A Project On Sme Sector in India - Recent 9886649997
A Project On Sme Sector in India - Recent 9886649997
A Project On Sme Sector in India - Recent 9886649997
Banks are the most significant players in the Indian financial market.
They are the biggest purveyors of credit, and they also attract most of the
savings from the population. Dominated by public sector, the banking industry
has so far acted as an efficient partner in the growth and the development of the
country. Driven by the socialist ideologies and the welfare state concept, public
sector banks have long been the supporters of agriculture and other priority
sectors. They act as crucial channels of the government in its efforts to ensure
equitable economic development.
In India the banks are being segregated in different groups. Each group has their
own benefits and limitations in operating in India. Each has their own dedicated
target market. Few of them only work in rural sector while others in both rural
as well as urban and many even only catering in cities. The banks are of several
types. Types of banks in India are (a) Public sector banks (b) Private sector
banks (c) Cooperative banks (d) Regional Rural banks and (e) Foreign banks.
RESEARCH DESIGN
Lending norms of the banks has been changing from time to time. So it is
necessary to know the basis for the banks to provide credit to different sectors.
In India most of the business entities are in SME sector. They need adequate
funds to run and expand their businesses. For getting loans from banks, they
need to fulfil some eligibility criteria and norms. So the main purpose of this
study is to evaluate the availability of credit for Small and Medium scale
enterprises.
The SME sector is a very vast area and contributing nearly 7% of GDP. This
study is useful for the SME organisations as it contains RBI guidelines for
raising funds for SME sector, eligibility criteria and norms. It helps new
entrepreneurs to know whether they will get the credit from the banks or not
according to their business plan and how much they can get according to their
financial structure. The wide range of information regarding the lending norms
and conditions will help the business man to take decision about funding of long
term, working capital and other requirements of the organization
Research methodology:
The study is mainly relying up on Secondary Data. A sample of eight banks has
been taken for the study. It includes various websites and articles
Capital funds are broadly classified as Tier 1 and Tier 2 capital. Two types of
capital are measured: Tier one capital, which absorbs losses without a bank
being required to cease trading, and Tier two capital, which absorbs losses in
the event of winding-up and so provides a lesser degree of protection to
depositors.
Tier I capital (core capital) is the most reliable form of capital. The major
components of Tier I capital are paid up equity share capital and disclosed
reserves viz. statutory reserves, general reserves, capital reserves (other than
revaluation reserves) and any other type of instrument notified by the RBI as
and when for inclusion in Tier I capital. Examples of Tier 1 capital are common
stock, preferred stock that is irredeemable and non-cumulative, and retained
earnings.
Term loan.
Bridge Loan.
Term loans
Term loans are the long term debt provided by the banks to the industry. It’s
generally for financing large expansion, modernization of diversified projects.
Hence they are also referred to as project financing. Banks and specially created
financial institutions are the main sources of term loans in India. Commercial
banks advance term loans for a period of 3 to 5 years. Or it may be 6 to 10. Term
loans are always secured.
Working capital is used for funding current assets. Broadly these would consist
of raw materials, work in progress, finished goods, and advance payments to
suppliers, account receivables and cash. Once the build- up of current assets is
assessed one should look for sources of funding those assets, credit available on
supplies and so on. The difference (gap) needs to be met. A part of this gap
should come from the borrower's long term sources and the balance can be
financed by working capital lender.
Depending on the long term sources available for working capital and the
anticipated build-up of current assets the lender takes a view about the loan
proposal.
Bridge Loan
A bridge loan is interim financing for an individual or business until
permanent or the next stage of financing can be obtained. Money from the new
financing is generally used to "take out" (i.e. to pay back) the bridge loan, as
well as other capitalization needs.
METHOD OF LENDING
Like many other activities of the banks, method and quantum of short-term
finance that can be granted to a corporate was mandated by the Reserve Bank of
India till 1994. This control was exercised on the lines suggested by the
recommendations of a study group headed by Shri Prakash Tandon.
The study group headed by Shri Prakash Tandon, the then Chairman of Punjab
National Bank, was constituted by the RBI in July 1974 with eminent
personalities drawn from leading banks, financial institutions and a wide cross-
section of the Industry with a view to study the entire gamut of Bank's finance
for working capital and suggest ways for optimum utilization of Bank credit.
This was the first elaborate attempt by the central bank to organize the Bank
credit.
