2011

Manasvi Mohan
1PI10MBA79

[SIDBI-A SUCCESSFUL FINANCIAL

INSTITUTION IN SME FINANCING]
[Type the abstract of the document here. The abstract is typically a short summary of the contents of the document. Type the abstract of the document here. The abstract is typically a short summary of the contents of the document.]

INTRODUCTION
Small and medium enterprises (SMEs) play a catalytic role in the development of any country. They are the engines of growth in developing and transition economies. In India they account for a significant proportion in manufacturing, exports and employment, and are major contributors to GDP. The Importance of SMEs in any economy cannot be overlooked as they form a major chunk in the economic activity of nations. They play a key role in industrialization of a developing country like India. India has been witnessing the transformation from a centrally planned and highly directed economy to a market friendly economy. But the growth oriented structural changes engineered through the economic reform agenda are yet to cover the SMEs. Although SMEs are today recognized as a priority in almost all countries, It is estimated that half to two -third of businesses, all over the world are SMEs .They comprise a widely divergent spectrum of establishments, engaged in economic activities ranging from engaged in economic from micro and rural enterprise to modern industrial units using sophisticated technologies.. Due to their contribution to their respective national economies, the importance and emphasis on SMEs has been accentuated in the minds of policy makers, planners and the industry in the recent past. This is a consequence of the recognition that the shift from agrarian to industrial and to post industrial knowledge based societies shall not be through the large industrial houses but through individual and small initiatives by visionaries the SMEs. There are some leading financial institutions such as Small Industrial Bank of India (SIDBI) has been started with the aim of contributing to industries that have the ability to grow and contribute towards GDP, till now SIDBI has satisfactorily contributed in credit disbursement to small and medium enterprises in India. In fact, it owns the major chunk of pie in the graph of overall SME financing in India.

OBJECTIVES:
To study the assistance provided by SIDBI for the growth small and medium enterprises (SMEs) in India. To study the Sanctions and Disbursements with respect to Refinance Assistance, Bills Financing, Project Financing of SIDBI.

METHODOLOGY:
Based on the objectives of this topic, information was gathered about various financing activities and other services rendered by SIDBI. This study is mainly based on secondary data. A study of assistance provided by SIDBI to the SMEs was done with the help of various articles published in journals and various news papers. Required data was collected regarding financing activities of SIDBI over the past years and a comparative analysis was done. The data has been depicted with the help of charts.

THE GROWTH OF SMES IN INDIA

SMEs may be defined in different ways by different countries .Most countries have adopted the benchmarks of employment. Some define them in terms of assets, a few in terms of sales and yet others, in terms of shareholders fund. In India, the term SSI (Small Scale Industries) is used far more often than SME and is based upon investment in assets. Although definition differ across countries, they have one thing in common; the vast majority of SMEs are relatively small and over 95% of SMEs in Asia employs less than 100 people. Such enterprises exist in the form of factories, workshops, trading and service organizations. Ownership patterns range from proprietorship and partnership to companies and cooperatives.

CHARACTERISTICS OF SMES
Born out of individual initiatives &skills Greater operational flexibility Low cost of production High propensity to adapt technology High capacity to innovate & export High employment orientation Utilization of locally available human & material resources

The SMEs sector plays a pivotal role in the overall industrial economy of India. It is estimated that in terms of value, the sector accounts for about 39% of the manufacturing output and around 33% of the total export of the country. Further, in recent years the SMEs sector has consistently registered higher growth rate compared to the overall industrial sector. The major advantage of the sector is its employment potential at low capital cost. As per available statistics, this sector employs an estimated 31 million persons spread over 12.8 million enterprises and the labour intensity in the SMEs sector is estimated to be almost 4 times higher than the large enterprises. SMEs are expected to contribute 22 per cent to India's Gross Domestic Product (GDP) by 2012, up from about 17 per cent at present, according to a survey by ASSOCHAM. The survey states that the projected increase in this contribution of SMEs to the countrys GDP would be on account of increased production due to technological up gradation. A survey said that SMEs' contribution to GDP is projected to go up by a minimum of 5 per cent and touch 22 per cent by 2012, since over 60 per cent of them are aggressively upgrading themselves technologically. It was also pointed out in the study that liberalisation and deregulation in the industry would also contribute to the SME sector's growth, and that the sector could go on to register a 40 per cent growth in the next five years, from 35 per cent in the last two years.

