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A Project Report
On
“Study of Credit Flow to Small and Medium Enterprises”
With
Special Reference to Indian Overseas Bank
INTRODUCTION
Introduction:-
Small and medium-sized businesses are a major part of the economy and the effective financing of such businesses makes a significant contribution to economic growth and performance generally.SME are considered the engine of economic growth in most Asian economies by virtue of their sheernumber and significant economic and social contributions. SME finance is the funding of small and medium sized enterprises, and represents a major function of the general business finance market – in which capital for different types of firms are supplied, acquired, and priced. Capital is supplied through the business finance market in the form of bank loans and overdrafts; leasing and hire-purchase arrangements; equity/corporate bond issues; venture capital or private equity; and asset-based finance such as factoring and invoice discounting.
The micro, small and medium enterprises (MSMEs) sector contributes significantly to the manufacturing output, employment and exports of the country. It is estimated that in terms of value, the sector accounts for about 45 per cent of the manufacturing output and 40 per cent of the total exports of the country.
The sector is estimated to employ about 595 lakh persons in over 261 lakh enterprises throughout the country. Further, this sector has consistently registered a higher growth rate than the rest of the industrial sector. There are over 6000 products ranging from traditional to high-tech items, which are being manufactured by the MSMEs in India. It is well known that the MSMEs provide good opportunities for both self-employment and wage employment.
SME’s Contribution towards GDP in 2011 was 17% which is expected to increase to 22% by 2012. There are approximately 30 million MSME Units in India and 12 million persons are expected to join the workforce in the next 3 years. SMEs are the fountain head of several innovations in manufacturing and service sectors, the major link in the supply chain to corporate and the PSUs. By promoting SMEs, the rural areas of India will be developed.
By its less capital intensive and high labour absorption nature, SME sector has made significant contributions to employment generation and also to rural industrialisation. This sector is ideally suited to build on the strengths of our traditional skills and knowledge, by infusion of technologies, capital and innovative marketing practices. So this is the opportune time to set up projects in the small scale sector. It may be said that the outlook is positive, indeed promising, given some safeguards. This expectation is based on an essential feature of the Indian industry and the demand structures.
The diversity in production systems and demand structures will ensure long term co-existence of many layers of demand for consumer products / technologies / processes. There will be flourishing and well grounded markets for the same product/process, differentiated by quality, value added and sophistication. This characteristic of the Indian economy will allow complementary existence for various diverse types of units.
The promotional and protective policies of the Govt. have ensured the presence of this sector in an astonishing range of products, particularly in consumer goods. However, the bug bear of the sector has been the inadequacies in capital, technology and marketing. The process of liberalization will therefore, attract the infusion of just these things in the sector.
SMEs are now exposed to greater opportunities than ever for expansion and diversification across the sectors. Indian market is growing rapidly and Indian entrepreneurs are making remarkable progress in various Industries like Manufacturing, Precision Engineering Design, Food Processing, Pharmaceutical, Textile & Garments, Retail, IT and ITES, Agro and Service sector.
SME Sector in India creates largest employment opportunities for the Indian populace, next only to Agriculture. It has been estimated that 100,000 rupees of investment in fixed assets in the small-scale sector generates employment for four persons. The total employment from SME sector in the country as per the third All India Census of SMEs conducted with the reference year of 2001-02 was 249.33 lakh numbers. Units operated with fixed premises are treated as SMEs. As per the estimates compiled for the year 2005-06 the employment was 294.91 lakh persons in SME sector. The share of SMEs in the total employment among units engaged in manufacturing and services is around 34.93 percent.
The process of liberalization and market reforms since 1991 has brought challenges as well as bouquet of opportunities. The challenges are intense competition both in domestic and overseas markets which makes imperative for the enterprises to maintain, improve and sustain competitiveness through lower cost, improved quality, making available wider choice by initiating various measures including innovation and up-gradation of technology.
The opportunities include expansion of business by entering into new markets both in terms of products and geography. An attendant and incidental outcome of the policy of liberalization, privatization and globalization (LPG) is that ‘Market’ has become the key. What to produce, where to produce, what quantity, of what quality and at which price, with what technology and where to sell - the key to unlock these questions is ‘Market’. Thus, there is an immense need to understand the complexities and intricacies of market- by all enterprises- be it a big fortune 500 or SMEs. Policy maker or the regulator also needs to fathom the realities of markets so that In a new era of open economies, it is increasingly recognized that large industry cannot afford to sustain in isolation from small industry and this increasingly necessitates them to have long term linkages with the SMEs as small and large industries have distinct places where they succeed on the principle of most efficient scale of economy. The intense competition is increasingly forcing both small and large industries to leverage upon the complementary strengths of each other in order to survive and thrive.
Definition of SMEs:-
In order to provide for facilitating the promotion and development and enhancing competitiveness of micro, small and medium enterprises Government of India has notified a new Act on 16.06.06 named as “THE MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT,2006. The Act which contains 32 Section becomes operational from 02.10.2006.
The Concept of “Enterprises” has been introduced as against “Industries”.
Enterprises are broadly classified into:-
a) Enterprises engaged in the Manufacturing / Production of goods pertaining to any industries
b) Enterprises engaged in providing / rendering of Services.
CLASSIFICATION OF MSME SECTORS based on the original investment in plant and machinery with regard to Manufacture/production units & original investment in equipment with regard to Services units.
CLASSIFICATION OF MSME SECTORSSECTOR MFG/SERVICE INVESTMENT IN
P & M / Equipments
MICRO LEVEL-I MFG. Upto Rs.5 lacs SERVICE Upto Rs.2 lacs
MICRO LEVEL-II MFG. Rs.5 lacs to Rs.25 lacs
SERVICE Rs.2 lacs to Rs.10 lacs
SMALL MFG. Rs.25 lacs to Rs.500 lacs SERVICE Rs.10 lacs to Rs.200 lacs
MEDIUM MFG. Rs.500 lacs to Rs1000 lacs SERVICE Rs.200 lacs to Rs.500 lacs
SMEs are the driver of economic growth and innovation. Figure 3 describes both reinforcing dynamics. The total number of SMEs in the economy depends on the rate of SME creation and rate of SME destruction. Profitable market opportunities increase the rate of SME creation. This increases the total number of SMEs in the country, which increases job creation and income per capita.As people become wealthier, they will increase their consumption, which in turn will open up new market opportunities that will entice the creation of more SMEs. Contrary to multinational corporations, the growth of SMEs directly benefits the country because most SMEs are domestic firms. This reinforcing dynamic generates economic growth.
The reinforcing loop of innovation also drives economic growth. As the number of SMEs increases, their knowledge of their product and industry increases. Their knowledge allows
them to innovate on the product or process, which helps them form a competitive advantage to generate more profits.Again,market opportunity as captured by the profitability of SMEs will encourage more people to establish their own SMEs to capture the opportunity.
In addition, the development of SMEs can also help to achieve other development goals. SMEs can either provide goods and services in areas critical to development, such as health and education, or provide a source of income to disadvantaged people. For example, efforts to develop women entrepreneurs help increase gender equality by providing women with a source of income.
SMEs are a Driver of Economic Growth and Innovation
Review of Literature:
A significant portion of the economy consists of the self-employed who are both
wage-earners and shareowners. The share of the proprietorship and partnership forms of
organizations in the national income is 35 per cent, that of corporate around 15 per cent, of
government around 25 per cent, and agriculture around 25 per cent. Combine agriculture and
the self-employed in industry and service sectors, nearly 60 per cent of the national income is
generated by the self-employed and does not fall in the paradigm of either capitalism or
socialism (Mathew. J, Mainimala 2006).
India has traditionally always had a very vibrant and competitive SME. Even after the
dawn of industrialization, British producers of textiles found hand made Indian textiles such a
threat that they lobbied hard to have its import banned, succeeding in the late eighteenth
century (Gupta & Sharma, 1996).
During pre-economic liberalization period a wide variety of incentives, concessions
and institutional facilities were extended for the development of SMEs. But these socialistic
promotional policy measures, in many cases resulted in protection of weak units rather than
the independent growth of units under competitive business environment (Nyati, 1988).
The relationship between necessity entrepreneurship and economic development is
most likely negative in low income countries, while the relationship between
entrepreneurship and economic development in high income countries is mostly likely
positive. India is having high level of opportunity entrepreneurship, at least in certain part of
country, even though the level of income in India is very low.
SME Sector plays a major role in India's present export performance. SME is
contributing almost 45% of the Indian Exports. Direct exports from the SME account for
nearly 35% of total exports. The number of small-scale units that undertake direct exports
would be more than 5000. Besides direct exports, it is estimated that SME contribute around
15% to exports indirectly.
