hand tools, drugs, pharmaceuticals, stationery items
and sports goods. The Small Scale units with investments in plant &machinery upto Rs.25 lakh were
classified as tiny industries and small scale units with export more than 50% of their output were
classified as Export Oriented Units. Industry related service business enterprises with investment in
fixed assets excludingland & building up to Rs.10 lakh were termed as Small Scale Service Business
Enterprises (SSSBEs).
The Ministry of SSI and Ministry of Agro & Rural Industry, Govt. of India vide Micro, Small
And Medium Enterprises Develop Act 2006 w.e.f. 02.10.06 has envisaged the under noted broader
classification of micro, small and medium enterprise:
In manufacturing sector, the micro enterprises are those enterprises engaged in the
manufacture/production/preservation of goods where investment in plant and machinery does not
exceed Rs twenty five lacs. In service sector, the micro enterprises are those enterprises engaged in
providing/rendering service where investment in plant and machinery does not exceed Rs ten lacs.
In manufacturing sector, the small enterprises are those enterprises engaged in the
manufacture/production/preservation of goods where investment in plant and machinery is more than
Rs twenty five lacs but does not exceed Rs five crore. In service sector, the small enterprises are those
enterprises engaged in providing/rendering service where investment in plant and machinery is more
than Rs ten lacs but does not exceed Rs. two crore.
In manufacturing sector, the medium enterprises are those enterprises engaged in the
manufacture/production/preservation of goods where investment in plant and machinery is more than
Rs five crore but does not exceed Rs ten crore. In service sector, the medium enterprises are those
enterprises engaged in providing/rendering service where investment in plant and machinery is more
than Rs two crores but doesnot exceed Rs five crore.

1.4 Importance:
The Micro, Small and Medium Enterprises (MSMEs) have emerged as a strong, dynamic and
vibrant sector of the Indian economy and are playing a very important and significant role in the socio-
economic development of the country. The MSME sector is playing a vital role in all the nations world
over in providing employment, contributing to Gross Domestic Product, potential for global investors,
contribution to exports, engine of economic growth, promoting equitable development, increasing
productivity and ensuring best use of local resources. The MSMEs contribute towardseconomic growth,
social progress and jobs creation. The progress of SMEs isessential for attaining economic growth
(Basson, 1994). The SMEs provide significant contribution in achieving the socio-economic objective
of the employmentgeneration. The SMEs sector provides base for industrialization (Mc Pherson, 1996).
SSI sector as per SIDBI data accounts for 96% of the industrial units, 40% output inmanufacturing
3
sector and 35% of the exports besides employment to over 17 millionpeople in India (Sarosh Bana,
2000).
The SME sector is a dynamic and growing sector which contributes largely in equal distribution
of income, creation of employment and poverty reduction (Liedholm, 2002). SMEs are the backbone
of virtually all economies in the world including those within ASEAN (Thitapha
Wattanaprutttipaisan, 2003). SMEs play an important and a vital role in the economy of all the
countries in the world (Ayyagari et.al 2003).
In India, Small Scale Industry plays a significant role in terms of balanced and sustainable growth,
employment generation, development of entrepreneurial skills and contribution to export earnings.
The SSI units provided employment to nearly 20million persons, accounted for 40 percent of the value
added in the manufacturing sector, 34 percent of total national exports and 7 percent of GDP during
2002-03 (Vepa Kamesam, 2003). MSMEs are a vibrant and growing sector in most economiesround
the world (Levy et. al., 2005).
The SME sector helps in savings mobilization and production of goods and
services which meet the basic needs of the poor (Green, Kirkpatrick and Murinde, 2006). SMEs are
subsectors of industrial sector which plays crucial roles in industrialdevelopment (Ahmed S. 2006).
SMEs play a vitally important role in economies of all countries (IFC, 2006). SMEs play a vitally
important role in alleviating poverty and contribute significantly towards the growth of developing
economies (Agbeibor,2006). There were 260.81 lakh MSMEs in India (15.33 lakh registered working
and
245.48 lakh unregistered enterprises), which provide employment to about 594.61 lakh persons of
which 28 percent were in manufacturing sector and 72 percent were in the service sector (as per quick
results of the 4th All India Census of MSMEs, 2006-07).
The number of MSMEs has increased to about 285.16 lakh (from 272.79 lakh in the previous year)
in the year 2008-09, registering a growth rate of 4.53 percent. Theemployment has increased to about
659.35 lakh during the year 2008-09 from 626.34lakh during the previous year.
The SMEs have become an engine of economic growth and form the backbone ofthe manufacturing
sector in India (Raju, 2008).The SME sector is a vibrant and dynamic one and an engine of growth
(Rani and Rao, 2008). MSMEs are consideredone of the most important economic multipliers in the
growing economy (Ravi Tyagi,2010). MSMEs globally have been the backbone of the economy; same
is true for India as well (Arup Kumar, 2010).

MSMEs perform central function in Industrial development and are significantcontributor to

the National Income in India with their contribution to Industrial production and exports etc. (Spence
and Painter-Morland, 2011). SMEs play an important and significant role in the economies of the
nations world over (Wieneke and Gries, 2011) The SMEs being dynamic, innovative and employers
play an important role in sustaining economic growth, increasing trade, generating employment and
creating new entrepreneurship in India (S. Saravanan, 2013). Worldwide, the MSMEs have been
accepted as the engine of economic growth and for promoting equitable development. The main
4
advantage of this sector is its employment potential at low capital cost (Nishanth and Zakkariya,
2014).

Presently, MSME sector with 3.6 crore units, employees 8.05 crore people in India. This sector
contributes 37.5 percent to our Gross Domestic Product. The Manufacturing Sector contributes 31.8
percent of MSME sector and the Service sector constitutes 68.2 percent of MSME Sector in India.
(Pratiyogita Darpan, IndianEconomy Issue, 2016).

1.5 Constraints and Strategies:

Some of the constraints being faced by MSMEs and strategies adopted as per literature review and in
practice have been stated as under:
The problem of Small Scale Industries is multidimensional and the Banks should act as friend,
philosopher and guide for achieving the rural industrialization and balanced regional development
(Murthy, 1980). The financial barriers affecting SMEs are high cost of credit, high bank charges, high
collateral requirements and lack of outside equity and venture capital (Stiglitz and Weiss, 1981).
Schiffer and Weder (1991) observed that small firms experience more difficulties than medium sized
firms, which also experience more difficulties than large firms in doing business due to financing
problems.
Cuevas et al. (1993) observed that access to bank credit by SMEs has been a major constraint
to industrial growth due to their inability to provide acceptable collateral besides cost of transaction
Aryeetey et al. (1993) supported the views of cuevas et al. (1993) and stated that finance problems
dominate all other constraints of SMEs. They suggested (1994) that banks should consider alternatives
to collateral such as guarantees, lien on equipment and sale contract. Storey (1994) stated the
constraints as asymmetric information, agency issues, lending risks to small firms, costly monitoring,
competing banks and variability of entrepreneurs.

Poussion (1996) stated the financial barriers causing business failure as financial weakness from
inadequate financing, over financing, poor debt management, wrongfinance mix and poor strategic
decisions. Nalsamma Antony (2002) stated that the inherited weakness in SSI growth in India is lack
of capital, lack of technical knowhow, inadequate marketing and inadequate credit. Judith Madill
(2002) pointedout branch staff, bank management and bank policies affecting SMEs. Raju (2002)
stated the need of comprehensive enactment, role of small industry associates and

adequate institutional finance. Edvin Gnanadas (2003) stressed on

changes in the attitude of bank officials, improvement in work technology, proper deployment of
manpower, ethics and resources.
Thompson and Lumpkin (2004) stated lack of proper financing mechanism, gaps in legal
framework, lack of transparency, weak legal system and monopolies asconstraints in SME financing.
Rajendhiran (2005) emphasised on collateral free lending to SSI besides project modernisation,

5
technology upgradation, quality improvement and export promotion. Krishnaswamy (2006) suggested
multiple strategies like offering attractive supply chain products, retail tieups, handling card swipes,
offering lower pricing and better forex solutions. Sinhor (2007) pointed out the difficulties faced by
SMEs as insistence of collateral securities, high interest ratesand higher transaction costs.
Sultan Singh (2008) advocated excellent customer service, products and services, system and
procedures, mechanization and computerization, decentralization and delegation, complaints
redressal skills, staff attitudes and responses for quality services to SSI customers. Malla (2009) states
the problems faced by MSMEs in getting finance as limited outreach of banks, rigid approach, high
collateral requirements, high interest rates and lack of supporting business development services.
Azad (2010) expressed the need for support and extension, services like marketing services,
market intelligence, modernization, technology up gradation and quality testing besides financing
institution network for SMEs growth. Yadav (2010)suggested cluster approach, as per customer focus,
cost control, risk containing and cost selling to meet diversified financial needs of MSMEs besides
adoption of voluntary codes of Bank’s commitment to MSMEs. Lahiri (2012) pointed out the
constraints as financing problems, extreme competition, poor technology, lack of infrastructure, lack
of skilled labour, marketing & distribution problems, delayed payments, withdrawal of reservation
policy, mindset problems, global fluctuations and neglected social welfare.
Saravanan (2013) highlighted obstacles faced by SMEs in obtaining finance as
lengthy loaning procedure, high collaterals, biasness, customer perception and preferences of SME
products and schemes. Ganesan and Punnoose (2014) states strengthening of banks credit system with
Centralized Processing Cells, SME loan factories, SME Care Centres, Specialized SME Branches and
Committee Approach for sanctioning SME proposals. On demand side, financing is most important
determinant for SMEs growth. On supply side various sizes and ownership forms impact SME
financing (Son Thi Thanh Nguyen, 2015).The government policy shouldbe directed towards increasing
competitiveness of MSEs for their survival in long runby encouraging entrepreneurs to improve quality
of their products, reduce cost of production, providing them market insight, knowledge and tools
(Avinash Rana, 2016)

1.6 Corporate Strategies for the Growth of the MSME Business

Mintzberg and Waters (1985) consider Corporate Strategy as a political process, which is socially
constructed rather than an unproblematic aid to rational decision making. Porter (1996) defines strategy
as the creation of unique and variable position, involving different set of activities. Barney (2002)
defines strategy as a firm’s theoryabout how to compete successfully.
Porter and Stern (2001) refer Innovation Strategy, which can involve creating or reengineering
products or services to meet new demand, introducing new processes to improve productivity,
developing or applying new marketing technologies to expand sales opportunities and incorporate
new form of management systems and techniques to improve operational efficiency.
The corporate strategies suggested by the State Bank of India from time to time include
6
development of MSME products and services, deployment of Relationship Managers and Marketing
teams and opening MSME intensive branches. Adequate scope exists to explore new strategies, test
existing strategies and find out the customer preferences and customer awareness level as regards to
the various strategies.

