Nayak Committee on SSIs

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Considering the contribution of the SSI sector to the overall industrial

production, exports and employment and also recognising the need to give fillip to
this sector, a special package of measures was devised by RBI (during April 1993)
to ensure adequate and timely credit to this sector. While doing so the
recommendations of the PR Nayak committee were taken into account. Examination of
bank finance profile of working capital to the small scale sector by the committee
has revealed that this sector as a whole received a level of working capital which
was only 8.1% of the its output. The village industries and the smaller tiny
industries among them could get working capital finance to the extent of only about
2.7% of their output.

The salient features of the package are set out below:

Banks have been advised to give preference to village industries, tiny industries
and other small scale units in that order, while meeting the credit requirements of
small scale sector.

The banks should step up the credit flow to meet the legitimate requirements of the
SSI sector in full during the 8th 5-year plan. For this purpose the banks should
draw up annual credit budget for the SSI sector on a bottom-up basis. Each branch
of the banks should prepare an annual budget in respect of working capital
requirements of all SSIs before the commencement of the year. Such budgeting should
cover (a) functioning units which already have borrowing limits with the branch (b)
new units and units whose proposals are under appraisal and (c) sick units under
nursing and also sick units found viable after discussion/ feedback received from
the borrowing units. The budget should take into account, among other relevant
aspects, normal sale growth, price rise during the past year, anticipated spurt in
business etc.

It is desirable that a single financing agency meets both the requirement of the
working capital and term credit for small scale units. The Single Window Scheme of
SIDBI enables the same agency SFC or commercial bank, as the case may be, to
provide term loans and working capital to SSI units having a project outlay upto
Rs. 20 lac and working capital requirement upto Rs. 10 lac. The banks have been
advised to adopt this approach.

At present norms for inventory and receivable are applicable to all units enjoying
aggregate fund based working capital credit limits of Rs. 10 lac and above from the
banking system. Units enjoying limit of Rs. 10 lac and above but upto Rs. 50 lac
are subject to the 1st method of lending. Henceforth for the credit requirements of
village industries, tiny industries and other SSI units having aggregate fund-based
working capital credit limits upto Rs. 50 lac (subsequently raised to Rs. 1 crore
and Rs. 200 lac during April 1997, to Rs.400 lac during August 1998 and further to
Rs.500 lac during May 1999) from the banking system, the norms for inventory and
receivables and also the 1st method of lending will not apply. Instead such units
may be provided working capital limits computed on the basis of a minimum of 20% of
their projected annual turnover for new as well as existing units.

The banks may satisfy themselves about the reasonableness of the projected annual
turnover of the applicant on the basis of annual statements of account or any other
documents such as returns filed with sales-tax/revenue authorities and also ensure
that the estimated growth during the year is realistic. These SSI units would be
required to bring in 5% of their annual turnover as margin money. In cases where
output exceeds the projections or where the initial assessment of working capital
is found inadequate, suitable enhancement in the working capital limits should be
considered by the competent authority as and when this is deemed necessary. Drawals
against the limits should be allowed against the usual safeguards so as to ensure
that the same are used for the purpose intended. Banks will have to ensure regular
and timely submission of monthly statements of stocks, receivables etc. and also
periodical verification of such statements vis-a-vis physical stocks.

The banks can lend on the basis of 1st method of lending to those units (companies/
organisations) which are engaged in marketing/trading of products of SSI, village
and cottage and tiny sector units. This would be subject to the condition that 100%
dealing is with the above mentioned products. If there are dealings with other
products also, then the relaxation of application of 1st method of lending will be
only to that portion of the marketing business relating to products manufactured by
above category of units. It is also a condition that dues of such units are settled
by such borrowers within a maximum period of 30 days from date of supply and it is
to be certified by the statutory auditors of the borrowing units on a quarterly
basis.

Action on Nayak Committee recommendations by RBI:

Banks should take immediate steps to ensure full adherence in letter and spirit by
all their branches and controlling offices to the RBI guidelines. With a view to
ascertaining the position regarding implementation of these guidelines by the
branches, banks themselves should carry out special studies on an annual basis on
as large a sample or branches, as possible. The findings of the these studies
should be reported to RBI periodically indicating among others, the steps taken for
rectifying the deficiencies, if any, observed in the process.

The procedure and time frame laid down for disposal of loan application received
from SSI borrowers should be strictly enforced. Whenever application for fresh
limits/enhancement of existing limits was not considered favourably by the
sanctioning official or where the limits applied for are proposed to be curtailed,
the same should be referred to the next higher authority with all relevant
particulars, to ensure scrutiny by any independent authority and the latter should
confirm the decision of the sanctioning official or otherwise dispose of the same,
within a time bound manner. Another alternative which would also help eliminate
delays inherent in the consideration of the proposal by the successive tiers in the
hierarchy and facilitate timely decisions on credit proposals it would be for banks
to adopt a system of Committee approach, in which decisions are taken by the
competent authority after a structured discussions with the branch managers and
also the authorities at the intervening levels.

Problems faced by the SSI sector in regard to bank finance, to a large extent could
be solved if the branch level officials have the right aptitude, skills and
orientation. In understanding their role, the branch managers/officials at the
branches should be made aware of the importance of small scale sector from the
point of view of creation of additional employment opportunities, exports etc. A
healthy growth of the sector will facilitate smooth loan recovery in the SSI
borrowal accounts. Further, timely assistance will prevent these accounts from
becoming sticky. The aforesaid aspects should therefore, form part of the inputs in
the training imparted to the banks� staff. There should an interaction between the
banks� staff and the SSI borrowers as part of the training programmes. Banks may
also consider awarding trophies to branches for the outstanding performance in
financing SSI units as a mark of public recognition.