This takes place through merchant exporters, trading houses and export houses. They
may also be in the form of export orders from large units or the production of parts and
components for use for finished exportable goods. The non-traditional products account for
more than 95% of the SME exports. The rewarding product groups where the SME
dominates in exports are sports goods, readymade garments, woolen garments and knitwear,
plastic products,
processed food and leather products (Vidya Suresh and P shashidhar).
BRAHMANANDAM, G, N., RAI, H.L., DAKSHINA MURTHY, “Financing Small Scale Sector”. The Role of Banks” INDIAN BANKING TODAY AND TOMORROW, MAY 1981-the above article was prepared on the role of banks in financing the SMEs in the year 1981. At those times the Indian banking was not all interested in financing the SMEs, because of their credit worthiness. Later due to changes in the industrial policy of India, the commercial banks come forward made immense help to the growth of SMEs. This article was written before the economic reforms taken place. Here is a gap for more analysis about the role of the banks in the post economic reforms.
INDIA'S SME SCENARIO:-
A special role for SMEs was earmarked in the Indian economy with the advent of planned economy from 1951 and the subsequent industrial policy followed by government. By and large, SMEs developed in a manner, which made it possible for them to achieve the objectives of:
1. High contribution to domestic production2. Significant export earnings3. Low investment requirements4. Operational flexibility5. Low intensive imports6. Capacity to develop appropriate indigenous technology7. Import substitution8. Technology-oriented industries9. Competitiveness in domestic and export markets
However, as a result of globalization and liberalization, coupled with WTO regime, SMEs have been passing through a transitional period. With enhanced competition from China and a few low cost centres of production from abroad many units have of late been facing a tough time.
However, those SMEs who had a strong technological base, international business outlook, competitive spirit and willingness to restructure themselves withstood the current challenges and came out successful to make their own contribution to the Indian economy.
It is the most important employment-generating sector and is an effective tool for promotion of balanced regional development. These account for 50 percent of private sector employment and 30 to 40 percent of value-addition in manufacturing. It produces a diverse range of products including consumer items, capital and intermediate goods.
However, the SMEs in India, which constitute more than 80 percent of the total number of industrial enterprises and form the backbone of industrial development, are as yet, in technological backwaters vis-á-vis advances in science and technology. These suffer from problems of suboptimal scales of operations and technological obsolescence.
While most of the large companies, even in developing countries, have financial as well as technical capacity to identify technological sources and evaluate alternate technologies that would suit their requirements, unfortunately, this capacity is conspicuously missing in most SMEs.
It is these features of SMEs that make them an ideal target for technological up gradation through technological cooperation with foreign and local enterprises, with R&D institutions and centres of technology development.
Small and Medium enterprises are the backbone of India's economy. They have to now work hard to get out of this impending scenario. There has to be a major change in policy on how they are operating. SMEs have to put in more effort on research and development (R&D) and on ways to use technology at par with the international standards.
Problems and Challenges:-
SME is one of the growing sectors of the country even though they are facing so many problems which restrict the growth
1. Under-utilization of Capacities.2. Inadequate and Untimely Credit Flows.3. Inability in Technology up gradation. 4. Inefficient raw material procurement.5. Poor financial situations and low levels of R&D6. Inability to Market Finished Goods.7. Ineffective monitoring and feedback mechanism.8. Shortage of power9. Lack of awareness of credit facilities available10. Lack of knowledge about various credit schemes11. Overdependence on purchases by government etc…………
The opportunities of growth in the SMEs sector are enormous due to the following factors:
1. Less Capital Intensive2. Extensive Promotion & Support by Government3. Reservation for Exclusive Manufacture by small scale sector4. Project Profiles5. Funding - Finance & Subsidies6. Machinery Procurement7. Raw Material Procurement8. Manpower Training9. Technical & Managerial skills10. Tooling & Testing support11. Reservation for Exclusive Purchase by Government12. Export Promotion13. Growth in demand in the domestic market size due to overall economic growth14. Increasing Export Potential for Indian products15. Growth in Requirements for ancillary units due to the increase in number of green-field units coming up in the large scale sector.
Different Forms of Advances Banks - Loan Types
1. Demand Loan
In a demand loan account, the entire amount is paid to the debtor at one time, either in cash or by transfer to his savings bank or current account. No subsequent debit is ordinarily allowed except by way of interest, incidental charges, insurance premiums, expenses incurred for the protection of the security etc. Repayment is provided for by instalment without allowing the demand character of the loan to be affected in any way. There is usually a stipulation that in the event of any instalment, remaining unpaid, the entire amount of the loan will become due. Interest is charged on the debit balance, usually with monthly rests unless there is an arrangement to the contrary. No cheque book is issued. The security may be personal or in the form of shares, Govt. paper, fixed deposit receipt, life insurance policies, goods, etc.
2. Term Loan
When a loan is granted for a fixed period exceeding three years and is repayable according to the schedule of repayment, it is known as a term loan. The period of term loan may extend up to 10 years and in some cases up to 20 years. A term loan is generally granted for fixed capital requirements, e.g. investment in plant and equipment, land and building etc. These may be required for setting up new projects or expansion or modernization of the plant and equipment. Advances granted for purchasing land / building / flat (Apartment house) are term loans.
3. Overdraft
An overdraft is a fluctuating account wherein the balance sometimes may be in credit and at other times in debit. Overdraft facilities are allowed in current accounts only. Opening of an overdraft account requires that a current account will have to be formally opened, and the usual account opening form completed. Whereas in a current account cheques are honored if the balance is in credit, the overdraft arrangement enables a customer to draw over and above his own balance up to the extent of the limit stipulated.
4. Cash Credit
A cash credit is essentially a drawing account against credit granted by the bank and is operated in the same way as a current account in which an overdraft limit has been sanctioned. The principal advantages of a cash credit account to a borrower are that, unlike the party borrowing on a fixed loan basis, he may operate the account within the stipulated limit as and when required and can save interest by reducing the debit balance whenever he is in a position to do so.
The borrower can also provide alternative securities from time to time in conformity with the terms of the advance and according to his own requirements. Cash credits are normally
granted against the security of goods e.g. raw materials, stock in process, finished goods. It is also granted against the security of book-debts. If there is good turnover both in the account and in the goods, and there are no adverse factors, a cash credit limit is allowed to continue for years together. Of course a periodical review would be necessary.
5. Bills Purchased
Bills, clean or documentary, are sometimes purchased from approved customers in whose favour regular limits are sanctioned. In the case of documentary bills, the drafts are accompanied by documents of title to goods such as railway receipts or bills of lading (BOL). Before granting a limit, the creditworthiness of the drawer is to be ascertained. Sometimes the financial standing of the drawees of the bills are verified, particularly when the bills are drawn from time to time on the same drawees and/or the amounts are large.
Although the term "Bills Purchased" seems to imply that the bank becomes the purchaser / owner of such bills, it will be observed that in almost all cases, the bank holds the bills (even if they are indorsed in its favor) only as security for the advance. In addition to any rights the banker may have against the parties liable on the hills, he can also fully exercise a pledge’s right over the goods covered by the documents.
6. Bills Discounted
Usance bills, maturing within 90 days or so after date or sight, are discounted by banks for approved parties. In case a bill, say for Rs. 10,000/- (approx. $223 USD) due 90 days hence, is discounted today at 20% per annum, the borrower is paid Rs. 9,500/- (approx. $211 USD), its present worth. However the full amount is collected from the drawee on maturity. The difference between the present worth and the amount of the bill represents earning of the banker for the period for which the bill is to run. In banking terminology this item of income is called "discount".
Company Profile: - “Indian Overseas Bank”
Indian Overseas Bank (IOB) was founded in February 10th of the year 1937 by Shri.M.Ct.M.Chidambaram Chettyar, a pioneer in many fields Banking, Insurance and Industry with the twin objectives of specialising in foreign exchange business and overseas banking. IOB had the unique distinction of commencing business in 10th February 1937 (on the inaugural day itself) in three branches simultaneously - at Karaikudi and Chennai in India and Rangoon in Burma (presently Myanmar) followed by a branch in Penang. Indian Overseas Bank has an ISO certified in-house Information Technology department, which has developed the software that 900 branches use to provide online banking to customers.