Banks can work out the working capital gap, i.e. total current assets
less current liabilities other than bank borrowings (called Maximum
Permissible Bank Finance or MPBF) and finance a maximum of 75 per
cent of the gap; the balance to come out of long-term funds, i.e., owned
funds and term borrowings. This approach was considered suitable only
for very small borrowers i.e. where the requirements of credit were less
than Rs.10 lacs
Under this method, it was thought that the borrower should provide
for a minimum of 25% of total current assets out of long-term funds i.e.,
owned funds plus term borrowings. A certain level of credit for purchases
and other current liabilities will be available to fund the buildup of
current assets and the bank will provide the balance (MPBF).
Consequently, total current liabilities inclusive of bank borrowings could
not exceed 75% of current assets. RBI stipulated that the working capital
needs of all borrowers enjoying fund based credit facilities of more than
Rs. 10 lacs should be appraised (calculated) under this method
Under this method, the borrower's contribution from long term funds
will be to the extent of the entire CORE CURRENT ASSETS, which has
been defined by the Study Group as representing the absolute minimum
level of raw materials, process stock, finished goods and stores which are
in the pipeline to ensure continuity of production and a minimum of 25%
of the balance current assets should be financed out of the long term
funds plus term borrowings.
i) Policy Announcements
On the basis of the Policy Package announced by the Union Finance Minister
on August 10, 2005, PSBs were advised to fix their own targets for funding
MSEs in order to achieve a minimum 20 per cent year on year growth in credit
to MSEs. The objective is to double the flow of credit to the sector from Rs.67,
600 crore in 2004-05 to Rs. 1, 35, 200 crore by 2009-10, i.e., within a period of
5 years.
1. Disposal of Applications
All loan applications for SSI up to a credit limit of Rs. 25,000/- should be
disposed of within 2 weeks and those up to Rs. 5 lakh within 4 weeks provided
the loan applications are complete in all respects and accompanied by a 'check
list'.
2 Collaterals
The limit for all SSI borrowal accounts for obtention of collateral security is Rs
5 lakh. Banks may on the basis of good track record and financial position of
the SSI units; increase the limit of dispensation of collateral requirement for
loans up to Rs.25 lakh (with the approval of the appropriate authority).
3. Composite loan
A composite loan limit of Rs.1crore can be sanctioned by banks to enable the
SSI entrepreneurs to avail of their working capital and term loan requirement
through Single Window.
5. Delayed Payment
Under the Amendment Act, 1998 of Interest on Delayed Payment to Small
Scale and Ancillary Industrial Undertakings, penal provisions have been
incorporated to take care of delayed payments to SSI units which inter-alia
stipulates
a) Agreement between seller and buyer shall not exceed more than 120 days
b) Payment of interest by the buyers at the rate of one and a half times the
prime lending rate (PLR) of SBI for any delay beyond the agreed period not
exceeding 120 days.
Further, banks have been advised to fix sub-limits within the overall working
capital limits to the large borrowers specifically for meeting the payment
obligation in respect of purchases from SSI.
After the enactment of the Micro, Small and Medium Enterprises Development
(MSMED), Act 2006, the existing provisions of the Interest on Delayed
Payment Act, 1998 to Small Scale and Ancillary Industrial Undertakings, have
been strengthened as under:
(i)The buyer to make payment on or before the date agreed on between him and
the supplier in writing or, in case of no agreement before the appointed day, the
agreement between seller and buyer shall not exceed more than 45 days.
(ii)If the buyer fails to make payment of the amount to the supplier, he shall be
liable to pay compound interest with monthly rests to the supplier on the
amount from the appointed day or, on the date agreed on, at three times of the
Bank Rate notified by Reserve Bank.
(iii)For any goods supplied or services rendered by the supplier, the buyer shall
be liable to pay the interest as advised at (ii) above.
(v) In case of dispute with regard to any amount due, a reference shall be
made to the Micro and Small Enterprises Facilitation Council,
constituted by the respective State Government.
(iii) Working Capital Term Loan Interest to be charged 1.5% below the
prevailing fixed / prime lending rate, wherever applicable
(iv)Term Loan Concessions in the interest to be given not more than 2 % (not
more than 3 % in the case of tiny / decentralised sector units) below the
document rate.