SIDBI
SIDBI began as a refinancing agency to banks and state level financial institutions for their credit to small industries; it has expanded its activities, including direct credit to the SME through its several branches in all major industrial clusters in India. It has been playing the development role in several ways. It is an apex body and nodal agency for formulating, coordination and monitoring the policies and programme for promotion and development of small scale industries. Small Industries Development Bank of India is an independent financial institution aimed to aid the growth and development of micro, small and medium-scale enterprises in India. Set up on April 2, 1990 through an act of parliament, it was incorporated initially as a wholly owned subsidiary of Industrial Development Bank of India. Current shareholding is widely spread among various state-owned banks, insurance companies and financial institutions. Beginning as a refinancing agency to banks and state level financial institutions for their credit to small industries, it has expanded its activities, including direct credit to the SME through 100 branches in all major industrial clusters in India. Besides, it has been playing the development role in several ways such as support to micro-finance institutions for capacity building and on lending. Recently it has opened seven branches christened as Micro Finance branches, aimed especially at dispensing loans up to Rs. 5.00 lakh. SIDBI was established with the purpose to boost up small scale industries. small scale industries were getting destroyed in lack of proper economic resources whereas this was best option for the livelihood of middle class people living in small cities and towns. SIDBI provided these economic resources to small scale industries. Today, SIDBI is helping not only tiny, small and middle industry rather this bank is also progressing by leaps and bounds. If we consider the statistics, then we can come to know that there was a significant growth of 22% in the financial year 2009-2010 and it was Rs. 2,540 crore after provisions. As a result of this, its profit also increased by 41% to Rs. 421 crore. Also, earning per share increased to Rs. 9.36. Bank has declared higher equity dividend of 25% for the financial year 2009-2010. SIDBI retained its position in the top 30 Development Banks of the World in the latest ranking of The Banker, London. As per the May 2001 issue of The Banker, London, SIDBI was ranked 25th both in terms of Capital and assets. SIDBI provides financial assistance to units in the small-scale sector. SIDBI provides refinance against term loans granted by banks to SSIs, equity assistance, bills financing, project financing and resource support to institutions that are engaged in the development of SSIs. It also provides assistance to wide-range of industrial sectors including transport, health care, hotel and tourism and infrastructure. It also provides funds to the professional and selfemployed persons setting up small-sized professional ventures.

THE MAIN FUNCTIONS OF SIDBI ARE:

*Source: SIDBI

SIDBI has 6 product divisions, namely direct financing, bills financing, Refinancing, international finance, micro finance and fixed deposit. SIDBIs objective was to help the masses and the industry that is the base of all development, i.e. small scale industries. Thus came up the idea of financing these industries directly and on selective basis. So it was decided to introduce direct assistance schemes to supplement the other available channels of credit flow to the small industries sector. Since then, SIDBI has evolved itself into a supplier of a range of products and services to the Small & Medium Enterprises [SME] sector. Considering the level of competition in banking business due to globalized environment, SIDBI has now started spreading its wings either by way of diversifying its product portfolio or entering into the strategic alliance with other leading private sector banks, public sector banks and Non Banking Financial Institutions in order to achieve market development of its existing portfolio of services. It aims to provide all the services a Small and Medium Enterprise needs under one roof. Secondly, with the adoption of cluster development as the key strategy to develop manufacturing sectors competitiveness, SIDBI has an intention to adopt the cluster financing method to assist SMEs.

OPERATIONS Any banks operational excellence is measured by aggregate sanctions, subsequent disbursement of the sanctioned amount, the amount of revenue generated from the difference in spread over the loan taken and advances granted, higher amount of fee based income and the last and the most important timely recovery of dues. In addition, the banks assistance towards promotional and developmental efforts in the form of loans and advances for project financing as well as its overall utilization of available resources lying with the bank under study is another significant indicator of operational effectiveness. OVERALL SANCTIONS AND DISBURSEMENTS OF SIDBI SIDBI has booked the highest ever loan sanctions and disbursements by the end of financial year 2009-10. It recorded loan disbursals of Rs. 31,918 crore and loan sanctions at Rs. 35,521 crore.

SANCTIONS (in crore)

Figure 1
40000 35521 35000 30000 25000 20000 16164 15000 11102 10000 5000 0 1991
*Source : SIDBI Annual Report

29188

2410

2007

2008

2009

2010

DISBURSEMENT (in crore)

Figure 2
35000 30000 25000 20000 15087 15000 10225 10000 5000 0 1991 2007 2008 2009 2010 28298

31918

1839

*Source: SIDBI Annual Report

From figure 1 and 2 we can observe that there has been in the steady increase in the total sanctions and disbursements of sidbi over the years. This is the result of the extra efforts in policy making and aggressive help provided by the bank for the overall welfare of the small scale industries.

INCOME & PROFIT (in crore)

Figure 3
3000 2540 2500 2082 2000 1638 1500 1000 500 0 1991 2007 Income 2008 Profit 2009 2010 425 36 298 299 421 1187

198

*Source : SIDBI Annual Report

Figure3 shows the income and profit of SIDBI over the years. Profits for SIDBI over the years have been fluctuating as seen in the above, but we can observe that in the year 2010 the profits have doubled.