At the dawn of Independence IOB had 38 branches in India and 7 branches abroad. The Products & Services of the bank includes NRI Services, Personal Banking, Forex Services, Agri Business Consultancy, Credit Cards, Any Branch Banking and ATM Banking. Saga of the IOB is covered into four categories, such as Pre-nationalisation era (1947- 69), at the time of Nationalisation (1969), Post - nationalisation era (1969-1992) and Post-Reform Period - Unprecedented developments (1992 & after). In Pre-nationalisation era (1947- 69), IOB expanded its domestic activities and enlarged its international banking operations.
As early as in 1957, the Bank established a training centre, which has now grown into a Staff College at Chennai with 9 training centres all over the country.IOB was the first Bank to venture into consumer credit. It introduced the popular Personal Loan scheme during this period. In 1964, the Bank made a beginning in computerisation in the areas of inter-branch reconciliation and provident fund accounts. In 1968, IOB established a full-fledged department to cater exclusively to the needs of the Agriculture sector.
At the time of Nationalisation (1969), IOB was one of the 14 major banks that was nationalised in 1969. On the eve of Nationalisation in 1969, IOB had 195 branches in India with aggregate deposits of Rs. 67.70 Crs. and Advances of Rs. 44.90 Crs. In Post - nationalisation era (1969-1992), during the year 1973, IOB had to wind up its five Malaysian branches as the Banking law in Malaysia prohibited operation of foreign Government owned banks.
This led to creation of United Asian Bank Berhad in which IOB had 16.67% of the paid up capital. In the same year Bharat Overseas Bank Ltd was created in India with 30% equity participation from IOB to take over IOB's branch at Bangkok in Thailand. In 1977, IOB opened its branch in Seoul and the Bank opened a Foreign Currency Banking Unit in the free trade zone in Colombo in 1979. The Bank sponsored 3 Regional Rural Banks viz. Puri Gramya Bank, Pandyan Grama Bank and Dhenkanal Gramya Bank.
The Bank had setup a separate Computer Policy and Planning Department (CPPD) to implement the programme of computerisation, to develop software packages on its own and to impart training to staff members in this field. In the year 1988, IOB acquired Bank of Tamil Nadu in a rescue. In Post-Reform Period - Unprecedented developments (1992 & after), IOB formulated its Web site during the month of February in 1997. The Bank got autonomous status during the year 1997-98.
IOB had the distinction of being the first Bank in Banking Industry to obtain ISO 9001 Certification for its Computer Policy and Planning Department from Det Norske Veritas (DNV), Netherlands in September 1999. IOB started its STAR services in December of the year 1999 for speedy realisation of outstation cheques.
Now the Banks has 14 STARS centres and one Controlling Centre for providing this service and in the same year started tapping the potential of Internet by enabling ABB cardholders in Delhi to pay their telephone bills by just logging on to MTNL web site and by authorising the Bank to debit towards the telephone bills.
The Bank made a successful debut in raising capital from the public during the financial year 2000-01, despite a subdued capital market. IOB bagged the NABARD's award for credit linking the highest number of Self Help Groups for 2000-2001 among the Banks in Tamil Nadu. Mobile banking under SMS technology was implemented in Ahmadabad and Baroda. Pilot run of Phase I of the Internet Banking commenced covering 34 branches in 5 Metropolitan centres. IOB was one among the first to join Reserve Bank of India's negotiated dealing system for security dialling online.
The Bank has finalised an e-commerce strategy and has developed the necessary Internet banking modules in-house. For the first time a Total Branch Automation package developed in-house has been customised in one of the Overseas Branches of the Bank. Most software developed in-house.
During the year 2002-03, a new credit scheme Shubh Yatra' was introduced to provide loans to those who undertake foreign travel for tourism, employment and medical treatment. During the year 2004, the Government OF India selected IOB for channelizing government credit to other countries, which runs into billions of dollars. And also in the same year the bank made tie up with Times Online Money to launch an Internet-based remittance product, e-Cash Home, targeted at NRIs in the US wishing to transfer money to India. IOB made pact with Chola for MF products. During the year 2005, the bank joined hands with Visa to offer debit cards to its esteemed customers. In the year 2006, IOB inked MoU with CRI Pumps. In September 2006, Indian Overseas Bank (IOB) has finally taken control of Bharat Overseas Bank (BhOB), an unlisted private bank.
This is the first instance of a public sector bank taking over a strong private sector bank without resorting to the moratorium route. During May of the year 2007, Indian rating agency ICRA assigned an 'A1+' rating to the proposed 20 bln rupee certificates of deposit programme of Indian Overseas Bank, citing the bank's consistent and measured growth, the improvement in its asset quality through effective monitoring and collection systems, and improving core profitability.
During June of the year 2008, IOB launched two new products namely IOB Gold' and IOB Silver' in savings account and IOB Classic' and IOB Super' under current account. IOB have a network of more than one thousand eight hundred branches all over India located in various metropolitan cities, urban, suburban and rural areas.
PERFORMANCE HIGHLIGHTS of IOB - 30.06.2008
2.DEPOSITS: Total deposits grew from Rs.70205 crore as on 30th June 2007 to Rs,85001 crore as on 30th June 2008 registering an increase of Rs.14796 crore and growth percentage of 21.08%.
3. ADVANCES: Gross Advances increased from Rs. 48610 crore as on 30th June 2007 to Rs.63419 crore as on 30th June 2008, recording an increase of Rs 14809 crore and growth percentage of 30.46%.
4. OPERATING PROFIT: The operating profit for Q1 of 2008-09 is at Rs.241.18 crore as against the operating profit of Rs.409.17 crore for Q1 of 2007-08. This decrease in the first quarter of this year is mainly due to loss booked on account of inter segment category transfer of securities and loss on sale of securities and provision for wage arrears.
5.NET PROFIT: Net profit for Q1 of 2008-09 is at Rs,255.97 crore and this figure is lower by Rs.12.52 crores when compared to the net profit of Rs.268.49 crore booked during Q1 of 2007-08.
6. TOTAL INCOME: Total income for Q1 of 2008-09 is at Rs. 2186.83 crore while the same was at Rs.1907.79 crore for Q1 of 2007-08. The increase in terms of percentage works out to 14.63%. Interest Income has gone up to Rs.2217.08 crore from 1846.21 crore recording a percentage increase of 20.09%. Other income has gone down due to loss on sale and category transfer loss on investments.
7. TOTAL EXPENSES: Total expense for Q1 of 2008-09 is at Rs.1945.64 crore and the same for the corresponding quarter last year was at Rs.1498.62 crore, recording a percentage increase of 29.83%. The interest expenses has gone up from Rs.1137.20 crore to Rs.1490.91 crore with percentage increase of 31.10%.
8. NET INTEREST INCOME: Net interest income for Q1 of 2008-09 is at Rs.726.17crore while the same was at Rs 709.02 crore for the corresponding quarter last year. The percentage increase is 2.42.
9. CRAR: CRAR under BASEL I as on 30-6-08 is at 11.41%; with TIER I component at 7.63%. Under BASEL II, the ratio is at 11.25%. CRAR under BASEL I as on 30.6.07 was at 13.31%. The slide in the ratio over the year is due to increased volume of business and consequent increase in risk weighted assets. The risk weighted assets increased from Rs.55025 crores to Rs.71597 crore during one year period. The bank has not raised any capital from the market during the one year period.
Bank is well above the required CRAR ratio.
10. BUSINESS PER EMPLOYEE: Increased from Rs.4.81 crore as on 30.6.07 to Rs.5.93 crore as on 30.6.08.
11. NETINTEREST MARGIN: NIM was at 3.71% for the quarter ended 30th June 2007 and the ratio is at 3.12% for the quarter ended 30th June 2008.
The slide is attributable to pressure on margin i.e. increase in interest on deposits with out
corresponding increase in interest income from advances/investment. NII growth is minimal.
12. RETURN ON AVERAGE ASSETS: The ratio has come down from 1.27% to 0.99% over one year period.
13. CREDIT DEPOSIT RATIO: Improved to 74.61% from 69.24% over one year period.
14. CASA: The share of low cost deposits to total deposits has come down from 32.76% to 30.55% during one year period. This trend is sought to be arrested by vigorous compaign for low cost deposits and launching of new products like IOB Gold and Silver Savings Accounts and IOB Classic and Super Current Accounts.
15. NPA MANAGEMENT: Gross NPA over one year period has come down from Rs.1137 crore to Rs.1099 crore bringing down the Gross NPA percentage from 2.34% to 1.73%. However Net NPA percentage has gone up from 0.50% to 0.75% over one year period.
16. TOTAL CAPITAL FUNDS: Total capital funds of the bank increased to Rs.8170 crore from Rs.7324 crores over one year period due to internal accretion.