(v) Contingency Loan Assistance: The Concessional rate allowed for Working
Capital Assistance
For all corporate SMEs, which have funded and non-funded outstanding
of Rs.10crore and above, Department of Banking Operations & Development
has issued separate guidelines.
i) Give preference to village industries, tiny industries and other small scale
units in that order, while meeting the credit requirements of the small scale
sector;
ii) Grant working capital credit limits to SSI units computed on the basis of
minimum 20% of their estimated annual turnover whose credit limit in
individual cases is up to Rs.2 crore [ since raised to Rs.5 crore ];
iii) Prepare annual credit budget on the `bottom-up’ basis to ensure that the
legitimate requirements of SSI sector are met in full;
iv) Extend ‘Single Window Scheme’ of SIDBI to all districts to meet the
financial requirements (both working capital and term loan) of SSIs;
v) Ensure that there should not be any delay in sanctioning and disbursal of
credit. In case of rejection/curtailment of credit limit of the loan proposal, a
reference to higher authorities should be made;
vi) Not to insist on compulsory deposit as a `quid pro-quo’ for sanctioning the
credit;
vii) Open specialised SSI bank branches or convert those branches which have a
fairly large number of SSI borrowal accounts, into specialised SSI branches;
viii) Identify sick SSI units and take urgent action to put them on nursing
programmes;
v) Enhancement in the limit for composite loans to Rs. 5 lakh. (since enhanced
to Rs.1 crore);
vi) Strengthening the recovery mechanism;
vi) Banks to pay more attention to the backward states;
viii) Special programmes for training branch managers for appraising small
projects;
ix) Banks to make customers grievance machinery more transparent and
simplify the procedures for handling complaints and monitoring thereof.
9.3 Report of the Working Group on Flow of Credit to SSI Sector -Ganguly
Committee
As per the announcement made by the Governor, Reserve Bank of India, in the
Mid-Term Review of the Monetary and Credit Policy 2003-2004, a “Working
Group on Flow of Credit to SSI sector” was constituted under the Chairmanship
of Dr.A.S.Ganguly. The Committee made 31 recommendations covering wide
range of areas pertaining to financing of SSI sector. The recommendations
pertaining to RBI and banks have been examined and have accepted 8
recommendations so far and commended to banks for implementation which are
as under:
i) Adoption of cluster based approach for financing SME sector
iii) Sanctioning of higher working capital limits by banks operating in the North
East region to SSIs, based on their commercial judgement due to the peculiar
situation of hilly terrain and frequent floods causing hindrance in the
transportation system
iv) Exploring new instruments by banks for promoting rural industry and to
improve the flow of credit to rural artisans, rural industries and rural
entrepreneurs
(iii) The group has proposed to empower the boards of banks to formulate
policies relating to restructuring of accounts of SME units subject to certain
guidelines.
MARGIN NORMS
I. No margin is required for loans up to Rs.50000/-
II. Minimum margin requirements for loans/credit facilities above Rs.50000/-
are as under:
A. TERM LOANS
1. For loans above Rs.50000/- and up to Rs.5 Lac -10%
2. For loans above Rs.5 Lac -15%
3. In case of Term Loans for acquiring second hand machineries, higher margin
may be stipulated on case-to-case basis.
D. For loans under Government sponsored schemes and Bank’s special credit
schemes; margin will be obtained as stipulated in the scheme even if it is
different from the levels indicated above.
SECURITY NORMS
a. No collateral security or third party guarantee is required for loans to micro
and small enterprises upto Rs.5 lacs. Such loans will invariably be covered
under Credit Guarantee Scheme of CGTMSE
b. Loans above Rs.5 lacs and upto Rs.100 lacs to micro and small enterprises
will also be sanctioned without collateral security or third party guarantee
subject to following conditions:
i. The unit should be eligible to be covered under Credit Guarantee
Scheme of CGTMSE
ii. The bank is fully satisfied with regard to viability of project and track
record of the promoter/units.
c. In all other cases of credit facilities to micro and small enterprises (other than
a and b) suitable collateral security and or third party guarantee will be obtained
based on risk perception and judgment of sanctioning authority.
CONCLUDING REMARKS
The loan policy for MSE sector will operate within the overall loan policy
of the Bank and subject to guidelines/instructions of Regulatory
Authorities/RBI/Government of India. Therefore, the policy will be amended
with the approval of the Board whenever revised guidelines are received from
the Regulatory Authorities.