1.7 MSME Financing: Products & Services

The development of new products and services is a continuous function ofmarketing management
in the current environment by a company or an organization.The products and services offered by an
organization must be suitable to meet the changing needs of the customer.
According to Philip Kotler, “a product is anything that can be offered to a marketfor attention,
acquisition, use or consumption that might satisfy a want or need. Thusa product may by physical
good, person organization, place or idea.” The bankingproducts are generally intangible in nature.
These are core products which are nottangible but benefits of these products make them
valuable. The augmented typeproducts contain value addition. The product mix and the service mix
are marketed.
The organization should manage their products carefully over the period of time to meet customer
needs, wants and changing behaviour. The products and services pass through introduction, growth,
maturity and decline stages. Therefore new products/service development strategy and research
involving new idea generation, screening, development, testing, marketing and commercialization
needs to be followed.

There are various products and services offered by SBI to MSME Customers. The prominent
products and services are Artisan Credit Card, Swaroj Credit Card, SME Credit Card, SME Smart
Score, Traders Easy Loan, Cyber Plus,, Arthias Plus, Doctor Plus, SBI Shoppe Plus, School Plus,
Rent Plus, Transport Plus, Paryatan Plus, Auto Clean, Rice Mills Plus, SME Micro, SME Collateral
Free Loans, SBI Smile, SBI Gyanshala. The prominent and powerful SME business accounts
offeringvarious services are: SME Standard Current Account, SME Power Pack Current Accounts.
The current study proposes to study the salient features of these products and services. The study also
proposes to know the MSME customer awareness level and preferences of these products and
services offered by State Bank of India.

1.8 MSME Financing Schemes:

A number of schemes are being implemented for the establishment of new MSMEs and growth and
development of existing MSMEs. Some of the important scheme are: The Prime Minister
Employment Guarantee Programme, Micro and Small Enterprises Cluster Development
Programme, Credit Grantee Fund scheme for MSEs, Performance and credit Rating Scheme,
Assistance to Training institutions, Scheme of Fund for Regeneration of Traditional Industries.
(MUDRA) Micro Unit Develop and Refinance Agency Ltd (2015) to promote entrepreneurship at
micro level through funding. Make in India (2014) campaign for attracting industrialists tomake
India global manufacturing hubs.
7
Creation of India Inclusive Fund to combine innovation and dynamism of enterprisesto solve
problems at the base of economic pyramid in India.
There are various schemes for the benefit of MSMEs. The current study envisages studying the salient
features of these schemes and knowing the customer preferencesand awareness level. Some of the
schemes of Govt. of India, Ministry wise are as under:
Ministry of Finance: Composite Loan Scheme, Scheme for Refinance for Small Road Transport
Operators.
Ministry of Rural Development: Indira Awas Yojana, Pradhan Mantri Gram Sadak Yojana,
Swaranjayanti Gram Swarojgar Yojana.
Ministry of Tribal Affairs: Micro Credit Scheme for SelfHelp
Groups. Ministry of Agriculture: Cold Storages financing scheme
Ministry of MSMEs: Credit Guarantee Scheme, Credit Linked Capital SubsidyScheme for
Technology Up gradation.

1.9 MSMEs Financing by SBI: An Overview

Recently, MSME financing have caught focus of Banking Industry. SBI has always
committed to this sector and other banks are also joining to attract business from MSME units. MSME
business gives volumes to the banks. The customers from MSME segment are loyal to their bank.
Large Corporate are shifting their inventory costs and operational costs to MSMEs, either through
outsourcing or through value chains, thereby increase of banking needs of MSMEs. Banks are
adapting their own strategies to tap business from MSMEs. State Bank of India has been pioneer in
MSMEs financing and has devised Business Process Re-engineering and strategy initiatives aimed at
the emerging challenges like offering Core Banking Solutions (CBS) empowered value added
products to SMEs and introducing separate sales force like Relationship Managers and Multi Purpose
Sales Force.

8
Review of Literature
Agarwal (1987) in his thesis titled, “Bank Financing of Small Scale Industries in India,” points out
that the Indian Banking System has failed in extending appropriateamount of loan in time to small scale
industries. He has concluded that banks shouldbe practical, flexible and dynamic in extending the
finance to enable the industrial units by relaxing their strict legal attitude.
Jain (1990), in his study titled, “Assistance of Small Industry,” emphasizes the financial institutions
and government role to develop the small scale industry. The setting of right type of institution,
providing infrastructure facility, providing institutional assistance liberal and sympathetic attitude in
formulation andimplementation of government policies towards small industry.
Storey (1994) in his article tilted as “ Understanding the Small Business Sector,” states the overview
of bank financing to SMEs and highlights constraints likeasymmetric information, agency issues, risk
to lending in small firms, costly monitoring, competition among banks, variability of entrepreneurs
and expresses view that entrepreneur gain from increased project valuations and banks gaining from
repayment problems.
Venkateswara Rao (1995) in his article, “Development of SSI,” has emphasized therole of banks to
nurture the small scale industries by going beyond just providing finance. The survey conducted by
the RBI and the National State Insurance Corporation (NSIC) also revealed that the small units use
capital more efficiently andprofitability of small scale sector is higher than the large scale sector.
John Thompson and Stephen Lumpkin (2004) in their article title, “ The SMEs Financing Gap:
Theory and Evidence,” point out that SMEs financing gaps result from sources like lack of proper
financing mechanism – with gaps in legal framework. The banks may avoid financing start – ups and
young firms which lack collaterals and offer high returns but high risk. The critical determinants of
SMEs access to finance are macroeconomics, legal, regulatory and financial framework.
Namasivayam and Kamalakannan (2005) in their article titled, “Financing of
Small Scale Industries in Rural Development,” state that financial institutions should create and
encourage awareness on financial literacy among small entrepreneurs who intend to start industrial
units in rural areas as more than seventy percent of population lives in rural India. The bank staff
should live in villages and act as extension workers to make the service area concept successful.
Rajendhiran (2005)in his article “Role of Small Scale Industries Development Bank of India in the
Development of Small Scale Sector,” highlights that SIDBI provides direct and indirect assistance for
setting up of new project, modernization, technology up gradation, expansion; quality improvement
and export promotion besides collateral free lending to small scale sector up to defined limits.

Pathrose (2006) in his article, “SME Financing: Strategic Perspectives for Banks,” recommends
simplification of systems and procedures by the banks as regards the accounting and documentation
while extending loans to SMEs. The banks staff should act as guide, philosopher and promoter of
industries and should extend technological products like ATM, internet banking, mobile banking to
SMEs.

9
Viswanatha Reddy and Himachalam (2006) in their article, “Entrepreneurs Perception of Financial
Services,” find that small scale industries lack adequate finance and confront shortage of working
capital. They recommend that the banks and financial institutions should reduce the time gap between
application submission,sanction and disbursement while extending loans to SMEs.
Krishnaswamy (2006) in his article, “Multiple Strategies in the SME field,” states that SME business
gives volume to the bank. The customers from SME segment aregenerally loyal to their bank. Banks
have different strategies to tap business from SME segment. HDFC bank reaches out to SMEs through
industry majors. ICICI bankhas been reaching out to SMEs through retail tie- ups. Banks like Citi
Bank, Stan Chart, HDFC and ICICI are handling Card Swipe. SBI has initiated BPR initiatives,
centralized processing, sales force, CBS enabled value added products.
Subir Mehra (2007)in his article, “ Widening Options in Access,” suggests some parameters to be
considered by financing banks to SME sector as adequate cash flows, net worth of business, adequate
collateral, a track record, purpose of loan, a

post dealing with banks and FIs and quality of financial disclosure. The study pointsout that SMEs
are increasingly banking with multiple institutions, banks and exploring innovative banking solutions.
Sobha Rani and Koteswara Rao (2008) point out in their study “Financing Small Enterprises –
Recent Trends,” that SME sector has high potential and deserves encouragement for financing. They
suggest that there is need to change the mind setof banks and financial institutions in order to provide
liberal credit to SMEs.
Sultan Sing (2008) concludes in his study “ A study of the Quality of Services Provided to SSI
Customers by Public Sector Banks,” that customer and bank relationship is relative permanent and
enduring one which should be nurtured throughexcellent customers service to enhance business. The
study states that service and satisfaction depend upon bank branch location, products and services
designs, systemand procedures, mechanization and computerization, decentralization and delegation,
complaints redresal skills, staff attitudes and responses.
Raju (2008), in his study, “Small and Medium Enterprises (SMEs) in India: Past, Present and Future,”
concludes that SMEs have become the engines of economic growth in India and form the backbone of
Indian manufacturing sector. The study has discussed the constraints faced by SMEs as lending,
marketing, license issues in detail. The MSME Act 2006 provisions have been

examined to encourage this sector besides future policy parameters for sustainability of MSME
sector.