17. BOOK VALUE PER SHARE: Book value per share of the bank has gone up to Rs.91.40 from Rs.76.12 over one year period.
Board of Directors:-
CONSTITUTION:The Constitution of the Board of the Bank is governed by "The Nationalized Banks (Management and Miscellaneous Provisions) Scheme, 1970, formulated by the Central Government, after consultation with the Reserve Bank of India, in exercise of the powers conferred by section 9 of "The Banking Companies (Acquisition and Transfer of Undertakings) Ac, t 1970".
COMPOSITION:The Composition of the Board of Directors of a Bank is governed by "The Nationalised Banks (Management and Miscellaneous Provisions)Scheme 1970" read with "The Banking Companies (Acquisition and Transfer of Undertakings) and Financial Institutions Laws (Amendment) Act 2006" and amendment to thevide Extraordinary Gazette Notification dated 19.02.2007 of the Central Government.
CONTRIBUTION:In terms of The Banking Companies (Acquisition and Transfer of Undertakings Act 1970, the General Superintendence, Direction and Management of the affairs and business of the Bank vests in the Board of Directors which is entitled to exercise all such powers and do all such acts and things as the Bank is authorized to exercise and do.
STRENGTH OF THE BOARD:
Shri. M.NarendraChairman and Managing Director
DOB : 12.07.1954Educational Qualification : B.Com., LLB
Shri M Narendra took charge as Chairman and Managing Director of Indian Overseas Bank on 1st November 2010.
Shri M Narendra joined Corporation Bank as an officer trainee in 1975 and was in this Bank till 5th November 2008. He was appointed by Government of India as Executive Director, Bank of India, on 6th November 2008 and held this position, till his present assignment at Indian Overseas Bank.
Shri Narendra has traveled widely both within the country and outside. He has undergone various training programmes including workshops/seminars at BTC, IIM-Ahmedabad and Bangalore, NIBM and Australian Institute of Banking & Finance.
Shri Narendra secured various Corporate Awards instituted by Corporation Bank such as Chairman's Club Membership recipient for 8 consecutive years from 1984-85 to 1990-91, SoGian Award and Regional Leadership Award.
Known for his conceptual clarity, communication skills and ability to build result oriented teams Shri Narendra has been one of the key members of the Teams to implement Organisational Transformation Projects in both Corporation Bank and Bank of India.
In his capacity as Executive Director of Bank of India, he was the nominee director on the Board of Indo Zambia Bank Limited, Lusaka, Zambia, a joint venture Commercial Bank between 3 Indian Public Sector Banks and Government of Zambia.
He is a member of (i) Technical Advisory Committee on Money, Foreign Exchange & Government Securities Market constituted by Reserve Bank of India and (ii) Standing Committee on Risk Management & Basel II Implementation constituted by Indian Banks Association.
Name Designation
A D M Chavali Executive Director
A K Bansal Executive Director
Ajit Vasant Sardesai Shareholder Director
Alok Pande Nominee Director
Deepa Chellam Company Secretary & Compliance Officer
G R Gandhi General Manager & Board Secretary
G R Gandhi Secretary
K Ananda Kumar Employee Director
M Narendra Chairman and Managing director
Niranjan Kumar Agarwal Non Official PartTime Director
S Sadagopan Shareholder Director
S V Raghavan Nominee Director
Sooraj Khatri Non Official PartTime Director
Sridhar Lal Lakhotia Employee Director
Products/Services of Indian Overseas Bank:
The thoughtfully designed products and services of the Indian Overseas Bank can be listed as given below:
Personal Banking
Saving bank Current account Term deposit Retail loans Home loans and mortgages Depository services IOB Fine Gold International VISA Cards Any Branch Banking Multi city cheque facility Insurance and mutual fund
Corporate Banking
Micro Small and Medium Enterprises (MSME) IT & ITes BPO Cash management services -IOB STARS
Rural
IOB's commitment for social causes Agricultural short time loans Financial inclusion Agri business consultancy
NRI Accounts
Non-Resident Ordinary (NRO) Resident Foreign Currency Account (RFC) Foreign Currency Non-Resident Accounts (Banks) NRI home loan scheme NRI remittances Remittances procedures Tracking cell Forward cover IOB NRI shield IOB Expo Gold Card
Forex
SWIFT centers Authorized dealer branches Forex collection services Overseas cash
Government Business
E-Payment of direct taxes E-Payment of indirect taxes Pension payment scheme Sales tax collections Provident Fund Scheme 1968 8 percent savings taxable bond scheme Senior citizen scheme 2004
Indian Overseas Bank Loan Policy to SMEs
A. DIRECT FINANCE TO MSE SECTOR :-
ENTERPRISES ENGAGED IN MANUFACTURING ACTIVITY :
1. Micro Enterprise: where investment in plant and machinery(original cost excluding land, building and other specified items) does not exceed Rs.25 lacs.(Micro Level I – investment up to Rs.5 lacs / Micro Level II investmentabove Rs.5 lacs to 25 lacs)
2. Small Enterprise: where investment in plant and machinery(original cost excluding land, building and other specified items) is more than Rs.25 lacs but does not exceed Rs.5 crores.
ENTERPRISES ENGAGED IN PROVIDING OR RENDERING OF SERVICES
1. A Micro Enterprise is an enterprise where investment in equipmentdoes not exceed Rs.10 lacs. Micro Level I – investment up to Rs.2 lacs /Micro Level II investmentabove Rs. 2 lacs to Rs. 10 lacs)
2. A Small Enterprise is an enterprise where investment in equipmentis more than Rs.10 lacs but does not exceed Rs.2 crores..
In both the above cases the investment in equipment (original cost) excluding land, building, furniture, fittings and other items not directly relating to service rendered or as may be notified under the MSMED Act 2006 should be reckoned for the purpose of determining the investment.
KHADI AND VILLAGE INDUSTRIES SECTOR (KVI)
All advances granted to units in the KVI sector, irrespective of their size of operations, location and amount of original investment in plant and machinery will be considered as advances to Small Enterprises. Such advances will be eligible for consideration under the small enterprises segment within the priority sector.Advances granted to units in the KVI sector are the credit facilities made available to individuals, artisans, institutions, cooperative societies etc., for production of khadi products, cottage industries/village industries products.
B. INDIRECT FINANCE TO MSE SECTOR
1. Persons involved in assisting the decentralized sector in the supply of inputs and marketing of outputs of artisans, village and cottage industries.
2. Advances to cooperatives of producers in the decentralised sector viz. artisans, village and cottage industries.
3. Investments existing as on March 31, 2007 made by banks in special bonds issued by NABARD exclusively for financing non-farm sector may be classified as indirect finance to Small Enterprises sector till the date of maturity of such bonds or March 2010, whichever is earlier. Investments in such special bonds made after March 31, 2007 will not be eligible for such classification.
4. Loans granted by banks to NBFCs for on-lending to small and micro enterprises (manufacturing as well as service)
INDIAN OVERSEAS GUIDELINES ON MSE FINANCE :
Advances to MSE sector will be assessed like any other advance (except for the specific relaxations and concessions given in this policy) and credit decisions will be taken based on viability, merits and commercial judgment in each case as per general norms of lending. The credit appraisal will be made in a transparent and non-discriminatory manner.All genuine and just requirements of the MSE units will be considered and adequate amount of credit will be sanctioned to ensure that the unit does not suffer for want of funds at a later date.Necessary credit support will be extended to MSE units for business restructuring, modernization, expansion, diversification and technological up gradation as may be required from time to time.
The following type of credit facilities will be extended to MSE units.
1. Term Loans2. Project Finance3. Working Capital Finance4. Purchase and discounting of Bills5. Negotiation of Bills6. Non fund based facilities such as LC and LG7. Pre shipment/Post shipment finance8. Credit facilities under Bank’s special credit schemes such as Sanjeevani, Easy Trade Finance, Commercial Cash Credit against Jewellery etc.,9. Any other type of credit depending on specific need.
ASSESSMENT OF CREDIT FOR MSE UNITS:
A. Simplified procedures will be adopted for sanction of working capital limits. 20% of the projected and accepted annual turnover will be extended as working capital limit to MSE units requiring aggregate fund based working capital limits up to Rs.7.5 crore. Borrower has to bring in 5% of the accepted turnover as margin. Current Ratio of 1.25 will be acceptable in such cases.
B. For MSE units requiring working capital limits above Rs.7.5 crore and upto Rs.10 crore, the Maximum Permissible Bank Finance (MPBF) method based on Credit Monitoring Arrangement (CMA) data will be followed.