This policy will be in force until a review is made by the Board of
Directors for accommodating the emerging requirements.
Application
The banks will
a. Make available, free of cost, simple standardized, easy to understand,
application form for loans.
c. At the time of making available application form, the banks will also provide
information about the interest rates applicable, and the fees/charges, if any,
payable for processing, pre-payment options and charges, if any, and any other
matter which affects customer’s interest, so that a meaningful comparison with
those of other banks can be made.
e. Collect all particulars required for processing the application for credit
facility at the time of application. In case they need any additional information,
they will contact customers within seven working days from receipt of
application.
g. Not charge any processing fee for loans up to Rs.5 lakh if the loan is not
sanctioned.
Credit Assessment
a. The banks will
i) Verify those details mentioned by customers in their application by contacting
them through the bank’s staff / agencies appointed by the banks for this purpose
at the customer’s business address/ residence.
iii) Their business’s cash flow, profitability and existing financial commitments
supplemented, if necessary, by account statements.
iv) Consider customer’s request for suitable enhancement in the working capital
limits in cases where the output exceeds the projections or where the initial
assessment of working capital is found inadequate and they have provided
necessary evidence.
d. Guarantees
If customers want banks to accept a guarantee or other security from someone
else for their liabilities, the banks will ask customers for their permission to give
confidential information about their finances to them or to their legal adviser.
They will also
i) Encourage them to take independent legal advice to make sure that they
understand their commitment and the possible consequences of their decision.
ii) Tell them that by giving the guarantee or other security they may become
liable as well as customers.
Sanction/Rejection
The banks will
a. Not insist on compulsory deposit as ‘quid pro-quo’ for sanctioning credit
facility/ies.
c. Put down in writing terms and conditions and other caveats governing credit
facilities agreed to and duly certify the same and give customers a copy thereof.
d. Supply authenticated copies of all the loan documents executed with a copy
each of all enclosures quoted in the loan document and the list thereof.
e. Convey in writing the reasons for not acceding to customer’s request for a
loan or credit facility.
f. Follow a rating system, the parameters of which will be shared with the
customers.
h. Ensure disbursal of the loan sanctioned within two working days from the
date of compliance with all terms and conditions governing such sanction.
State Bank of India has been playing a vital role in the development of
small scale industries since 1956.The Bank has financed over 8 lakhs SSI units
in the country. It has 55 specialized SSI branches, 99 branches in industrial
estates and more than 400 branches with SIB divisions. The bank is providing
loan facility to SME sector under various schemes. They are:
Margin:
Demand Loan: 25% (minimum) of the value of the warehouse receipt,
valued at the market value OR 20% (minimum) of the minimum support price
declared by State/Central Government, whichever is higher
Others:
a) The Warehouse receipt should be duly marked lien in favor of the bank
b) The Branch should verify the authenticity of the warehouse receipt and get
its lien noted with the warehouse before disbursal of the demand loan/ CC
facility.
c) The margin shall be topped up on a fortnightly basis. However, it should
be topped up immediately in case the price of commodity moves by more than
10%, in opposite direction, since last top up.
d) CC Limits and operating account will be different for different
commodities handled by the same trader/customer. Interchangeability in limits
can be offered, if required.
The advance can be availed by way of Loan or Cash Credit limit. It can
also be availed for Non Fund Based requirements (for issuance of Bank
guarantees or LCs). Cash Credit limit or non-fund based limit is renewable
every 12 months. Loan can be repaid in monthly or quarterly, even half yearly
instalments - as may be suitable to the borrower – in a period up to 5 years.
The tenor of the loan is normally is 3 years, and the pricing is fine-tuned to
suit the risk profile of the borrower. The repayment is structured in monthly
or quarterly installments, according to the cash generation cycle.
SBI OPEN TERM LOAN - the easy and hassle-free way to get finance
The loan can be utilized for any genuine commercial purposes in line
with the regular business activity of the customer. These would include term
loans for:
• Ideally SME units should apply for Open Term Loans along with
their renewal requests for working capital facilities, so that the
appraisal can be done simultaneously and line of credit made available
for an entire year.
ALLAHABAD BANK
Banks’ Policy
Processing of Applications
i. Loan Application Revised Simplified application form will be used for
Micro and Small Enterprise. The existing Common loan Application form
applicable to all loans irrespective of limit will be applicable for Medium
Enterprises sector.
c. The reason for rejection will be communicated to the borrower in line with
stipulation mentioned in the Fair Practice Lenders Code.
the photographs and also bear the cost of photographs of borrowers falling in
the category of Weaker Sections.