Pankaj Kumar (2009), in his article, “Customer Relationship Management in RetailBanking,” deals
with various aspects of CRM. Customer service followed by constant product innovation is most
important dimensions of retail banking. The study emphasis on achieving greater organic growth,
service emerging customer segments, revitalizing productoffering, improving channel management
and securing customers information.
Sangwan (2009), in his micro research paper titled, “Determinants of Financial Literacy,” highlights
10
the financial Literacy keeping in view the prevailing numerous saving andinvestment products from
banks, financial institutions, post offices, equity markets and mutual funds providing wider scope for
managing personal finance with help of Regression Equation. The study suggests government,
stakeholders, NGOs, SHGs, Resident Welfare Organizations, Farmer Clubs, Social and Religious
accredited counselors, group involvementand support for improving financial literacy.
Ganeshan (2009) in his article, “Institutional Finance for Small Scale Industries – An overview,”
mentions that the public sector banks besides providing adequate and timely credit to small scale
sector, should evaluate the feasibility of the projects to select right type of projects by the
entrepreneurs. Cheaper credit without collaterals is the need of small scalesector in India.
Mohanty (2009), in his article “Global Slowdown and Management of SMEs – A sustainableEconomic
Growth Approach,” suggests that public sector banks should open at least one SME branch in every
district and SME Cluster centres for providing timely and adequate finance to this sector.
Venkat Janardhan Rao et al. (2009) suggest in their article, “State of Small and Medium Enterprises
in India,” that the banks should reduce rate of interest, processing fee and legal charges to SMEs as
main challenge faced by SMEs is the access to timely and affordable
credit from banks.
Malla (2009) in his article, “Financing of MSMEs – Issues and Concerns,” states the problems face
by MSMEs in getting institutional finance as limited outreach of banks, rigidapproach, collaterals
requirement, high interest and costs, computerized documentation andlack of supporting business
development services.
Fatima Veghlom (2009) in study, “Understanding Bank – SME Relationships: The influence of
Adaptation and Fairness on Customer Satisfaction,” highlights that banks are employing fairness in
their strategy and encouraging employees to have relational interactionwith SMEs for higher customer
satisfaction. The SME customers should be treated in an adaptable and fair manner by the banks.

Mercieca and Scheack (2009) in their research article, “Bank Market Structure, Competition and
SME Financing Relationships in European Regions,” has found thatcompetition in European banking
sector has a positive effect on the number of lending relationship, weak evidence that concentration
reduces the number of banking relationship and weak persistent evidence that these tend to offset
each other.
Bhasin (2009) in his article, “Banking Technology,” states that Payment Systems provide the
highways for conducting trade, commerce and others industrial activities in any country.He highlights
the Electronic Payment Systems in Indian banking which includes Real Time Gross Settlement
(RTGS), National Electronic Funds Transfer (NEFT), Electronic ClearingServices (Debit / Credit),
Electronic Funds Transfer (EFT), and Cheques Truncation System(CTS). The customers are willing
to accept these systems.
Briga Hynes (2010), in his study, “International Small Business Growth: A process perspective,”
conducted on Irish SMEs states that government policy to develop more SME
11
– targeted financials and non financial supports to develop the export capabilities and competencies
of owner – manager.
Azad (2010) in his article, “Grooming SMEs in Booming ASEAN,” expresses need for
support and extension services like marketing services, market intelligence, modernization,
technology up gradation and quality testing etc besides institutional network accelerating SMEs
growth.
Malla (2010) in his article, “Strategic Support to MSMEs suggests larger credit flow to micro
enterprises by the banks. The banks should reduce transaction cost and improve credit flow to micro
enterprises in clusters.
Ravi Tyagi (2010) in his article, “Risk Capital for MSMEs,” stated that MSMEs are considered one
of the most important economic multipliers in any growing economy. TheseMSMEs have increased
and diversified funding requirements. SIDBI’s innovative financing solutions and risk capital
assistance by its products like participative debt, subordinate debt,and preference equity and startup
assistance scheme as complement financing requirementsof MSMEs.
Arup Kumar (2010) in his article’ CART – A Tool for Credit Appraisal and Rating of MSMEs using
IT Plat form,” highlights the Credit Appraisal and Rating Tool for faster processing of loan proposals,
reducing turnaround time, reducing transaction cost and effective tool in improving credit delivery
process of SIDBI. This is emerging as preferred tool of the banking and financial sector for extending
credit facilities to MSMEs as one stopsolution.
Gaurav Sehgal and Ashok Aima (2011) in their article, “Microfinance for SMEs: Prospects,
Challenges and Implication,” point out that SMEs face difficulties in raising loansfrom commercial
banks due to lack of financial data and collaterals. They are forced to raiseloan from informal finance
sources. The banks should be practical in financing instead of seeking much financials.

Rajesh Dubey (2011) in his article, “Financial Inclusion for SMEs,” reveals the problems faced by
MSMEs, in getting finance as delayed and inadequate credit, inability to upgrade technology, lack
of institutional credit for startups and lack of collaterals. He suggests
venture capital financing as alternate financing sources. The Indian SMEs face skilled labor
challenges from China.
Arun Thukral (2011) in his article title,” SMEs Know the Borrower’s Credit Worthiness,”states that
the MSMEs face the problem of availability of credit across the country. The corrective policy
measures are being initiated by the banks to ensure smother flow of credit but achievements are mild.
Emmanuel and Daniya (2012), in their research study, “Development of Small and MediumScale
Enterprises: The Role of Government and Other Financial Institutions,” has tried to identify the role
of government and other financial institutions particularly microfinance institutions in the
development of SMEs in Nigeria.
Norudin Mansor et al. (2012) in their article titled, “Determinants of Awareness on IslamicFinancial
Institutions E-Banking among Malaysian SMEs,” has stated the three factors viz. promotion,
12
technology and service quality as independent variables as almost similar in theirrelationship towards
creation of awareness among SMEs through e-banking.
Rajib Lahiri (2012) in research paper, “Problems and Prospects of Micro, Small and Medium
Enterprises (MSMEs) in India in the Era of Globalization” has stated that constraints to MSMEs as
financing problems, extreme competition, poor technology, lack of infrastructure, lack of skilled
labor, marketing and distribution problems, delayed payments, gradual with drawls of reservation
policy, mindset problems.
Sudha Venkatesh and Krishnaveni Muthiah (2012)in their research article, “ SMEs in India:
Importance and Contribution,” have specified the MSMEs problems like lack of adequate and timely
credit, high cost of credit, collateral requirements and limited access toequity capital.
Sahila and Chaudry (2012) in their article as “Appraisal of Quality of Services to Exportersin PSBs”,
mention that service quality gaps get widened due to mismatched level of perception between the
customers and bankers. The customer service is dealing with peopleof emotions and the banks should
educate the customers about banking systems, schemes, products, procedures, rights and duties of
the customers to develop healthy bank customer’srelationship. The banks should provide technology
innovations to customers like AutomatedTeller Machines, Telebanking, Electronic Funds Transfer,
Online Banking, Real Time, Anywhere Banking etc.
S. Saravanan, (2013) in article, “Small and Medium Enterprises Financing”, state that SMEs are
dynamic, innovative, employer important role in sustaining economic growth, increasing trade,
generating employment and creating new entrepreneurship. Bank financing is the most popular
scheme of financing SMEs in India, Low interest, alternative conditions but procedure involved in
length too much documentation, insufficient collateral and brashness are problem, customer
perception towards SME products, customers awareness about SME scheme, Whether borrower are
satisfied about services provided by the bank to them.
Ganesan and Punnoose (2014) in their research, “A study on Credit Delivery Structure in Banks for
financing Micro, Small and Medium Enterprises (MSMEs),” observe that the credit delivery structure
for MSMEs in banks and financial institutions have three tier structure viz. Branch, Controlling Office
and Head office / Central Office. Some of the banks have strengthened their credit system with
Centralized Processing Cells (CPCs), SME loan factories, specialized MSME branches and SME care
centers. There is a committee approachfor sanctioning of high value proposals. The study recommend
for creating system of ensuring easy credit availability to SMEs and transforming bankers mindset
towards MSMEs.
Nishanth and Zakkariya (2014), in their research paper, “ Barriers faced by Micro, Small and
Medium Enterprises in Raising Finance,” has pointed out that MSMEs sector faces manyconstraints
like inadequate and untimely supply of bank finance, difficulties in procuring rawmaterials, marketing
and distribution challenges and non availability of suitable technology.They have found that growth
and development of MSMEs can be ensured by initiating
actions by government and banks by reducing the barriers perceived by MSMEs and providing them
13
necessary facilities and adequate finance.
Ram Jass Yadav, (2014) in his research paper, “Issues in SME Financing,” has recommend the
measures from a bankers and entrepreneurs perspective based on empirical observationsof the study
for SME finance as Leadership` and talent management for uninterrupted creditsupply, i.e. human
capital, leaning operations and imparting education, technology and innovation, activity based credit,
equity market, role of chambers and associations.
Mirlan Amine and Reinhard Stock Mann (2015) in their article, “Small and Medium Enterprises
Survey Myanmar” state that the rapid changes have increased internationalization and
competitiveness. The demand for skills, financial and business development service is growing.
Son Thi Thanh Nguyen (2015) in thesis on “Bank Efficiency and Barriers to Lending: ThreeEssays”
focuses on bank lending to SMEs in demand and supply sides. The thesis covers thedeterminants of
successful access to bank credit by SMEs, factors of business environment affecting SME growth.
On demand side, financing is most important determinant for SME growth. On supply side, various
sizes and ownership forms, impact SME financing.
2. Need and Scope of the Study:
The financing of MSMEs by the Banks is quite old. The concepts and priorities have been changing
over a period of time. The MSMEs play an important role in the production and distribution of goods
and services and also act as mediator between producers and consumers.A neglect of this sector may
lead to vital gap in the economy. The share of MSMEs in our country’s Gross Domestic Product is
increasing. A vast scope exists for financing this sector.In quite good number of the MSMEs, the
business is either family owned or inherited. The advances to them are more stable and less prone to
become Non-performing Assets and Sick Assets. The supervision, follow up and control of these
advances is comparatively easy and cheap. These provide stable business with less overheads and
more profit. The MSMEs generally hold sound and good collateral securities in the form of
immovable properties.
The study is being conducted at a time when the micro, small and medium enterprises have
duly been defined and classified as per MSME Development Act 2006 to include the small scale
industries and service sector including trade, transport operators, professional and self employed,
business enterprises and commercial and institutional up to defined limits of investment in plant,
machinery and equipment. Achieving the national targets of doubling the SME finance in five years,
annual growth of 20 % in SME finance, achieving minimum share of 20% of SME advances in total
advances and attaining minimumCD ratio of 60 % by all the banks has been made mandatory for the
banks. The growing impacts of liberalization, privatization and globalization have largely influenced
the MSMEsector. The compliance of various agreements under WTO (World Trade Organization)
have compelled to improve and upgrade the technology. The banks are being strengthened and
supposed to comply with BASEL III norms of capital adequacy besides IRAC norms. Thereis stiff
competition among the banks for the business including MSME advances business. The MSME
entrepreneurs are facing many constraints while raising finance. The banks are inducing sharp
14
changes in technology to develop various MSME friendly products and services as per the
technological changes and customer needs.
This would help the banks and ultimately the country to achieve the projections as per Indian
vision 2020 - a document by the Planning Commission according to which the Industry share in GDP
which is 26% at present is projected at 34% and the service sector share which is at present 46%, is
projected at 60% by the year 2020.
The present study will provide the Banks in general and State Bank of India in particular an
opportunity to better understand the intricacies of their financing SME Sector by analyzing their
constraints, adopt suitable strategies and amend their approach and policies accordinglyin order to fully
tap this sector, increase their advances and reduce the NPAs. The existing approach of the banks is to
be studied and new strategies for improvements based on research findings are proposed to be
suggested.