C. For MSE units requiring working capital limits over Rs.10 crore, Cash budget system or MPBF method, at the option of the borrower, will continue to be followed.
D. A combined working capital limit will be allowed against the stock and receivables without any sub limit for CC against receivables. However, different margins will be fixed for stock and receivables.
E. Lending will be based on scoring model for advances upto Rs.2 crores. Information required for scoring model will be incorporated in the application form itself. No individual risk rating is required in such cases.
F. If the bank sanction term loan solely or jointly with one or more Banks, working capital limit will also be sanctioned solely or jointly (in the ratio of term loan) to avoid delay in commencement of commercial production. It will also be ensured that there are no cases where term loan has been sanctioned but sanction of working capital facilities is awaited.
G. The interest payable up to six months after commercial production will be included as part of the project cost for assessment of credit requirements. Sufficient moratorium period say, up to six months, after commencement of commercial production, will be allowed forrepayment of principal amount wherever required, to enable the unit establish itself in the market.
H. When the sanctioning authority decides to reject a MSE credit application, the same will be conveyed to the applicant only after obtaining approval from the next higher authority.
MARGIN NORMS :-
I . No margin is required for loans up to Rs.50000/-
II. Minimum margin requirements for loans/credit facilities aboveRs.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.
B. Working Capital Finance
1. Working Capital against hypothecation of raw materials, work in Process, finished goods etc.,Above Rs.50000/- and up to Rs.5 Lac -15%Above Rs.5 Lac -20%
2. Working Capital against Book Debts/Receivables Margin to be taken as per our Bank’s general loan policy document,with out any concession.
C. Minimum cash margin of 10% will be prescribed in respect of non fund based limits such as LG and LC.
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.
E. In exceptional cases, margins lesser than indicated above can be prescribed with the approval of the appropriate authority as per powers delegated in bank’s concession policy.
SECURITY NORMS :-
A. No collateral security or third party guarantee is required for loans to micro and small enterprises upto Rs.5 lacs (up to Rs.10 Lacs for loans sanctioned after May 2010). Such loans will invariably be covered under Credit Guarantee Scheme of CGTMSEB. Loans above Rs.5 lacs (above Rs.10 Lacs for loans sanctioned after May 2010) 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 CGTMSEii. 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.
D. Even when the loan is eligible to be covered under the Guarantee cover of CGTMSE, if the borrower prefers to bring acceptable collateral security and third party guarantee, in lieu of the CGTMSE Guarantee Cover, the same will be considered.
All collateral free loans above Rs.5 lacs and upto Rs.100 lacs will be brought under cover of Credit Guarantee Scheme of CGTMSE. As per General Loan Policy Document secured advances can be sanctioned by Branch Managers upto the level of Scale IV only bytaking collateral securities to a minimum extent of 75% of the credit limits sanctioned. This will be relaxed in respect of MSE advance and Branch Managers up to the level of Scale IV will be allowed to sanction secured advances to MSE sector by taking collateral securities to a minimum extent of 60% of the credit limits sanctioned. Such sanctions should be supported by sound reasoning.
CLUSTER BASED APPROACH
Clusters are defined as sectoral and geographical concentration of MSME units sharing common opportunities and threat. Thrust will be given to cluster based finance wherever recognized clusters are existing.
Following benefits of cluster based approach to lending will be taken advantage of:• Dealing with well defined groups• Availability of appropriate information for risk assessment and• easy monitoring of borrowal units.
Diverse needs of the MSE units functioning within the cluster will be considered and adequate finance will be extended to such units . Creation of infra structure facilities and
establishment of common facility centres in clusters will also be financed in association with Central and State Government Agencies.
For limits upto Rs.2 lacs Within 2 weeksFor limits above Rs.2 lacs and upto Rs.5 lacs Within 4 weeksFor limits above Rs.5 lacs Within a reasonable frame of timeAbove time frame shall apply to disposal of applications for credit enhancement also.
PRICING AND CREDIT RATING OF MSE ADVANCES :-
As per Risk Management Policy of the Bank, all borrowal accounts with credit limits of Rs.1 crore and above to Large Corporate, Traders, SME and Infrastructure (Road and Power) must be rated under Risk Assessment Model (RAM) before sanction. Pricing of all loan facilities of Rs.1 crore and above is to be made based on the rating obtained.A relaxation will be made for MSE borrowal accounts in this regard and MSE accounts for credit facilities up to Rs.2 crores need not be rated under RAM. Pricing of MSE credit facility upto Rs. 2 crores will be based on internal scoring model.
Growth parameters:-
The bank will set targets for growth of MSE credit by a minimum year on year growth of 20% or as mandated by Government of India from time to time. Targets will also be fixed each year for fresh disbursements of MSE credit. Within the MSE sector, thrust will be given to improve advances to Micro Enterprises . Efforts will be made to ensure that all sub sectors under MSE sector receive credit as under
Micro Level I 40% of total credit to Micro and Small
Enterprises
Micro Level II 20% of total credit to Micro and Small
EnterprisesSmall
Enterprises 40% of total credit to Micro and Small
Enterprises
IOB CREDIT FACILITIES FOR ELIGIBLE SMEs :-
In this regard they need to submit some documents are as follows:
1.SME Registration Certificate 2.Partnership Deed / Memorandum & Article of Association 3.Authority letter to sign the application 4.List of all partners / directors with their age, address, certified Net Worth / Income Tax returns, qualifications and experience
5.Copy of the audited accounts for the last three years (where accounts for the last year have not been audited, provisional accounts duly certified by a Chartered Accountant, along with two years audited accounts, are to be submitted)
6.In case of new project/expansion, copy of the project report containing a brief project profile, cost of project, source/means of finance 7.Brief write-up about the products manufactured, end users, marketing tie-up and orders in hand 8.Details of subsidy, tax concession available to the applicant
9.Quality certificates, export awards won, membership of any associations
10.Any other information that would enable us to understand your business better 11.Details about group companies (names, constitution, net worth, turnover etc.) 12.Contact details of Bankers, key suppliers & key customers 13.Insurance details of plant & machinery 14.Rating report 15.Clear vision of the customers
16.Project proposal report
Indian Overseas Bank Interest Rate:
To encourage and enhance finance to SME sector, the following interest rates are stipulated for SME advances :-Size of the Loan Rating Interest Rate
Up to Rs. 2 lakh Pricing Not based on Ratings
BPLR-2%
Above Rs. 2 Lakh and Up to Rs. 1 Crore
Pricing Not based on Rating
BPLR-1%
Pricing Based on Rating as shown below:-
Above Rs. 1 Crore A+ BPLR-1%
A BPLR-0.5%
B BPLR
C BPLR+1%%
BASIC NEED OF SMEs:-
• WORKING CAPITAL- Working capital refers to the funds invested in current assets, i.e. investment in stocks, sundry debtors, cash and other current assets. Current assets are essential to use fixed assets profitably. For example, a machine cannot be used without raw material capital. The investment on the purchase of raw material is identified as working capital.
• Working Capital Management, also known as short-term financial management involves the management and control o f the Gross current assets so that a satisfactory level of Working Capital (Net Working Capital requirement), needed to carry out day -to-day activities, is maintained and the current liabilities are discharged as and when they fall due. Working Capital Management involves cash flows within the Operating Cycle of the Company, usually not exceeding the period of one year, unlike long -term financial management where cash flows extend for more than one year.
• Theoretically, there are two concepts of Working Capital
(1) Gross working capital: The gross working capital refers to investment in all the current assets taken together. The total of investments in all the current assets is known as gross working.
(2) Net working capital: The term net working capital refers to excess of total current assets over total current liabilities. It may be noted that the current liabilities refers to these liabilities which are payable with in a period of 1 year. And also there are two types of working capital are as follows:
PERMANENT & TEMPORARY WORKING CAPITAL:
• The overall Working Capital requirement does not stay constant and keeps fluctuating. However, to carry on business, a certain minimum level of Working Capital is required on a regular basis which is referred to as “Permanent or Fixed Working Capital”
• Any amount over and above the permanent Working Capital is known as the “Temporary or seasonal Working Capital” requirement. It is also known as variable working capital.
• The Operating Cycle creates the need for Current Assets or Working Capital. The Working Capital need of a Company does not come to an end once an Operating Cycle is completed. As it is a cyclical process, the need continues to exist even after the Company has realised cash against its credit sales. Thus, there should be continuous supply of Working Capital for the Company to carry on its business activity.