One of the complaints frequently voiced by the SSI units pertains to insistence by
some banks on compulsory deposit mobilisation as a quid pro quo for the sanction of
credit facilities to the units. While enlisting the cooperation of banks� customers
for deposit mobilisation cannot be faulted, insisting on deposit mobilisation of
stipulated amounts as a precondition to the sanction of credit or otherwise, has no
justification.

The 2nd All India Census of SSI (1988) carried out by the Development
Commissioner(SSI), Govt. of India, has revealed that there were 85 district in the
county each with more than 2000 registered SSI units with Industries Deptt. of the
State Govt. and another 110 districts each having between 1000 to 2000 registered
SSI units. RBI decided during July 1993 that while SFCs would act as the principal
financing agency for SSIs in 40 out of the 85 districts referred to above to take
care of both the term loan and working capital requirements of all new SSI units
which can be financed under Single Window Scheme (SWS) of SIDBI, the commercial
banks should act as the principal financing agency under the SWS in the remaining
45 districts, as well as in rest of the country. Banks should also consider
converting such of the branches as having a fairly large number of SSI borrowal
accounts, into specialised branches.

Important banking operational clarification on Nayak Committee Recommendations

The implementation of recommendations of Nayak Committee, relating particularly to

the assessment of working capital, gave rise to certain operational problems.
Reserve Bank has clarified these issues on the following lines:

The assessment of credit limits for all borrowers enjoying aggregate fund based
working capital limits of less than Rs. 1 crore from the banking system, is to be
done both as per the traditional method and on the turnover basis and the higher of
the two limits is to be fixed as the permissible bank finance. However, the neither
the inventory norms stipulated under Tandon Committee apply nor the PBF is subject
to ceiling as per the first method of lending. In cases where the limits determined
by the traditional method are less than 20% of the turnover, the assessment will
have to be re-examined. Nayak Committee has stated that the working capital below
the minimum level of 20% may be justified under special circumstances in which the
requirement is demonstratively lower than the minimum level as in the case of
ancillary units.

Where the working capital cycle is shorter than 3 months, the working capital
required would be less than 25% of the projected turnover. In such case it is not
required to still give PBF at 20% of the turnover.

If the liquid surplus available with the borrower is higher than 5% of the
turnover, as stipulated under the recommendations, the limits can be fixed at a
lower level than 20% of the turnover keeping in view that the genuine requirements
of the unit are met adequately. If a unit has been managing its working capital
efficiently, the limits can be set at a lower level.

The units having longer operating cycle for working capital than three months,
should be provided proper limits to operate at a viable level taking into account
the recommendation that 20% of the turnover is the minimum stipulation and not the
maximum.

In case of seasonal industries the distinction between the peak and non-peak level
of turnover has to be considered instead of annual turnover.

The creditors and other current liabilities are among the sources of funds required
for building up the current assets and will be treated in the same manner as in the
traditional method.

The borrower�s contribution (margin) will be 5% of the turnover in all cases except
where the working capital cycle is not taken at three months. The margin will
proportionately increase with the increase in the period of operating cycle. Care
is to be taken that the proportion of margin to bank finance should be maintained
in the ratio of 1:4 or even higher in case of availability of higher liquid
surplus. If the borrower is not able to bring in minimum contribution of 5%, as a
general rule, no dilution should be allowed except in special circumstance like
sick units or when permitted being desirable due to peculiar circumstances in the
sanction.

The sub-limits against the various components of stocks and receivables should be
fixed taking into account the existing norms of inventory and receivables as bench
mark and bankers should adopt flexible approach on case to case basis in a
realistic manner while assessing the credit needs. While allowing deviations, the
sanctioning authority must ensure that proper justification is available and given.

With regard to the aspects like allowing drawing power on the basis of stocks and
receivables� statements or calling data on actual turnover on a monthly basis or
calling of certificate from auditor�s every 6 months in respect of actual sales, it
has been clarified that calling for sales data on monthly basis and comparing with
the drawings in the account would be helpful particularly in the matter of arriving
at effective operational limits as also in the monitoring the borrowal accounts.
The drawing power in any case is to be allowed on the basis of monthly stock
statement.

In order to check the validity of projections for turnover, in case of existing

units sales data pertaining to actuals of last five years, estimates for the
current year and projections for the next year together with the true analysis of
the industry to which the borrowing unit belongs would also be useful. Other
relevant information i.e modernisation or expansion of the existing manufacturing
capacity, Govt. policy on taxation and other relevant internal and external factors
also need to be taken into account.

Seven Point Action plan

Govt. of India in budget for 1995-96 announced a 7 point action plan as under:
Time bound action for setting up specialised SSI branches in 85 identified
districts of high small industry density.
Adequate delegation of powers at the branch and regional level.
Banks to conduct sample surveys of their performing SSI accounts to find out
whether they are getting adequate credit.
Steps to be taken to see that as far as possible composite loans (covering both
term loans and working capital) are sanctioned to SSI entrepreneurs.
Regular meetings by banks at Zonal and Regional levels with SSI entrepreneurs.
Need to sensitize bank managers and reorient them regarding working of the SSI
sector.
Simplification of procedural formalities by banks for SSI entrepreneurs.