The financing of MSMEs is more or less similar in all the Banks and has a wide field
like assessment of proposals, documentation, supervision and follow up. The present study will be
focused on identification of constraints faced by SMEs in getting finance from Banksand problems
faced by Banks in extending finance to this sector thereby suggesting requisitestrategies after assessing
the potential available. The other sector advances provided by the bank have been kept outside the
purview of the project.
1) The problem and prospects of MSMEs beneficiaries in general can be understood by
understanding the problems and prospectus of MSMEs beneficiaries of banks at Pathankot district.
2) Similarly the study can provide a better appreciation of problems and prospectus in generalof the
MSMEs located in and around Pathankot irrespective of the Bank that has financed those SMEs.
Tremendous scope exists for the bank’s branches to enhance SME financing by offering
efficient customer service and competitive interest rates and adopting various strategies. The study
of District Credit Plans will provide bank wise data of the budgeted finance, actual finance and to
determine gap thus to arrive at the further scope of financing SMEs.

15
 Objective and Hypothesis
2.1 Objectives of the Study :
➢ To study the constraints faced by Micro, Small and Medium Enterprises in raising finance
from banks and suggest suitable strategies to overcome / reduce the constraintsfor business
growth.
➢ To study and highlight the prominent products, services and schemes of SBI for MSME
financing based on customer awareness and preference.
➢ To study the trends of total deposits, advances and profitability based on financial highlights
of SBI and their co relation with MSME business growth.
➢ To study the MSME financing system and procedure in SBI and make suggestions where
necessary. (receipt of loan applications, appraisal, assessment, recommendation, sanctions,
documentation, disbursement, repayment, supervision and follow up etc.)
2.2 Hypotheses Proposed
H0: Not more than 50% of MSMEs face challenges when accessing finance from banks. Null
Hypotheses (H0): There is no correlation between the variables (i) deposits andadvances, (ii)
advances and MSME advances.
H0 = There is no significant difference of NPAs on SME business growth and performancebetween
SBI whole and SBI Pathankot district.
H0: Two populations, turnover as per respondents and as per crosscheck of balance sheetshave no
significant variance.
H0: There is no relationship between variables, SME loans availed and SME loan
required/enhancement required. Consequent upon progressing of the research, more hypotheses will
be framed and tested.

Methods:

5.1 Research Methodology:

The research problem was finalized after referring various Literature Reviews on MSME financing
besides practical experience of the Researcher on the field. The data for the presentstudy will be used
from secondary sources and primary sources. In consonance to the objectives of study, the secondary
data will be used from the published Annual Reports of the Bank and from annual Credit Plans of the
Banks. The primary data in the form of well designed questionnaires will be collected from
heterogeneous type of representative MSMEpopulation of various sub segments on random sampling
basis. The tabulated data as per therequirements of the objectives of the study will be analyzed with
appropriate statistical methods like the percentage method, ratio analysis, standard deviation and
correlation coefficient, time series, trend analysis, chi-square test, F-test and T-test etc.
5.2 Research Design is the blue print for the collection, measure and analysis of data.
5.2.1 Sampling

16
 Design:Population:
a) Total population consists of about 4500 MSME units in the district, which includes
registered and unregistered units.
b) There are about 150 bank officials dealing in MSME financing at branches and headoffice
of the banks.

Sample Unit:
a) Complete Micro / Small/ Medium Enterprises business unit proposed to be covered.
b) The official / dealing with MSME financing is also proposed as sample unit.
Sample Size:
a) 450 Micro, Small and Medium Enterprises
b) 50 bank officials engaged in MSME financing.
Sampling Techniques:
a) Proportionate Stratified Random Sampling Technique
b) Simple Random Sampling Technique
5.2.2 Data Collection Design: The undernoted data collection techniques are proposed:
i) Questionnaire
The relevant data collection by means of questionnaire will be undertaken by researcher himself.
The samples (questionnaires) four hundred fifty in number from different types anddifferent sub-
segments are proposed to be collected from MSMEs. The data will also be collected from 50 bank
officials dealing with MSME financing.
ii) Interview
The data will also be collected by way of scheduled and structured interviews from Govt.Officials
like Block Development Officer, General Manager, District Industries Centre and other officials from
other agencies concerned with MSMEs development.
5.2.3 Instrumental Design: Instrument refers to the Questionnaire / Schedule proposed to collect
data. Questions have been framed after studying the various already tested and published
questionnaires with some modifications as per the need of the study e.g. some questions have been
taken from the study by Dr. Ram Jass Yadav, “Issues in SME Financing” and World Bank SME
questionnaire - December 2006 which are already tested for validity and reliability.
Pilot testing by selecting a small sample from target population and simulating the procedures for
data collection designed. The corrected and revised instrument will be used for final research.
6. Research Tools and Techniques:
The primary source of data is questionnaire which comprises of different questions relating to the
rules and regulations of bank, SME advances, schemes and products, collateral security approach,
obtention of formalities, documentation and problems faced by the entrepreneurs in this regard. The
questionnaire will comprise of the questions pertaining to the problems faced by MSMEs and why
they hesitate to avail bank finance. The schedule based

17
questionnaire has also been designed to seek comments and opinions from bank officials. The
rating/ranking scale based on Pareto analysis of the strategies is proposed.
The secondary source of data will be Annual Reports, Performance Reports, Returns, and
Annual Credit Plans of the Banks, besides various books, periodicals and magazines. The past ten
years deposits, advances and SME advances data of the banks at the centrecomprising of district
Pathankot will be applied correlation coefficients and standard deviations worked out and
commented. The primary data collected as regard the annual turnover of select SMEs will be
compared with their balance sheet and financial statements submitted at the branches and will be
applied F-test to cross check the accuracy which showed that data collected from two populations
have the same variance. An attempt is proposed to work out the credit gap as per Nayak Committee
method of assessment of working capital limits. The financial highlights of State Bank of India as a
whole for the pastten years like assets and liabilities, NPAs and profits are proposed to be examined
through percentage analysis, ratio analysis and trend analysis.
7. Hypothesis Testing:
Keeping in view the nature and objective of research characteristics of population distribution,
sampling techniques and type of data, parametric tests like chi-square test, t-test,F-test are proposed to
testing the hypothesis pertaining to the primary data
8. Data Analysis and Interpretation:
The primary data so collected through questionnaires and interview schedules will be coded,
edited and tabulated. The tables/schedules will be drawn for various parameters of SME financing in
relation to objectives. Statistical analysis will be carried out. The tabulateddata will be analyzed by
using the appropriate statistical techniques viz. average, percentages, trend analysis, Standard
Deviation, Correlation Coefficient- time series trend analysis. The analysis of the data collected from
the secondary sources will be analyzed using different
ratios applicable for the banking service sector and correlation, trend analysis. The credit- deposit
ratio will be used to analyze the growth of advances comparative to growth of SMEadvances with the
percentage method. The analysis of such data will be interpreted in relation to the stipulated objectives
and thus conclusions will be drawn which will be systematicallyand scientifically. These are proposed
to be suitably drawn.
9. Discussion of Results and Implications of the Study:
Based on the data analysis and interpretations, the final results and findings arrived at, areproposed
to be commented objective wise. This can help the banks to examine theirorganizational or branch
structure and make necessary changes if needed. The study will also reveal that which products or
schemes are more popular and profitable and how much furtherpotential exists. The trends analysis
can facilitate banks to think of the inhibiting and facilitating factors for slow pace and required pace
of growth of MSME advances. This can provide a glance of MSMEs constraints to be visualized are
to be corrected by the banks. Thestudy will involve MSME entrepreneurs, banks officials handling
financing work, government agencies dealing with MSMEs and various socio-economic

18
organizations and agencies. The current studies/materials in this field will be thoroughly referred. The
study ofthe ten years financials of the large sized organization like State Bank of India through various
ratio analysis, percentage and trend analysis proposed to be shown through tables, figures, pie charts
and graphs will provide an opportunity to all the banks to compare their financial and trends to find
out the improvement potentials and formulate new strategies, introduce new products and services.
The study of trend analysis of financing at the centre can provide opportunities to the banksto study
and compare their MSME advances growth, product, services, schemes, strategies, system and
procedure .The study and comparison of credit deposit ratio, share of MSME advances to total
advances with national bench marks and with various banks can provide opportunities for banks to
enhance their MSME financing share.
The area based strategies of significant value will be suggested which can be used by various
banks in general and by Pathankot centre banks in particular to enhance their respective sharein MSME
financing which can largely increase their profitability also.
The geographical area of the study will be confined to Pathankot district. The presentstudy
will be confined to the micro, small and medium enterprises in manufacturing and servicing sector.
The large enterprises in commercial and institutional segment will not be covered in the study. The
captioned study will be conducted by practically studying the various MSME related products ,
services, schemes, system and procedure and performanceparameters of State Bank of India for over
ten years. The secondary and primary data will beexamined by applying crosschecks and statistical
tools to ensure accuracy. The existing strategies will be studied and new innovative and dynamic
strategies will be identified and suggested which would overcome the existing difficulties of MSMEs,
help the banks to enhance their SME financing portfolio, achieve the national targets, improve
profitability andviability of the banks and help the economy to grow and develop. The study would
also addto the existing literature.