SOURCE OF FINANCE FOR SMEs
SMES are basically depends on the 2 types of source of finance
(1) Internal and (2) external
1. INTERNAL:-
a) Paid up capital: Ordinary share, Preference share, deferred shares, and Forfeited shares.
b) Reserve surplus: Capital reserve, Development rebate reserve, Other sources
c) Provisions: Taxation (Net on advances on income tax), Depreciation, Bad debts
2. EXTERNAL:-
a) Borrowings: From Banks, from term lending institutions like IDBI, IFCI, SIDBI, ICICI, INDUSTRIAL DEVELOPMENT CORPORATION, etc.
b) Trade dues and current liabilities: Sundry creditors, Other sources
TYPES OF INDUSTRIAL FINANCE PROVIDED BY IOB:-
1. SHORT TERM: Less than 1 year to meet variable, seasonal or temporary capital requirement.
2. MEDDIUM TERM: 1 to 5 year for permanent working capital, small expansion replacement, modification etc.
3. LONG TERM FINANCE: Period more than 5 years. It is required for procuring Fixed Assets for establishing new branches or new business for substantial expansion of existing business modernization
FINANCING OF WORKING CAPITAL BY IOB IN THE FORM OF:-
1. CASH CREDIT: This type of credit is provided mainly to individuals or enterprises engaged in manufacturing & trading activities to enable them to carry on their activities. The amount of cash credit facility to be sanctioned to a units need based and is worked out as per well defined parameters in each bank. The guide line of RBI may also affect the quantum of facility in some cases. This facility is generally granted against the security of stocks of goods, bills/ book debts representing sales.
2. LETTER OF CREDIT: A letter of credit is the guarantee provided by the buyer’s banker to the seller that in the case of default or failure of the buyer, the bank shall make the payment to the seller.
3. BILLS FINANCE: The bank extends assistance to the borrowers against the bills. The finance against bills is meant to finance, the actual sale transactions. The finance against bills can take three forms.
Purchase of bills by the bank if these are payable on demand. Discounting of bills by bank if these are usance bills (or time) bills. Advance against bills under collection from the drawees, whether sent for realization through the bank or sent directly by the drawer to the drawees.
4. WORKING CAPITAL DEMAND LOAN: In compliance of RBI directions , banks presently grant only a small part of the fund- based working capital facilities to a borrower by the way of running case credit account ; a major portion is in the form of working capital demand loan. This arrangement is presently applicable to borrowers having working capital facilities of RS. 10crores or above. The minimum period of working capital demand loan this is basically non- operable account keep on changing. The working capital demand loan is granted for a fixed term on the carrying of which it has to be liquidated, renewed of rolled over.
5. OVERDRAFT FACILITY: Under this arrangement the borrower is allowed to withdraw the amount upto a certain limit from this current account over and above his actual credit balance. Within the stipulated limits any numbers of withdrawals are permitted by the bank.
AT THE OF LENDING SOME RELEVANT RATIOS ARE COVERED BY THE BANK:-
1. Liquidity Ratios: Current Ratio=(current Assets / current liabilities) Acid Test Ratio (quick ratio) = (Current Assets- Inventory / Current Liabilities) According to this ratio bank is testing the liquidity position of the client by the liquidity ratio because that they are able to pay or not their short term liabilities. 2. Activity ratios: Average Collection Period= (A/c Receivable/ Daily Average Sales) Capital turnover ratio= (Sales/ Capital Employed) Fixed Assets turnover Ratio= (Sales/ Capital Assets) Activity ratios are also called Turnover ratios or performance ratios. These ratios are to evaluate the efficiency with which firm manages and utilizes its assets. These ratios usually indicate the frequency of sales. It is helpful for the bank that they can estimate the paying capacity of the borrowers. 3. Leverage Ratios: Debt Ratio= (Total liabilities/ Total Assets) Debt Equity = (Total liabilities/ Share Holders Equity)
Banks are very keen to know about this ratio because it shows relative weights of debt and equity. These ratios indicate the proportion of debt fund in relation to equity. It covers share holders fund (equity) and long term borrowed fund (debt).
4. Net Profit Margin: (Net Profit/ Net Sales)
This ratio measures the profitability of the firm in terms of assets employed in the firm. Banks are also keen interested to know the profits of the borrowers that they are able to pay their interest and dues on time.
5. Debtors’ Turnover Ratio: Credit Sales Average Accounts receivable For the cash cycling banks wants to know about the collection and credit policies of the firm. The speed with which credit receivables are collected affects the liquidity position of the firm. 6. Return On Investment: (ROi)= (Net Profit/ Total Assets) It measures the profitability or the operational efficiency of the firm. This is very essential for the banks.
7. Dividend Per Share =(Total profits available to Equity Share Holders/ No. of Equity Shares)
This ratio indicates the amount of profit distributed to shareholders per share.
OTHER INSTITUTIONS IN MARKET FOR SME’S LOAN:-
• As the small and medium enterprises (SME) sector is one of the fastest growing industrial sectors all over the world, initiatives are being taken by national, private and financial institutions. Among them are:-
(1) Indian overseas bank (IOB) (2) State bank of India (SBI) (3) Bank of Baroda (BOB) (4) HDFC bank (5) ICICI bank (6) Small industries development organization (SIDO)(7) National small industries corporation (NSIC) (8) SIDBI (9) NABARD
(10) IDBI
2.1 OBJECTIVES OF STUDY
1. The main objective is to study the Factors which affect the Entrepreneurs’ decision while Selecting Bank for Availing Loan facility.
2. The study about credit facilities offered to the SMEs by the banks.
3. To know the ideas of Entrepreneur’s about SMEs loan products and services.
4. To study the satisfaction level of Entrepreneur’s about SMEs loans.
5. To study the problems faced by Entrepreneurs in obtaining the SMEs loans.
6. To examine the growth of SME industries.
SCOPE OF STUDY
The aim of present study is to highlighting small and Medium Entrepreneur’s Decision making toward availing Loan facilities from financial Institution. The study is carried out at Jaipur. Primary Data was collected by conducting survey in Industrial area at Jaipur. The relevant secondary data are collected from Statistical Hand Book of Indian Economy, and from Annual Report of MSME and from company’s Websites.
RESEARCH METHODOLOGY
3.1 RESEARCH METHODOLOGY:-Research methodology is a way to systematically show the research problem. It may be understood as a science of studying how research is done scientifically. It is necessary for the researcher to know not only the research methods but also the methodology.This Section includes the methodology which includes. The research design, objectives of study, scope of study along with research methodology and limitations of study etc.
RESEARCH DESIGN:
1. Study is all about the research & analysis of credit services offered to small and medium enterprises.
2. Study is being made for the purpose for identifying the Factors which affect the Entrepreneur’s decision while selecting Bank for availing Loan facility.
3. Study was carried out at Jaipur. 4. Primary data is required for analysis of report. 5. Period of the study is limited to 50 days.
3.2 SOURCES OF DATA
To fulfil the information need of the study. The data is collected from primary as well as secondary sources-
PRIMARY SOURCE:-I decided primary data collection method because our study nature does not permit to apply observational method.In survey approach we had selected a questionnaire method for taking a customer view because it is feasible from the point of view of our subject & survey purpose. We conducted 60sample of survey in our project to judge the Entrepreneurs’ decision making towards availing Loan facility from the Financial Institution for business purpose.
SECONDARY DATA
It was collected from internal sources. The secondary data was collected on the basis of organizational file, official records, news papers, magazines, management books, preserved information in the company’s database and website of the company.
3.3 SAMPLING:-
Sampling refers to the method of selecting a sample from a given universe with a view to draw conclusions about that universe. A sample is a representative of the universe selected for study.
SAMPLE SIZE:-Large sample gives reliable result than small sample. However, it is not feasible to target entire population or even a substantial portion to achieve a reliable result. So, in this aspect
selecting the sample to study is known as sample size. Hence, for my project my sample size was 60.
The Sample Size consists of all type of Enterprises
• SAMPLING TECHNIQUE:-
Cluster sampling technique was used in the survey conducted.
3.4 LIMITATIONS OF THE STUDY:-
This study also includes some limitations which have been discussed as follows:
1. The sample size of 60 Entrepreneurs’ limitation because of difficulty in generalization of results.
2. Since banks have some confidential reports which cannot be handover to the outsiders, so in-depth research and analysis is not possible.
3. To collect the data from various banks was quite difficult due to non- cooperation of some banks. This proved to be major limitation of the study.
4. To access such a large number of customers was difficult because of non-cooperative attitude of respondents.
5. Lack of data was also the other limitation of the study as some of banks do not have proper data on topic.
6. There was limitation of time to conduct such a big survey in limited available time.
7. The financials of the firms, were not available, as most of the firms are worried about disclosing their financials, thus for the industry analysis and other qualitative research, we had to rely on the secondary data sources.