REFINANCE ACTIVITY SIDBI has remained the premier refinancing institute for the promotion and development of small and medium enterprises. The mechanism used by SIDBI is it lends to Primary Lending Institutions (PLIs) and they deliver the credit facility to existing entrepreneurs and first generation entrepreneurs. This figure reveals the total sanctions and disbursement under refinancing assistance The main objective of introducing Refinance scheme was to facilitate the flow of funds to industrial units in the micro and small enterprises sector through eligible PLIs, comprising scheduled banks, State Financial Corporations (SFCs) State Industrial Development Corporations(SIDCs), etc., SIDBI grants refinance against term loans granted by the eligible PLIs to eligible industrial concerns for setting up industrial projects in the micro and small enterprise sector and for their expansion / modernisation / diversification

REFINANCE ASSISTANCE (IN CRORE) Figure 4

19400 19200 19000 19500 18800 18600 18400 18200 18000 sanction disbursement 2008-2009 18534. 24 19000 18500 18000 17500 Sanction 2009-10 Disbursement 18584.8 2 19260. 98 20500 20000 19926.0 9

*Source : SIDBI Annual Report

Figure 4 shows the refinancing details of SIDBI for the year 2008-09 and 2009-10. It shows the net growth of increase in 3.45% in Sanctions and not so impressively increases in disbursement of 0.25%. This is the result of the extra efforts in policy making and aggressive help provided by the bank for the overall welfare of the small scale industries.

MICRO FINANCE SIDBI is the apex lending body for microfinance institutions in India. Through its Foundation for Micro Credit (SFMC), SIDBI channelizes funds to the sector and provides a wide range of financial and non-financial services such as loan funds, grant support, equity and institution building support to the retailing microfinance institutions. Small Industries Development Bank of India has now opened a seven specialised microfinance branches in various centres across the country at Lucknow, Hyderabad, Chennai, Bangalore, Kolkata, Bhubaneswar and Guwahati. It has a network of 120 partner microfinance institutions

MICRO FINANCE (IN CRORE) Figure 5

1950 1900 1850 1800 1750 1700 1650 sanction disbursement 2008 -2009 1746.19 1920.73 3000 2950 2900 2850 2800 2750 2700 2650 2600 2550 2500 Sanction 2009-10 Disbursement 2671.61 2972.35

*Source : SIDBI Annual Report

The above figure 5 shows that the overall sanctions for micro financing by SIDBI has shown the growth in FY 2009-10 from total sanctions amount of Rs. 1920.73 crore in the financial year 2008-09 to Rs. 2972.35 crore in the FY 2009-10 which is almost 55% higher in than the previous year.

BILL FINANCING Bills financing have been another feather in the cap for SIDBIs portfolio of financing for assistance of the SMEs. The objective of the scheme is to mitigate the problem of delayed payments to SSI units. The schemes operating under Bills financing are Bills Re-discounting, Bills direct discounting, receivables financing scheme. This is for short term purposes and entrepreneurs in need of such short term requirements for working capital have favoured this scheme along with their financing options. The main objective of SIDBI Bills Finance Scheme involves provision of medium and shortterm finance for the benefit of the small-scale sector. Bills Finance seeks to provide finance, to manufacturers of indigenous machinery, capital equipment, components sub-assemblies etc, based on compliance to the various eligibility criteria, norms etc as applicable to the respective schemes.

BILL FINANCING (IN CRORE)

Figure 6
6560 6550 6540 6530 6520 6510 6500 6490 6480 sanctios disbursement 2008-2009 8500 8000 sanctios disbursement 2009-2010 6504.48 10000 9500 9003.37 9000 6549.48 10500 11000 10485.3 9

*as per sidbi annual report

Total sanctions and disbursements for the FY 2009 and FY 2010 can be seen from figure 6 where the sanctions have increased by 60% in the year 2010 and disbursements have increased by 38.42% in the year 2010 which shows that the sanctions and disbursements are not at par with the target of SMEs being able to attain the credit available.

CONCLUSION:
The Importance of Small and Medium Enterprises in any economy cannot be overlooked as they form a major chunk in the economic activity of nations. The singular contribution of SMEs is on account of their unique characteristics .Their role in economic activity is been benefited in both tangible and intangible ways., it is pertinent to mention that Small Industrial Development Bank of India has achieved landmark results in the domain of small and medium enterprise financing and fulfilling their credit requirements time to time in various forms such as long term project finance, working capital finance, bill discounting etc. However considering the level of appetite for credit facilities of Indian small and medium enterprises, private and public sector banks in India need to work out an unique and innovative model of financing to this vital sector (SME) of Indian Economy. Bibliography

www.sidbi.com www.ibef.org/artdisplay.aspx www.rupeeindia.com www.franchiseindia.com www.iipmthinktank.com - case on SME financing by Tarak Shah & Anshu Khedkar Indian smes and their uniqueness in the country- Dr. A.P.Pandey and
Shivesh