19
TABLE 1: DEFINITION OF MSME ACCORDING TO MINISTR Y OF MSME
Classification Investment Ceiling for Plant, Machinery or Equipments*@

Manufacturing Enterprises Service Enterprises

Micro Upto Rs.25 lakh ($50 thousand) Upto Rs.10 lakh ($20 thousand)

Small Above Rs.25 lakh ($50 thousand) & upto Above Rs.10 lakh ($20 thousand) &
Rs.5 crore ($1 million) upto Rs.2 crore ($0.40 million)

Medium Above Rs.5 crore ($1 million) & Above Rs.2 crore ($0.40 million) &
upto Rs.10 crore($2 million) upto Rs.10 crore ($2 million)

The employment criterion was dropped because the employment trends keep changing seasonally;
hence it is difficult to base the definition on them. Also, classification according to number of people employed
gives owners the incentive to limit employment to remainwithin Small and Medium Enterprises. Another
reason for dropping this criterion is the possible discrimination between labour intensive and techno
sophistication (Dr. P. Uma, 2013). But the Indian definition does not take into account annual turnover or variable
costs too and bases the definition solely on fixed costs. This implies that a micro enterprise that initially invested
20 lakh but had a turnover of 10 crore and increased its number of employees by 50% will remain a micro
enterprise if it chooses not to reinvest in the plant and machinery. This acts a drawback of the Indian definition
of MSMEs. Many researchers also argue that the investment ceilings are too low as compared to other
countries. ‘Thecap on plant and machinery for the purpose of classifying the units as MSMEs does not
encourageIndian MSMEs to move up the value chain. With such low level of investment ceiling, Indian
MSMEs are either expanding laterally or engaging themselves in low-tech/low-value products. Since the
manufacturing operations are capital intensive, investment ceiling for treatment of mediumenterprises may be
raised at least in the capital intensive sectors, benchmarking with such ceiling on investment in other
countries’ (EXIM Bank, Strategic Development of MSMEs, 2012).

20
 TABLE 2 : PERFORMANCE OF SSI/MSME UNITS, EMPLOYMENT, INVESTMENTS AND GROSS OUTPUT1

† Including activities of wholesale/retail trade, legal, education & social services, hotel & restaurants,
transports and storage &warehousing (except coldstorage)forwhich datawere extracted
EconomicCensus 2005, Central Statistics Office, M/o SPI.
* Estimated on the basis of per enterprises value obtained from sample survey of unregistered sector for

1 Source: Annual Report MSMEs 2012-13

activities wholesale/retail trade, legal, education & social services, hotel & restaurants,
transports and storage & warehousing(except cold storage) which were excluded from
Fourth All India Census of MSME, unregistered sector # Projected

21
 FIGURE 1 : NUMBER OF ENTERPRISES IN MSME SECTOR2

FIGURE 2: EMPLOYMENT IN MSME SECTOR3

These enterprises are spreadacross the country with 55% of theenterprises beinglocated in urban areas and the rest
45% in the rural areas in stateslike UttarPradesh, Maharashtra,Tamil Nadu, West Bengal, Andhra
Pradesh,Karnatakaetc. Uttar Pradeshhas about4.4 million MSMEs providingemploymentto
9.2millionpeoplewhereasWestBengalandTamilNaduhave3.4 millionand3.3millionMSMEs
respectively.Thisevengeographicaldistributionleadsto regional uniformity andinclusive growth.

22
There are two sectors that MSMEs can be classified into-manufacturing sector and services sector. The
manufacturing sector alone constitutes 90% of the total industrial units in India generating45%
ofthetotalindustrialoutputand contributingto45%oftheexports.These quantum units together contribute
much to the industrial development of the country utilising domesticallyavailable
resources.ThefactthatmostoftheseMSMEsareownedbypoor households helps conclude that MSME play
an important part in raising the standard of living of the poor.

FIGURE 4 :
CONTRIBUTION OF MSME IN TOTAL INDUSTRIAL
PRODUCTION5

Like in manyother developing countriesIndiahas a verylarge numberof informal Micro enterprises (95%
of the total MSMEs). There are a handful of larger firms- ventures created by foreigninvestment or family
controlled conglomerates built up over generations but there very few Small and Medium Enterprises (5% of
MSMEs). This lack of Small and Medium Enterprises (SMEs) is called the ‘The Missing Middle ’(David de
Ferranti & Anthony J. Ody, 2007).

23
 FIGURE 5: THE MISSNG MIDDLE

SMEsare thebackboneof modern economyand engines ofgrowth, thoughthey are ‘under- represented,
stifled by perverse regulatory climates and poor access to inputs’ (David de Ferranti & Anthony J. Ody,
2007). ‘SMEs play a major role in economic growth in the OECD (Organisation for Economic
Cooperation and Development) area, providing the source for most new jobs. Over 95% of OECD enterprises
are SMEs, which account for 60%-70% of employment in most countries. As larger firms downsize and
outsource more functions, the weight of SMEs in the economy is increasing.’ (OECD Policy Brief, 2000).
The World Bank shows positive correlation between the economic growth of the country and the size of
the SME sector.
Thoughthisnecessarilydoesnotimplycausationbutitsaysalotabouttheneedtofocuson their
development.But as rightly pointed outby Muhammad Yusuf,Micro enterprisesbeing the ones owned by
least resourceful people gain more traction by the government as compared to their larger, more
dynamic and productive cousins, the SMEs. Since most of the problems faced by Small and Medium
Enterprises are different than those faced by Micro Enterprises, appropriatepolicies are required to
cater to the needs of SMEs.
PROBLEMS

Various problems were identified in the previous section. This section will highlight the major problems
faced by MSMEs and the factors affecting their growth.

Finance
All the companies require capital to meet their fixed as well as variable costs but most of the MSME owners lack
required capital to establish and operate the firm, thus they have to resort to borrowing. ‘The reliance on debt for
finance depends greatly on the size of the firm. Smaller the entity greater is the reliance on debt as a primary
source of finance. Micro enterprises dependondebtasa primary sourceforboth early and
growthstagewhilesmall and services primarily transact in cash and tend to keepminimal records.
Manufacturingenterprisesand the ones with order-driven services tend to need more finance because of longer
working capital cycle and higher capital expenditure’(InternationalFinance Corporation).

24
 FIGURE 6: CREDIT REQUIREMENT OF MSME

But banks are not the primary source of finance for most of the enterprises as owners find the application
process cumbersome and tedious. Also, they do not qualify for loans due to lack of both collateral and positive
balance sheets. ‘Credit guarantee support has been instituted to support collateral-freedebtupto
INR10million($ 0.2million),howeverthisremainsunder- utilized at less than 5% of the overall debt to the
sector. While the trend of collateral-free debt is growing gradually, collateralized debt continues to account for
95%-98% of Micro, Small and Medium Enterprise credit’ (IFC). According to IFC, the dominant source
of finance is the informal sector 95% of which constitute the non institutional sources like family,
friends, relatives etc. Institutional channels like trade credit, chit funds and moneylenders tend to be
expensive, charging interest rates ranging from 25% to 60% per annum. So their always tends to be a debt gap
which works as a huge barrier in establishment as well as operation of MSMEs.
Marketing
Being a small entity and having a perpetual shortage of finance, the MSMEs are unable to market their
product as well as the large enterprises which works to their disadvantage. They donot focus on packaging
methods or sales and advertising. Most of the firms undergo losses during first five to six years just due
to lack of consumer demand. But eventually they make a place in the market based primarily on the
quality of their product and contacts that they gatherduring business transactions. They also use different
kinds of marketing techniques such as Campus Ambassador Programmes and influential marketing. They
tie up with trading agenciesto learn the latest trends in the market and get in touch with brokers to get
initial contracts. Marketing also greatly differs from business to business. For example to market food
productsmedia campaigns are used and to market intermediate products distributors are assigned that sell
the product in different areas. Government has launched many schemes and has various mechanisms in
place to help small firms in the marketing domain but it continues to be a majorproblem.
Government Regulations
To enter the market or get registered as a Private Limited company one has to get various licenses such
as Service Tax Registration, PAN Card, TAN (Tax Collection & Deduction Account Number), VAT/
CST Registration, Shops & Establishment License, Central Excise License, Importer Exporter Code,
Professional Tax, Employee Provident Fund Registration and ESI (Employee State Insurance)
Registration, and construction permits from the Municipal Corporation, to name a few – the sewerage,
fire, electricity, environmental departments. For thefood industry there are other licenses such as Food
Safety and Security License, Health Care License and Police License. Not only the application process
for these licenses is cumbersomebut the information required to apply for them is difficult to come across
too which is the reasonwhy most of the people hire Chartered accountants and Lawyers to get registered.
Even after registration and licensing there are problems such as trade barriers. Some state governments
donot allow transportation of particular manufactured products into their states without registration (eg.
Uttar Pradesh). The owner comes to know about these regulations only when he finally hasto face the
barrier.

25
Managerial Incompetence
In most of the MSMEs, the owners are managers. They do not have enough funds to hire professional
managers. Therefore, they are sometimes not able to make informed decisions regarding technology and
capital. They tend to underestimate the required capital amount, installpoor production technology or make
wrong management decisions. ‘What action can you take as a business owner when sales plummet, or
profits crumble, and the pressure is on? A commonconsensus amongst management consultants, business
mentors and business coaches is that thetemptation to bury the head in the sand is so strong in many
SMEs that they cannot make that shift’ (Julian T Rowe, 2008). Thus managerial incompetence makes for
a very significant factor
hindering the growth of MSMEs in India.