8. Ignorance and reluctant attitude of Entrepreneurs was also a major limitation in this study.
9. Thus above all were the limitations in this research study. The maximum efforts were made to overcome these limitations in the study.
ANALYSIS
&
INTERPRETATION
Contribution of SME units in GDP :-
SME’s Contribution towards GDP in 2011 was 17% which is expected to increase to 22% by
2012. There are approximately 30 million MSME Units in India and 12 million persons are
expected to join the workforce in the next 3 years
Year Total industrial productionGross Domestic
Product (GDP)
1999-2000 39.74 5.86
2000-2001 39.71 6.04
2001-2002 39.12 5.77
2002-2003 38.89 5.91
2003-2004 38.74 5.79
2004-2005 38.62 5.84
2005-2006 38.56 5.83
2006-2007 45.62 7.20
2007-2008 45.24 8.00
2008-2009 44.86 8.72
Source : (MSME) Annual Report 2010-11
1999-2000
2000-2001
2001-2002
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-20090.005.00
10.0015.0020.0025.0030.0035.0040.0045.0050.00
Total industrial productionGross Domestic Product (GDP)
Interpretation: - From the above data we can observe that SMEs contribution to the Gross Domestic Product (GDP) is increasing year by year and also the total industrial output by the SMEs also increasing.
1.) Types of Business :-
StatisticsType of Business
NValid 60
Missing 0Mean 1.5833
Type of Business
Frequency Percent Valid Percent
Cumulative Percent
Valid
Manufacturing
35 58.3 58.3 58.3
Service 15 25.0 25.0 83.3
Professional 10 16.7 16.7 100.0
Total 60 100.0 100.0
Interpretation: - By looking at Table and Bar Diagram we can observe that more No. of Respondent belongs to Manufacturing Enterprises. There is no missing value.
2.) Types of Business and Legal Structure of business :-
Case Processing Summary
Cases
Valid Missing Total
N Percent N Percent N Percent
Type of Business * Legal Structure of Business
60 100.0% 0 0.0% 60 100.0%
Type of Business * Legal Structure of Business CrosstabulationCount
Legal Structure of Business Total
Proprietorship Partnership Corporation
Type of Business
Manufacturing
17 14 4 35
Service 6 7 2 15
Professional 4 6 0 10Total 27 27 6 60
Chi-Square Tests
Value df Asymp. Sig. (2-sided)
Pearson Chi-Square 2.180a 4 .703Likelihood Ratio 3.123 4 .537Linear-by-Linear Association
.004 1 .949
N of Valid Cases 60
a. 5 cells (55.6%) have expected count less than 5. The minimum expected count is 1.00.
Interpretation:- From the above data we can observe that there is significant association exist
between these two variables as Chi-square value is significant. Pearson Chi-square test
showing the significant association between variables. Above Data showing the relationship
between the types of business and legal structure of business.
3.) Types of Business and Kind of Industries :-
Case Processing Summary
Cases
Valid Missing Total
N Percent N Percent N Percent
Type of Business * Kind of Industries
60 100.0% 0 0.0% 60 100.0%
Type of Business * Kind of Industries Cross tabulationCount
Kind of Industries Total
Micro Enterprise
Small Enterprise
Medium Enterprise
Type of Business
Manufacturing 13 15 7 35
Service 4 7 4 15
Professional 4 4 2 10Total 21 26 13 60
Chi-Square Tests
Value df Asymp. Sig. (2-sided)
Pearson Chi-Square .712a 4 .950Likelihood Ratio .724 4 .948Linear-by-Linear Association
.023 1 .879
N of Valid Cases 60
a. 4 cells (44.4%) have expected count less than 5. The minimum expected count is 2.17.
Interpretation:- The above data showing the relationship between the types of Business and
kind of industries. By looking at Chi-Square value which is showing significance of the
association between types of Business and kind of Industries.
4.) Types of Business and Why additional Fund Required:-
Case Processing Summary
Cases
Valid Missing Total
N Percent N Percent N Percent
Type of Business * Why addtional fund Required
53 88.3% 7 11.7% 60 100.0%
Type of Business * Why addtional fund Required CrosstabulationCount
Why addtional fund Required Total
Expansion of Business
Replacement of Existing
Assets
Working Capital
Requirement
Any Other
21.00
Type of Business
Manufacturing
15 10 3 1 1 30
Service 3 5 5 0 0 13
Professional 7 3 0 0 0 10Total 25 18 8 1 1 53
Chi-Square Tests
Value df Asymp. Sig. (2-sided)
Pearson Chi-Square 11.144a 8 .194Likelihood Ratio 12.270 8 .140Linear-by-Linear Association
.846 1 .358
N of Valid Cases 53
a. 12 cells (80.0%) have expected count less than 5. The minimum expected count is .19.
Interpretation:- From the above data we can observe that there is missing value which is because of among all the Respondent few of them do not want to take loan .The above bar diagram show the relationship between the types of business and their requirement of additional fund.
5.) Satisfaction level with existing Bankers:-
NValid 60
Missing 0Mean 1.7667Minimum 1.00Maximum 4.00
Satisfactiion level with existing Banker
Frequency Percent Valid Percent
Cumulative Percent
Valid
Highly satisfied
26 43.3 43.3 43.3
Satisfied 26 43.3 43.3 86.7
Neutral 4 6.7 6.7 93.3
Dissatisfied 4 6.7 6.7 100.0
Total 60 100.0 100.0
Interpretation:- the above data show the satisfaction level of Entrepreneurs with their existing
Banker and service provided them. From the above data we can observe that 43% of the
Respondent Highly satisfied with their Existing Banker and same % of the ratio satisfied with
their Existing Banker.
6.) Purpose of Loan :- (Factor Analysis)
Communalities
Initial Extraction
Purpose of Loan(Business Start Up)
1.000 .828
Purpose of Loan(expansion of Business)
1.000 .712
Purpose of Loan(Replacement of existing Assets)
1.000 .432
Purpose of Loan(Working capital Requirement)
1.000 .763
Purpose of Loan(Any other purpose)
1.000 .674
Extraction Method: Principal Component Analysis.
Total Variance Explained
Component Initial Eigenvalues Extraction Sums of Squared Loadings
Total % of Variance
Cumulative % Total % of Variance
Cumulative %
1 1.255 25.107 25.107 1.255 25.107 25.1072 1.133 22.668 47.774 1.133 22.668 47.7743 1.020 20.391 68.165 1.020 20.391 68.1654 .893 17.866 86.0315 .698 13.969 100.000
Extraction Method: Principal Component Analysis.
Component Matrixa
Component
1 2 3
Purpose of Loan(Business Start Up)
-.282 .175 .847
Purpose of Loan(expansion of Business)
.611 .443 .376
Purpose of Loan(Replacement of existing Assets)
-.558 .337 .085
Purpose of Loan(Working capital Requirement)
.352 .745 -.291
Purpose of Loan(Any other purpose)
.606 -.488 .261
Extraction Method: Principal Component Analysis.a. 3 components extracted.
Interpretation:- Factor analysis is basically done for reducing data and summarization. From
the above data we can observe that Purpose of loan have five factors and not all of them
important from the point of view of every Entrepreneur. By Factor analysis we find the data
which is most preferred by the respondent and remove the factors which do not have any
significant importance for the research.
By Principal component analysis method of factor analysis we can observe from the above
table that showing eigen value only first four factors is mostly preferred by the Respondents.
7.) Main Reason for Preferring Bank for Borrowing Funds
NValid 43
Missing 17Mean 2.4419Minimum 1.00Maximum 5.00
Main Reason for Preferring Bank for Borrowing Funds
Frequency Percent Valid Percent Cumulative Percent
Valid
Ease of availability of loan 15 25.0 34.9 34.9
For granting the Subsidy 5 8.3 11.6 46.5
Low and fixed rate of Interest
14 23.3 32.6 79.1
For getting other banking facilities
7 11.7 16.3 95.3
Availing benefit of Credit Worthiness
2 3.3 4.7 100.0
Total 43 71.7 100.0Missing System 17 28.3Total 60 100.0
Interpretation:- From the above data we can observe that main reason for preferring Bank for Borrowing funds is Ease of availability of loan and Low and fixed rate of interest.