Composite Loan
Types of Loans
The Bank may provide all types of funded and non-funded facilities to the
borrower under this sector viz, Term Loan, Cash Credit, Letter of Credit, Bank
guarantee, etc.
Margin
• Up to Rs.25000.00 Nil
i. While considering proposals under MSME sector, the book debt up to six
months may be treated as current assets, for the purpose of computation of
permissible bank finance and drawing power calculation.
ii. The margin on the book debts may also be considered at 20% to 25% on
merit of the case.
iii. In regard to age of the book debts, a certificate preferably from Auditors
/Chartered Accountant to be obtained.
iv. All book debts more than 180days are to be treated as Non-current asset.
Security
In case a loan is not covered under CGTMSE scheme for valid reasons,
the Security coverage Ratio for such loan above Rs.10.00 Lac will be based on
the Risk Rating status of the borrower.
AB-1 1.25:1
AB-2 1.5:1
AB-3 1.75:1
3. Collateral security shall not be insisted upon in those cases where the RBI
directives specifically advised the banks not to insist on obtaining Collateral
security /third party guarantee, in certain priority sector credit or Government
sponsored schemes.
Risk Rating
i. The RBI has directed to Banks to take steps to rationalize the cost of loans to
SME sector by adopting a transparent rating system.
ii. The rating of account may be done under In-House Module or Rating from
outside rating Agencies.
Sl.
Credit Exposure Rating Module
No.
1 Upto Rs.10.00Lac As per CRG-01
Above Rs.10.00 Lac up to Rs.1.00 As per Credit Risk Management
2
Cr Policy of the Bank.
1.Credit Rating Grading-7( CRG-
7A)-Existing Unit
Above Rs.1.00 Cr to less than
3
Rs.5.00 Cr 2.Credit Rating Grading-7(CRG-
7B)- New Unit
Risk Assessment Module
(RAM)-CRISIL
where if the RAM module is not
operationalized, the following
modules will be applicable:-
4 Rs.5.00 Cr & above
Credit Rating Grading-7
(CRG-7A): Existing unit.
i. Our Bank has entered into MOU with CRISIL, ONICRA and SMERA, for
getting the SME borrowers rated by them.
ii. The National Small and Industries Corporation (NSIC) has been appointed as
nodal agency which provides subsidy to the units obtaining Credit rating from
any of the empanelled agencies with them. NSIC reimburse 75% of the rating
fee of the empanelled agencies to the Micro and Small Enterprises
{manufacturing sector i.e. earlier SSI units}.
iii. Validation of the rating will be done as per extant guidelines of the Credit
Risk Management
ii) For assessment of the working capital requirement for borrowers falling
within the band of above Rs.5.00crores and below Rs.10.00Crore
(Manufacturing sector) and above Rs.2.00 Crore and below Rs.10.00 Crore
(service sector) the traditional method of computing MPBF as per second
method of lending will continue. If any of the borrowers falling in this band
intends to shift to cash budget system, the same may be accepted.
iii) For borrowers having working capital limit of Rs.10.00 crore and above,
Cash Budget system will be applicable. However, if a borrower is desirous to
continue with the existing MPBF system the Bank may accept the request. If
any of the borrowers falling in this band intends to shift to cash budget system,
the same may be accepted.
CORPORATION BANK
* from the date of receipt of duly completed loan application and check list
3. No collateral security for advances up to Rs. 5 lacs and for Advances over Rs.
5 lac up to Rs. 25 lakh based on good track record and financial position.
Corporation Bank reduces its Bench Mark Prime Lending Rate (BPLR) by 50
basis points to 12.00% from 12.50% from April 1, 2009
INDIAN BANK
Interest Rates Please see the Interest Rate link on home page
* BPLR = 12.00 %
SYNDICATE BANK
The Syndicate bank is providing various types of loans for SME units. They are
as follows
Eligibility:
• Credit requirement of the applicant party/unit shall not be more than Rs.
50 lacs.