Lack of Information/awareness
Almost all the stakeholders agreed that people are not generally aware of the registration procedures,
requirements and licensing system. Most of them do not even know that there is a ministry called the
Ministry of Micro, Small and Medium Enterprises and that there are variouspolicies to help them with
financial, marketing, technological and managerial problems. SanjayKumar, owner of BudWhite Teas
Private Ltd says that when he got his company registered he had no information that he could get it
registered as a MSME and avail the benefits provided bythe government. Even the people who have
registered their companies as MSMEs do not knowabout all the schemes currently in place. Sanjeev Garg
who has got his company registered as aSmall Scale Industry (SSI) says there must be some advisory
mechanism to advice theentrepreneurs about latest technology and new markets without realising that
there are more than 60 institutions such as technological Development institutes, Tool rooms , Testing
Centresetc that provide technological support to MSMEs. In the Union Budget, 2014 Initial sum of ` 100
crore is assigned for “Start Up Village Entrepreneurship Programme” for encouraging ruralyouth to take
up local entrepreneurship programs. But no channel has been created for this information to reach the
Rural Youth. It therefore might not be wrong to conclude that majorityof entrepreneurs are either unaware
about the available benefits or they do not find them in theirproximity.
Infrastructure
Delhi has certain industrial areas where you can get property and set up a firm. These are the only areas
in which a manufacturing firm can be set up otherwise permissions are needed from the MCD. The
Industrial areas are divided into North, South, West and East Zone comprising of G.T. Karnal road
Industrial area, Okhla Industrial area, Naraina Industrial Area, Patparganj Industrial Area etc. These areas
being specified to conduct productive activity must have an Study of MSMEs | Centre for Civil Society |
www.ccs.in Page 21 of 33 environment conducivefor manufacturing. But according to the entrepreneurs
in these areas, they have poor infrastructure such as poor roads, electricity shortage lack of backup
systems etc. Lack of Infrastructure highly affects exporting companies as the Indian railway freight and
handling charges are very high and services very slow as compared to other countries which puts Indian
MSMEs at a competitive disadvantage.

Competition
SMEs are generally facing low competitiveness in terms of knowledge, innovation, prudent investment,
business operation, and good management, which are important factors required toelevate the quality
level (OSMEP, 2007 a). The large enterprises have the capability of realising economies of scale and
therefore reduce the prices of their products. They also spend a formidable amount in marketing their
brand either via advertising campaigns, distributors or other means. The MSMEs are unable to do such
extensive marketing due to shortage of finance
which renders them less competitive. MSMEs also face competition from other developing countries due
to globalisation and increased international trade such as Vietnam, China, Thailand that produce the
similar low cost, low value added labour intensive products. But most of the companies do not see
competition as major factor slowing down the growth of the company. They tend to compete in quality
rather than prices. Macroeconomic Instability MSMEs are argued to be more vulnerable to economic
crisis as compared to the rest of the industrial sector due to their small size, limited resources, finance,
knowledge and technology (Cheah and Cheah, 2005). It is a two sided hit as the credit flow stops on one
26
 hand and consumerdemand reduces on the other. But almost all the stake holders agree that the effect of
an economic crisis depends on the foresight of the entrepreneurs. The ones able to foresee the crisisequip
themselves appropriately to cope with it. Its effects also differ depending on the field of the enterprise.
For example, according to Prasoon-the owner of Sattviko restaurantspeople do not stop eating food
during a crisis thus most of the food business remains safe from the crisis.

Technological Upgradation
Technology acts as a significant factor in deciding the competitiveness of an enterprise. MSMEstend to
have low productivity and are weak in terms of competition which is the result of usingStudy of MSMEs
| Centre for Civil Society | www.ccs.in Page 22 of 33 inadvanced technology,not maximizing machinery
utility and not improving in technology due to the limitation of funding. Also, most MSMEs are mainly
users of technology, not adaptors of technology (OSMEP, 2007 a). Most managers or owners are either
not aware of the available technology or do not have the financial capability to upgrade their technology.
The technological status andits usage greatly influence the position of enterprises in the market. Thus to
keep the domestic firms technologically at par with international firms in the time of globalisation must
be one ofthe most immediate concerns of the government.

Research and Development

‘With globalisation, there is an urgent need of a dynamic and self sustaining culture of innovation’
(FICCI MSME Summit, 2012). To compete in the global market the manufacturingfirms especially, need
to continuously innovate and meet constantly changing consumer demands. According to a report by
FICCI, share of innovating firms in India was only 19%. It is ranked 62nd on the Global Innovation
Index and 8th in its income group—after China, Moldova, Jordan, Thailand, Vietnam, Ukraine, and
Guyana (FICCI MSME Summit, 2012). Now, the problem is that most of the MSME owners do not
realise the importance of R&D department and do not feel the need for this department. Moreover, the
owners do not generally have the knowledge, education, capital and sometimes capability to drive a
research and development department to in the right direction.
Lack of Skilled Labour
Even though MSMEs employ 40% of nation’s population, according to the entrepreneurs lackof skilled
labour is a perpetual problem for MSMEs. Educated and skilled people prefer jobs inLarge Enterprises
due to higher wages and job security as compared to small industries that cannot afford to pay very high
wages. So, they have to hire unskilled people and conduct on thejob training programs. Eventually the
labour tends to perform better giving better results. It is also a challenge to retain labour as in the micro
and small enterprises they generally are not bound by formal contracts.

Corruption
According to a report by United Nations Industrial Development Organisation, smaller the firm, more
likely it is to be affected by corruption. Further as the report pointed out and the stakeholders agree is
that more SMEs than larger firms believe that corruption is “part of the way things work in the country”.
They pay much higher percentages of annual revenues in bribesto public officials, and make additional
payments to get things done much more frequently thanlarge companies (UNIDO Vienna, 2007). It leads
to ineffective policies, Study of MSMEs | Centre for Civil Society | www.ccs.in Page 23 of 33 inefficient
bureaucracy and exploitation ofthe smaller firms. But it is worth mentioning that bribery also makes things
faster and easier formany firms struggling with the registration and licensing systems.

27
 ANALYSIS

This section will analyse the factors affecting growth of MSMEs in India by the help of
quantitative analysis.

The figures below are the result of quantitative analysis conducted by the author.
Figure 7 shows the problems affecting growth of manufacturing sector enterprises in MSME sector. The biggest
problems faced by the firms are Finance, Marketing and Lack of Skilled Labour.
Infrastructureherecomprisesoffactorslikeconditionoftheindustrialareas,electricity or energy supply,
transportation facilities etc which also play an important role in holding back the companies’ growth.

FIGURE 7 : FACTORS AFFECTING GR OWTH OF MANUFACTURING SECTOR -MSME

Services
Sector

FIGURE 8 : FACTORS AFFECTING GR OWTH OF SERVICES SECTOR -MSME

Diagram 8 demonstrates the intensity of the effect that each factor has on the growth of services sector
firms among MSMEs according to the stakeholders. The biggest three factors are marketing, competition and
lack of skilled labour.Finance does not pose as big a challenge to the services sector as it does to the
manufacturing sector. This is because manufacturing forms mostly install machinery and thus need more
28
capital investment. Similarly Research and Development plays a more important role in deciding the
growth of manufacturing sector. Other major problems faced by the services sector are finance and
government regulations.

FIGURE 9 : FACTORS AFFECTING GR OWTH IN INDIAN MSME

29
Figure 9 shows the intensity of problem posed by each factor on MSMEs in India. For industry
as a whole finance, marketing and lack of skilled labour turn out to be the biggest problems
followed by government regulations, infrastructure and competition. The policies need tofocus on
these problems to help in some significant growth of the companies.

TABLE 3 : LIST OF RESERVED ITEMS FOR MSME PRODUCTION6

30
 Questionnaire - I (For MSME Entrepreneurs)
Financing of MSMEs by Banks: A Case Study of State Bank of IndiaNote: The information
required in this Questionnaire shall be kept strictly confidential. The information shall be used
for the study purpose. Please tick the relevant where necessary.
1. Name of the owner of business/service organization…
2. Name of the Firm /Company /Unit:
3. Constitution of Firm/Company:
i) Proprietary firm ii) Partnership firm iii) Pvt. Limited Company
4. Activity:
5. Educational qualification of the owner/key person:
i) Below Matriculation
ii) Matric and above but below Graduation
iii) Graduation and above
iv) Professional qualification (Please Specify)
6. When did you start your business
i) Less than a year back ii) Over one year to 5 years
iii) Over 5 years iv) Ancestral occupation since years
7. Annual turnover of the firm/Company/Unit:( as per balance sheet)
i) Less than ten lacs ii) Between ten lacs and one crore
iii) Between one crore and ten crore iv) Above ten crore
8. How much is your original investment in plant and machinery/ equipment?(please
tick):

Manufacturing Servicing

1. Upto Rs. 25 lakh 1. Upto Rs. 10 lakh

2. More than Rs. 25 lakh and uptoRs. 5 2. More than Rs. 10 lakh and upto Rs.2 crore
crore
3. More than Rs.5crore and upto Rs.10 3. More than Rs.2 crore and upto Rs. 5crore
crore

9. Name of the bank and branch with whom you are dealing and enjoying facilities:
i) Bank: ……………….. Branch: ……………………..
ii) Facility enjoyed: …………… Limit: .................................... Term Loan:
…………………
iii) Your viewpoint as regards present system of financing (Please tick therelevant):
a) Satisfied b) Partially satisfied c) Unsatisfied
31
 iv) Whether you need credit facilities/enhanced limit: a) Yes b) No
v) If yes, (i) working capital (ii) term loan (iii) both
10. Why you prefer dealing with SBI (Please tick at least one):
i) Largest Indian Bank ii) Excellent customer Service
iii) Easily approachable iv) Other (Pl.Specify)
11. What is your experience while raising loan (Please tick at least one):
a) Bank officials takes unduly long time
b) Lengthy and cumbersome paper work
c) Highly collateral security oriented approach
d) Demand for too much information and data on piece meal queries
e) Any others(Pl. Specify) _
12. According to you what are the main constrains you experienced, while raisingloans
(Please tick at least one):
a) Highly collateral security oriented approach of the bank
b) Demand financial / audited financial statements for 3 to 5 years
c) Demand revenue documents, NOCs, identity and address proof
d) Lengthy and cumbersome documents
e) Any other (Pl. Specify)_
13. What strategies you suggest the bank to minimize constraints ingetting
financing (Pl. tick at least one)
a) Collateral norms should be relaxed
b) Audited financials should not be insisted upon
c) Bank officials should help in filling up application
d) Simplified documents
e) Any other (Pl. Specify) _
14. Advantages enjoyed by you with your present bank (Pl. tick at least one):
a) Low interest rate and service charges
b) Quick decision taking ability of Bank Officials
c) Rendering assistance and overdraft in case of emergency
d) Less paper work, simplified application and documentation
e) Any Others (Pl. Specify)