8.) Importance of factors for availing Loan KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
.383
Bartlett's Test of Sphericity
Approx. Chi-Square 90.396
Df 45
Sig. .000
Communalities
Initial Extraction
Importance of Factor for availing Loan(Processing Time)
1.000 .738
Importance of Factor for availing Loan(speed of Disbursement of Loan)
1.000 .598
Importance of Factor for availing Loan(Submission of Important Document)
1.000 .689
Importance of Factor for availing Loan(EMI and pay back period)
1.000 .743
Importance of Factor for availing Loan(Requirement of Securities)
1.000 .569
Importance of Factor for availing Loan(Image and Market Reputation of the bank)
1.000 .611
Importance of Factor for availing Loan(Margin Amount)
1.000 .665
Importance of Factor for availing Loan(Hidden Charges)
1.000 .715
Importance of Factor for availing Loan(Staff Courtesy)
1.000 .511
Importance of Factor for availing Loan(Interest Rate)
1.000 .433
Extraction Method: Principal Component Analysis.
Component Initial Eigenvalues Extraction Sums of Squared Loadings
Total % of Variance Cumulative % Total % of Variance Cumulative %
1 1.976 19.762 19.762 1.976 19.762 19.7622 1.606 16.065 35.827 1.606 16.065 35.8273 1.460 14.597 50.424 1.460 14.597 50.4244 1.230 12.298 62.722 1.230 12.298 62.7225 .981 9.808 72.5306 .790 7.895 80.4257 .689 6.894 87.3208 .578 5.776 93.0959 .444 4.439 97.53510 .247 2.465 100.000
Component Matrixa
Component
1 2 3 4
Importance of Factor for availing Loan(Processing Time)
.421 -.211 .703 -.148
Importance of Factor for availing Loan(speed of Disbursement of Loan)
.539 .319 -.307 .336
Importance of Factor for availing Loan(Submission of Important Document)
.100 .806 .144 .091
Importance of Factor for availing Loan(EMI and pay back period)
.409 .426 .627 .038
Importance of Factor for availing Loan(Requirement of Securities)
-.735 .104 -.005 -.137
Importance of Factor for availing Loan(Image and Market Reputation of the bank)
.221 -.581 .339 .331
Importance of Factor for availing Loan(Margin Amount)
-.538 .201 .459 -.353
Importance of Factor for availing Loan(Hidden Charges)
-.288 .147 .062 .779
Importance of Factor for availing Loan(Staff Courtesy)
.525 -.210 -.271 -.343
Importance of Factor for availing Loan(Interest Rate)
.310 .417 -.236 -.329
Extraction Method: Principal Component Analysis.a. 4 components extracted.
Component Transformation Matrix
Component 1 2 3 4
1 .769 .486 .047 -.4132 -.018 .175 .944 .2793 -.422 .856 -.224 .1954 .479 -.018 -.238 .845
Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization.
Interpretation:- Above result for the rotated component matrix shows that 10 variables which
are converted into 5 factors.
Above result for the roateted component matrix shows that 12 variables which are converted
into 5 factors.
Factor 1 having following variables
Margin amount
Hidden charges
Brand Reputation in Market
Staff courtesy
Factor 2 having following variables
EMI
Prepayment Penalty
Payback period
From above factors EMI and Payback period is giving higher contribution to factor2.By
analysing above all variable hence factor 2 variable can be named as EMI
Factor 3 having following variables: -
Speed of Processing
Speed of Disbursement of Home loan
Factor 4 having only one variable:-
Interest Rate
2.) Employment in MSMEs Sector:-
S. No. YearEmployment (lakh
person)Growth Rate
1 1992-93 174.84 5.33
2 1993-94 182.64 4.46
3 1994-95 191.40 4.79
4 1995-96 197.93 3.42
5 1996-97 205.86 4.00
6 1997-98 213.16 3.55
7 1998-99 220.55 3.46
8 1999-00 229.10 3.88
9 2000-01 238.73 4.21
10 2001-02 249.33 4.44
11 2002-03 260.21 4.36
12 2003-04 271.42 4.31
13 2004-05 282.57 4.11
14 2005-06 294.91 4.37
15 2006-07 594.61 101.62
16 2007-08 626.34 5.34
17 2008-09 659.35 5.35
18 2009-10 695.38 5.47
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-090
100
200
300
400
500
600
700
800
Employment (lakh person)
Employment (lakh person)
Interpretation:- From the above data we can observe that SMEs play an important role in
generating employment for a country. In India the Employment generated by the SMEs is
increasing year by year .
3.) Fixed Investment in MSMEs Sector:-
Interpretation:- the investment in Fixed investment in MSMEs is increasing with the higher
rate over the year.
4.) Production in terms of Gross Output in MSMEs Sector :-
Sr. No. YearProduction (Rs crore)
Current PricesGrowth Rate
1 1992-93 84413 4.71
2 1993-94 98796 17.04
3 1994-95 122154 23.64
4 1995-96 147712 20.92
5 1996-97 167805 13.60
6 1997-98 187217 11.57
7 1998-99 210454 12.41
8 1999-00 233760 11.07
9 2000-01 261297 11.78
10 2001-02 282270 8.03
11 2002-03 314850 11.54
12 2003-04 364547 15.78
13 2004-05 429796 17.90
14 2005-06 497842 15.83
15 2006-07 709398 42.49
16 2007-08 790759 11.47
17 2008-09 880805 11.39
18 2009-10 982919 11.59
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-090
200000
400000
600000
800000
1000000
1200000
Production (Rs crore) Current Prices
Production (Rs crore) Current Prices
Interpretation:- the total production produced by the SMEs is increasing.
Export of SME:
SME Sector plays a major role in India's present export performance. 45 to 50 percent
of the Indian Exports is contributed by SME Sector. Direct exports from the SME Sector
account for nearly 35 percent of total exports. Besides direct exports, it is estimated that
Table No. 4: Growth of SME Exports:
YearTotal exports
Exports from SME
sector Percentage share
(Rs. Crores) (Rs. Crores)
1991-92 44040 13883 31.5
1992-93 53688 17785 33.1
1993-94 69547 25307 36.4
1994-95 82674 29068 35.1
1995-96 106353 36470 34.2
1996-97 118817 39249 33.4
1997-98 126286 44442.18 35.19
1998-99 141603.53 48979.23 34.59
1999-00 159561 54200.47 33.97
2000-01 202509.7 69796.5 34.47
2001-02 207745.56 71243.99 34.29
2002-03 252789.97 86012.52 34.03
2002-03 252137 86013 34.03
2003-04 291582 97644 33.49
2004-05 375339.52 124416.56 33.15
2005-06 456417.88 150242.03 32.92
Sources: Total Exports - Economic Surveys - Various Issues SME Exports O/o DC(SME)
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2002-03
2003-04
2004-05
2005-060
100000
200000
300000
400000
500000
Total exports (Rs. Crores)Exports from SME sector (Rs. Crores)
INTERPRETATION:
SME Sector plays a major role in India's present export performance. From the above fig. we
can know about the contribution part of SMEs in the total export i.e. 40%.Whole sectors are
contributing 60% and SME sectors alone are contributing 35%, which also helps in
generating the foreign revenue
Type of organization :-
The table given below shows that 90.08% of the enterprises in the registered MSMEs sector were proprietary enterprises. About 4.01% of the enterprises were run by partnerships and 2.78% of the enterprises were run by private companies. The rest were owned by Public Limited Companies, Co-operatives/ Trusts or others.
Distribution by type of Organization : (Numbers in Lakh)Proprietary 14.09 (90.08%)Partnership 0.63 (4.01%)Pvt. Company 0.43 (2.78%)Pub. Ltd. Company 0.08 (0.54%)Co-operatives 0.05 (0.30%)Others 0.36 (2.30%)
Nature of activity :-
67.10% of the enterprises in the registered MSME s sector were engaged in manufacturing, whereas 16.78% of the enterprises were engaged in the services activities as may be seen from the table given below. The remaining 16.13% of the enterprises were engaged in repairing and maintenance.
Distribution by Nature of activity : (Numbers in Lakh) %Manufacturing 10.49 (67.10%)Services 2.62 (16.78%)Repairing & Maintenance 2.52 (16.13%)Total 15. 64 (100%)
67.10%
16.78%
16.13%
Distribution by Nature of activity :
ManufacturingServicesRepairing & Maintenance
PERCENTAGE OF SMEs PREFERRED TO TAKE LOAN FROM VARIOUS BANKS
INTERPRETATION:
From the above analysis we know that SMEs give 1st preference to the Govt. specialized bank for taking the loan because of easy process rather than the private sector banks. SMEs less prefers the private sector banks because of the heavy documentation work which is needed.