• The annual sales/revenue turnover of the applicant party / unit shall not
be more than Rs. 250 lacs
SyndVyapar
Purpose: To meet the credit needs of traders
Rate of interest: Upto Rs.2 lakhs: PLR; Above 2 lakhs: Depending on credit
rating of the borrower
Security: Mortgage of property / Pledge of NSC / KVP / LIC / RBI Relief bond
and hypothecation of stock in trade
Upto Rs.50000/- PLR -3.50 PLR - 2.00 PLR -3.00 PLR – 1.50
Above Rs.50000/- up to PLR -2.00 PLR -2.00 PLR -1.50 PLR – 1.50
Rs.2.00 lakhs
B) SMALL
ENTERPRISE Spread to be added to PLR
S
Credit Rating of SYN SYN SYN SYN SYND SYND 7 &
Borrower SYND D2 D3 D4 D 6
1 5 below NPA
Above Rs.2 -0.50 -0.25 0.00 0.50 1.00 1.50 1.75 2.00
lacs
assets
Repayment in case of Ranging from 24 months to 60 months
Demand/Term Loan
[in case of Demand Loan/ Term Loan, actual
PBDIT
should not be less than 1.10 times of proposed
annual
EMI.]
Application and
collection of On monthly basis
Interest
Renewal OLCC accounts are renewable every year
Applicability of the
Only for New Clients
Scheme
All proposals should be submitted to Central
Office
Authority of Sanction and no discretionary power is allowed to the
branches for sanction of this facility.
KARNATAKA BANK
(of which at least 50% must come upfront and All other sectors - 20%
balance within 6 months)
It shall also be ensured that the ceiling of 30% of term loans for loans
with residual maturity of more than 7 years prescribed in the Loan Policy is
complied with.
The relief and concessions may be decided as per the cash flow
anticipated in the techno-economic viability report.
PROCEDURE
b) Copies of the audited balance sheet and profit and loss account of the
borrower for the last three years.
d) For projects under implementation, details of sources and uses of funds since
inception.
f) Projected Balance sheet and Profit and Loss account covering the period
of repayment proposed for the restructured debt.
LEGAL BASIS:
YES BANK
Appraisal Process
• The loan appraisal consists of evaluating customer profile, business viability,
past credit history of the borrower and the end use of the fund.
• The borrower is visited by the officers of the bank at residence /office / factory
premise. The officer understands the management, business requirement,
future potential of the business and exact credit requirement of the borrower.
• Detailed ratio/balance sheet analysis to also carry out to grade the financial
health of the borrower entity.
All loan applications for Micro and Small Enterprise up to Rs. 2 lakhs
would be processed within 2 weeks and up to Rs. 5 lakhs would be processed
within 4 weeks provided the loan applications are complete in all respects
and accompanied by a 'check list'. YES Bank has dedicated specific bank
officers who are part of the Small Business Banking/Business Banking loan
sanction and disbursement process team dedicated to assist the borrower in
filling the application form as also completing the loan sanction and
disbursement process.
Pricing
• Interest rate and other charges would be as per the sanction terms as detailed
in the loan agreement and copy of the same is also given to the borrower at the
time of executing the agreement
• Loan can be fixed/ floating. Floating rate will be linked to the BPLR of the
bank
• Increase in the Fees/Charges would be notified through our website/Account
statements/email/sms/notice at the branches 30 days prior to the revised
charges becoming effective.
• The PLR would be available on the website for reference and would be
updated within seven days of change.
• The interest rates on loans up to Rs 2 lacs will not exceed BPLR. The penal
interest will be charged for all loans as per the Bank guidelines for the
relevant product portfolio and not be decided on a case to case basis. Also
there will not be any prepayment charge of working capital loans upto 5 lacs.
Security
The facilities offered by banks would be secured by primary security and
collateral security, wherever applicable. The evaluation and acceptability would
be as per the credit policy decided by the Bank from time to time. All assets
given as security should be insured to the fullest. Collateral Free loans for limits
less than Rs. 5 lacks: The bank has in place retail lending programmes, which
cater to small ticket advances on collateral free basis upto Rs. 5 lacs
Post disbursement
a. Change in interest rates: The bank would intimate the customer regarding
interest rate change through any or all of the following modes:
i. Written letter
ii. Notice at the branch
iii. Notification on Website
ii. Release all securities on receiving repayment of loan immediately and in any
case not later than 25 working days subject to any legitimate right or lien for
any other claim we may have against you.
iii. Grant the customer increase in the drawing power within 96 hours of
lodgement of stock and book debt statement.
iv. Bank would provide authenticated copies of all loan documents with a copy
of enclosures, as quoted in the loan document.