15. Suggest your viewpoint to enhance the scope for MSME advances growth: (Pl.tick at least
one):
i) Lesser NPAs
ii) Advances as per revised classification
iii) Thrust on important service sector and services
32
 iv) Any Others (Pl.
Specify)
16. Suggest your view point for further development of MSME segment of theBanks:
(Please tick at least one):
i) Sanctioning authority should possess quick decision taking ability
ii) Less paper work and simplified documents
iii)Bank should not possess high collateral security approach Any othersuggestion you
want to be incorporated

17. Suggest ways (strategies) as how should Govt. facilitate MSME sector: (Pl. tickat least one):
i) Providing excellent infrastructure facilities
ii) Extending soft refinance to Banks for MSME financing
iii) Liberalizing and simplifying loan terms
iv) Any Others (Pl. Specify)
18. List the main MSME financing products offered to you by the bank. State your preference level
and awareness level about these products: (Pl. write products, preference / awareness wise)
(artisan, credit card, swarojgar credit card, SME credit card, SME credit plus,SME smart
score, SME micro, MSE collateral free)
i) Awareness wise 1. 2. 3 4
ii) Preference wise 1. 2. 3 4
19. List the main MSME financing services offered to you by the bank. State your preference and
awareness level about these services: (Pl. write services, preference / awareness wise)
(ATM, green channel, NEFT/RTGS, CBS, KIOSKS, Swayam, smart change)
i) Awareness wise 1. 2. 3 4
ii) Preference wise 1. 2. 3 4
20. List the main MSME financing technology products / services offered to you by
the bank. State your preference level and awareness level about these technologyproducts /
services: (credit card, debit card, internet banking, mobile banking, prepaid card, eZ pay card,
smart pay card)
i) Awareness wise 1. 2. 3 4
ii) Preference wise 1. 2. 3 4
21. List the main MSME financing schemes offered to you by the bank. State your preference and
awareness level about these schemes:
(corporate loan, supply chain, PMEGP, CGTMSE, SJGSY, SRMS)
i) Awareness wise 1. 2. 3 4
ii) Preference wise 1. 2. 3 4
22. How do you rate overall SBI Core Banking Solutions?

33
 i) Excellent ii) Good iii) Can’t say iv) Poor v) Very poor

23. The major constraints of MSMEs are:

(Please tick the appropriate statement below, to the extend you agree or disagree to the
statement)

Stateme Strongly Agre Not Disagr Strongly

nt Agree e Sure ee Disagree
(5) (4) (3) (2) (1)
a) Non availability of credit from
bank
b) Inadequate credit availability
c) Delayed credit availability
d) High collateral security
orientation
approach

e) High rate of interest & other

charges
f) Insisting for Audited Balance
sheets
and financials
g) Lengthy documents
h) Non displaying of products,
scheme,
services at branches

Dated Signature (Optional)

Thank you very much for the time & efforts you have spared in completing this questionnaire.
For queries, if any contact on: rana.oc@rediffmail.com , Mob. No. 08988163329 (O.C. Rana).
Pl. return the filled questionnaire in the enclosed self addressed envelope

34
 Questionnaire – II (For Bank Functionaries)
Financing of MSMEs by Banks in Punjab - A Case Study of State Bank of India Note:
(Information required will be used to study purpose and shall be keptconfidential) Bank
Officials Dealing with MSMEs
1. Since how long you are serving in the bank, handling MSME advances and headingbranch?
(please tick row and column from the below table)
Length of Servicein Handling MSME Branch Head
Advances in
Bank
Bank
Less than 1 year Less than 1 year Less than 1 year
1 year – 5 years 1 year – 5 years 1 year – 5 years
5 years – 10 5 years – 10 years 5 years – 10years
years
10 years and 10 years and above 10 years and above
above

2. What type of training / learning / working exposure have been provided to you inMSME
Financing? (Pl. tick at least one)
a) No training / learning / working exposure provided in MSME financing
b) Only hands on training / learning / working exposure provided at the branches
c) Training / learning / working exposure provided in banks training / learningcenter
d) Training / learning / working exposure provided in banks / Academy / RBICollege
3. (a) Do you observe constraints while extending loans to MSMEs (only dealingofficials
3. (b) What are the constraints of bank officials due to which they are conservativelyextending
credit to MSMEs beneficiaries (Pl. tick at least one)
35
 a) Fear of staff accountability
b) Fear of default and NPA increase
c) Expensive supervision / recovery visits
d) Paucity of collateral with MSMEs
e) Any other (Pl. Specify)

4. hat could be the enabling environment for growth of finance to MSME sector?(Pl. tick at
least one)
a) Legal and regulatory framework.
b) Government support
c) Financial infrastructure support
d) Easy access to finance
e) Any other (Pl. Specify)
5. Please suggest the measures on the basis of priority to increase MSME creditportfolio in
branches and banks (Please indicate rank in the bracket)
a) Targeting minimum 20 % annual growth ( )
b) Adopting cluster financing approach ( )
c) Opening MSME branches ( )
d) Providing collateral free loans ( )
e) Any other (Pl. Specify)
6. Please tick the statements regard the system and procedure followed in yourbank
regarding to the Receipt of Loan Application (Pl. tick at least one):

7. Please give lending products you offered to MSMEs (customer awareness andpreference
wise)
a) Awareness wise: 1. 2. 3. 4.
b) Preference wise: 1. 2. 3. 4.

8. Please give lending services you offered to MSMEs (customer awareness andpreference
wise)
a) Awareness wise: 1. 2. 3. 4.
b) Preference wise: 1. 2. 3. 4.

36
9. What could be the enabling environment for growth of finance to MSMEsector? (Pl.
tick at least one)
a) Legal and regulatory framework.
b) Government support
c) Financial infrastructure support
d) Easy access to finance
e) Any other (Pl. Specify)
10. Please suggest the measures on the basis of priority to increase MSME creditportfolio in
branches and banks (Please indicate rank in the bracket)
a) Targeting minimum 20 % annual growth ( )
b) Adopting cluster financing approach ( )
c) Opening MSME branches ( )
d) Providing collateral free loans ( )
e) Any other (Pl. Specify)
11. Please tick the statements regard the system and procedure followed in yourbank
regarding to the Receipt of Loan Application (Pl. tick at least one):
Sr. Stateme
nt
i) Loan application received & disposed register maintained
ii) Entered in a register & issued acknowledgements
iii) Standard loan application received & disposed register (bilingual)maintained
and application with checklist entered and acknowledgementissued

iv) Application entered in register & provided help to complete

v) Receipt date entered in application & disposal marked onsanction /
Rejection

3. Please tick in the following statements regarding the Loan Pre-sanction Visit:

Sr. Statement
i) Identity proof, address proof and supporting documents to be
verified.

37
 ii) Applicants particular and antecedents to be verified.

iii) Applicants particular and credit report to be compiled

iv) Application particular, project site and nearby infrastructure to be
verified.
v) Identity proof, address credit report, antecedents record, projectlocation
and nearby infrastructure to be verified and recorded.

3. Please tick a most appropriate from the following statements regarding thesystem and procedure
being followed in your bank regarding Loan Appraisal:
Sr. Statement
i) Technical Appraisal
ii) Commercial Appraisal
iii) Financial/ Economical Appraisal
iv) Managerial Appraisal
v) Technical Feasibility and Economic Viability

3. Please tick the following statements regarding the system and procedure in your
bank regarding Loan Assessment and recommendation:
Sr. Statement
i) Net worth and opinion reports to be compiled
ii) Financial ratios and trends to be worked out
iii) Credit reports, NOC, No dues certificate, approvals, collaterals tobe
Obtained

iv) Search on revenue paper to be carried out

v) Obtain credit reports, NOC, No dues certificate, approvals, collaterals (if
required), revenue papers, compile opinion reportsand verify particulars in
applications. Work out important financial ratios, examine trends and apply
simple loan assessment method

4. Please tick the following statements regarding the system and procedure in your
bank regarding Loan Sanction / Rejection:
Sr. Statement
i) Technical feasibility and economic viability to be examined
ii) Appraisal, assessment and recommendations to be recorded

38
 iii) Primary and collateral security value-asset coverage to be seen
iv) Statutory approvals and ratings to be confirmed.
v) Sanction on merit-examine technical feasibility and economic viability;
proper appraisal, assessment, recommendations; asset coverage, ratings and
score to be satisfied and recorded. Return/reject if activity not viable,
not feasible or incomplete formalities.

5. Please tick the following statements regarding the system and procedure in your
bank about Loan Documentation:
Sr. Statement
i) Banks usual loan documents to be obtained
ii) Banks usual loan documents and mortgage documents to be
Obtained
iii) Banks usual loan documents, mortgage documents andrevenue
documents to be obtained

iv) Banks usual loan documents, mortgage documents and otherdocuments

to be obtained

v) Obtain Application cum Appraisal, Letter of Arrangement, Standard Loan

Agreement (stamped), Revenue Documents,Statutory Approvals, Mortgage
Deed (stamped) and other documents like identity and addressproof.