Term Loan:
i. In case of term loan, Debt Equity Ratio (DER) should not normally be above
3:1.However, in case of capital intensive industries, the same may be considered
5.00:1.
iii. Apart from calculating Debt Service Coverage Ratio (DSCR), it is suggested
to observe the expected cash surplus i.e. the cushion available as detailed in the
format. The projected closing cash balance at the end of each year must be at
least 50% of the proposed repayment of the instalment of the term liabilities for
the respective year.
vi. The finance for purchase of Gensets will also be considered on merit of the
case.
Other benchmark financial ratios like Current Ratios, Tenure etc. will be in line
with the Bank’s lending policy.
The table compares the different criteria of different banks. Each bank
will follow different norms for lending. The SMEs have to choose
among the alternatives. Normally they will be having multiple
accounts
The above graph shows the steady increase in the flow of bank credit for small,
medium and large scale industries.
II 0.75 CA – CL
But the unit is working with average stocks-in-process of 2.68 weeks and will
be permitted to hold the inventory level upto that value only.
2.50 months finished goods and receivables = Rs. 2.5 x 5315.82 /12
The excess level of inventory and receivables projected by the unit is thus
Rs. 2133.79 - Rs. 1921.58 = Rs. 212.21 lacs. As per the broad indicators the unit
should be allowed to hold inventory and receivables upto Rs. 1921.58 lacs only
and the unit must make efforts to reduce its holding.
Let us now consider the following example to illustrate the application of all the
above three methods:
In this example
Method III
Total current assets 700
Less: Core current assets(assumed 160
figure) from long term sources
Balance current assets 540
Less: 25% of above for long term sources 135
405
Less: other current liabilities 280
Maximum Permissible Bank Borrowings 125
(MPBF)
Excess borrowings 275
Interpretation:
Above tables shows how Banks assess the risk, profitability and
efficiency. In order to award loan to the business entity banks has to look in to
the risk, return and efficiency by using the past and present information
available about the company. Bank will consider the following factors to assess
the risk.
Industry Risk
Here the banks will look in to the all risk factors that related to a industry.
Include the production stage risk and post production risk. Production stage risk
assessed by considering the factors like raw materials, technology,
infrastructure etc and post production risk involves demand, competition and
marketing challenges.
Management Risk.
Operational risk.
Collateral security
Financial
SUGGESTIONS
In spite of all the measures, the availability of adequate and timely credit
to SMEs continues to be a major concern. The proportion of credit to SMEs
among the total bank credit has shown a declining trend. The share of net bank
lending to SSI sector has declined from 17.5 % in 1998 to 8.5 % in 2006.
According to the third All India Census of Small Scale Industries, there are
around 11.85 million small scale units in India, out of which, only 1.63 million
are registered and rest are unregistered. Only 14.26 % of the units in
registered sector and 3.09 % in unregistered sector have access to institutional
finance. The coverage of institutional finance, thus, is far from satisfactory.
It is clear from the above that, despite the best intentions of the
Government to expand the credit to SMEs, the results are far from satisfactory.
Following points could be considered:
business and technology up gradation that needs to be dealt with separately. The
schemes like credit ratings are most relevant to this sector.
Fifth, the SME associations and NGOs should come forward and accept
more responsibilities. Their role should not be limited to only lobbying for their
members. The associations and NGOs can play a crucial role in micro
financing.
Sixth, a few changes and improvements in the policies could help infuse
credit to this sector. Equity participation ceiling of large companies in small
scale sector should be raised from 24 % to 49 %. It would certainly
motivate large enterprises to invest in small enterprises and thereby expansion
of these units.
Seventh, over the period, it has been observed that small units that are
linked to large corporates as suppliers, service providers, etc. are usually
successful. It is relatively easier for the banks and financial institutions to
finance various requirements including working capital, technology up
gradation, etc. of these units. Promotions of clusters linked to large units, thus,
could help expansion of credits to small units.
Finally, it has been observed that one of the major reasons for delays
in sanction and disbursal of loans is the lengthy documentation and legal
procedures involved in the process. It will greatly help SMEs if facilitation
services are provided by various promotional agencies like SISIs, DICs,
SIDCs, industry associations, banks, etc.