6. Please tick the following statements regarding the system and procedure in your
bank about Loan disbursement:

Sr. Statement
i) Obtain and scrutinize invoices
ii) Obtain and scrutinize invoices, payment to be made directly tosuppliers

iii) Obtain margin money, obtain and scrutinize invoices, paymentto be

made
directly to suppliers

39
 iv) Insurance of the assets/machinery, obtain margin money, obtainand
scrutinize invoices, payment to be made directly to suppliers

v) Insurance of the assets/machinery, obtain margin money, obtainand

scrutinize invoices, payment to be made directly to suppliers, obtain
receipts and verify assets/machinery. Ensure proper utilizationof loan

7.Please tick the following statements regarding the system and procedure in your
bank about Loan Supervision and Follow up

Sr. Statement
i) Periodical inspections

ii) Periodical inspections and recovery visits

iii) Periodical inspections and notices to defaulters
iv) Periodical inspections, recovery visits and notices to defaulters
v) Verify assets/machinery, carry out periodical inspections and recovery
visits, serve notices to defaulting borrowers, obtain stock statements,
balance sheets, balance conformations, revivalletters (as due), record in
inspection register

3.Please tick the following statements regarding the system and procedure in yourbank about
Rehabilitation/Rephasement/Reschedulement/Restructuring
Sr. Statement
i) Rephasement in deserving cases
ii) Reschedulement of installments, conservatively fixed earlier
iii) Potential viable sick units to be provided rehabilitation/nursingpackage
through banks- relief and concessions within norms

iv) Restructuring of assets - Corporate Debt Restructuring ineconomically

viable, technically feasible and promoters commitment containing cases
as per RBI guidelines

40
 v) The potential viable sick units should be extended rehabilitationpackage;
the economically viable and technically feasible units where promoters are
committed to keep the unit operative shouldbe restructured as per RBI
guidelines and in deserving cases
rephasement and reschedulement should be done.

3.Please tick yes or no in the following statements regarding the system and
procedure in your bank about Loan Recovery:

Sr. Statement
i) Invoke SARFAESIA Provisions
ii) File suits in Lok Adalat and Invoke SARFAESIA Provisions
iii) Invoke SARFAESIA Provisions, File suits in lok Adalat andInvoke
SARFAESIA Provisions

iv) File civil suits

v) Filing suits in Lok Adalat, Debt Recovery Tribunals SARFAESIA and civil
suits against willful defaulters, compromise, write offs and DICGC claim
in extreme poverty
i.e. activity closed, assets destroyed, borrower
critically ill/expired

Signature and Name (Optional)

Thank you very much for the time & efforts you have spared in completing this
questionnaire. For queries, if any contact on: rana.oc@rediffmail.com , Mob. No.
08988163329 (O.C. Rana).

41
 Annexure III
(For Govt. Officials including SIDBI, NABARD and Banks higher authorities concerned with
MSMEs)
The information required in this Questionnaire shall be kept strictly confidential. The information
shall be used for the study purpose.
Govt. Officials, SIDBI, NABARD and Banks higher authorities concerned with MSMEs

1. Do you observe any constraint in extending credit by banks to MSMEs?

Yes No
2. What type of constraints MSMEs are facing while availing finance from Banks?
i)
ii)
iii)
iv)
v)
3. What remedies/strategies you advise for MSME finance growth in banks? i)
ii)
iii)
iv)
v)
4. What facilities/infrastructure/linkages you are providing/propose to provide MSMEs? i)
ii)
iii)
iv)
v)

5. Any new SME projects/proposals are coming up in the area?

Signature (Optional)
Name
Deptt.
Thank you very much for the time & efforts you have spared in completing this
questionnaire. For queries, if any contact on: rana.oc@rediffmail.com , Mob. No.
08988163329 (O.C Rana).

42
 CONCLUSION AND RECOMMENDATIONS

The aim of the paper was to identify and analyse the main regulatory and operational problems faced by Micro,
Small and Medium Enterprises in India, study the existing policies and make further
recommendations.

The study concludes that Financeis a major obstacle in thegrowthof micro, small and medium enterprises. The
lower and middle class is capable of driving itself out of poverty; it is ambitious and active in taking up
new ventures and starting businesses but most ideas are being nipped in the bud because of lack of capital.
Not only does it discourage aspiring entrepreneursbut
alsoplaysahugeroleinholdingbackthegrowthofexistingfirms.Infact many other factors slowing down
growth arise due to lack of finance. For example, technological upgradation becomes a problem only
because firms lack enough capital to install new machines, skilled labour can be hired and retained by giving
them higher wages etc. Another problems that ails most of the enterprises is Marketing. It costs most of the
MSME owners initial four to five years of their entrepreneurial life to gain quality contacts and make their place
in the market. Some of them by then incur huge losses or keep floating on a zero balance sheet. Even later
they lag behind the larger enterprises- due to lack of knowledge and money- in packaging and
advertising their products or services.

In countries like Thailand and China stake holders say that Government regulations ease the operation of firms
whereas in India owners find them very stringent and complex. They agree that the cumbersome
documentation and filing for registration and licensing systems are difficult to take care of which
forces them to hire expensive Chartered Accountants and Lawyers. Also, the information regarding the
procedures is not available which renders them vulnerable to corrupt officials that tend to extort money
against providingclearances.

Infrastructure and Competition are the next big problems followed by Macroeconomic Instability,
managerial incompetence, Research and Development, corruption and lack of information. Lack of
information is the root cause of many other problems like Technological upgradation and R&D
sincegenerally,small MSMEowners arenothighly informed, they do notknowaboutthelatest and
mostsuitabletechnology and donothave enoughknowledge to drive the R&D department in their
companies. They do not have information about the
benefitsprovidedbythegovernment.Majorityoftheownersdonoteven know that there is a Ministry of
Micro, Small and Medium Enterprises. Thus, even though the government realises the importance of
MSMEs as growth engine and has manypolicies and schemes in place to cover almost every aspect of
problems faced by theenterprises since a long time and has been updating the policies continuously, it has
not led to any drastic change in the their condition because of poor implementation and lack of awareness
among people. Even if the people know about certain benefits they do not consider them worth the effort
and time of getting themselves registered as an MSME. Therefore, there needs to be more focus on
spreading awareness rather than adding morepolicies each year.
One of the solutions can be a MSME information/ advisory helpline. It is a viable solution because
in India almost every individual owns a mobile phone even in the most remote areas of the country. The
helpline can serve dual objectives:-
1) First, it caninformpeopleabout theprocedure ofgetting registeredas an MSME- the documents
and requirements. It can let them know about government schemes and policies in place to help
them out in establishing and operating the firmand the nearest bank that can provide them with
loans or the nearest entrepreneurial skilling centre etc.
2) Second, it can advise people in various fields in which the owner might lack information. For
example, the latest, most suitable technology in market to manufacture industry specific
goods, suitable marketing techniques etc. This can highly improve the competitiveness of the
domestic firms.
43
Another recommendation would be improvement in the infrastructure facilities provided by the government.
For example the industrial areas of Delhi are not developed and lack most basic provisions like roads, regular
energy/electricity supply etc. Also, there is a requirement of a single window registration procedure both for
getting registered as a Company and a MSME. This will reduce corruption and ease the registration process
which will allow people to do the documentation themselves without hiring a CA or lawyer.

There are other considerable recommendations made by EXIM bank and PM’s Task Force in their report on
MSMEs (EXIM Bank of India, 2012). Some of the recommendations made by EXIM Bank are as
follows:-
➢ Redefine ceiling limit of mediumenterprises
➢ Cluster Development Programs
➢ Need for Focussed Technology/ R&D Institutions for MSMEs
➢ Increase SMEs’ Access toFinance
• Export credit support to SMEsector
• Assessing non financial Parameters
• Developing Mezzanine Financing
• The Working Group, constituted under the chairmanship of Dr. K C Chakrabarty, then
Chairman and Managing Director,Punjab NationalBank has suggested:
1. An independent Rehabilitation Fund for rehabilitation of sick, micro,smalland
medium enterprises with a corpus of ` 1000 crores .
2. A Fund for contributing to the margin money required to be broughtby the
promoters of SME units taking up technological upgradation.
3. A Marketing Development Fund, which could provide financial assistance in
setting up distributionand marketinginfrastructure/ outlets.
4. A National Equity Fund Scheme to support the greenfield and
expansion projects.

➢ Promoting Entrepreneurship
➢ Increase the support to enhance export competitiveness of MSMEs
➢ Promoting synergy
➢ Exit policy forMSMEs
➢ Strengthening Sub-Contracting Relationships

It is also prominent from the recommendations of EXIM Bank and PM’S Task Force;and schemes
of MSME Ministry that thereis more focuson Microand Small Enterprises than the Medium Enterprises.
Reserve Bank of India advises banks to lend 60% of the MSE Advances to Micro Enterprises andensure10%
growthin credit tomicro enterprises.The inclinationtowards micro enterprises is also fair to an extent because
they are the ones with least knowledge and resources. But Small and Medium enterprises play a very
importantin development of the economy as is shown by the theory of The Missing Middle and the
positive correlation between theeconomic growthofa countryand thesizeofits SME
sector.Thereforethereneedsto be more focus on Small and Medium enterprises in government policies
and schemes.

Helping MSMEs is the only way of helping people help themselves.

44
 REFERENCES

Bryman,A.and Bell, E.(2007). Business Research Methods, 2nd ed.,Oxford: OxfordUniversity Press.

Centre for International Development. The Missing Middle . Published: Harvard Kennedy School,
Harvard University. Accessed 28 May 2014
http://www.hks.harvard.edu/centers/cid/programs/entrepreneurial -finance-lab- research-
initiative/the-missing-middle. internet.

Cheah, H-B. and Cheah, M. (2005). Small, diversified and sustainable: small enterprises in a
sustainableproduction system.In:Harvie, C.and Lee, B-C. (eds),(2005).
Sustaining growth and performance in East Asia, Cheltenham: Edward Elgar, pp. 28-71.

David de Ferranti & Anthony J. Ody, 2007. Beyond Microfinance: Getting Capital to Small and
Medium Enterprises to Fuel Faster Development. Accessed 16 June2013.
http://www.brookings.edu/research/papers/2007/03/development-de- ferranti. internet.

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