WINTER PROJECT REPORT

ON

MSME FINANCE GOVERNMENT INITIATIVE

SUBMITTED BY

POOJA JHA2K12BFS14

TO PROF. RAVINDRA BHATIA

In Partial Fulfillment & Requirements of PGDM Programme

Asia-Pacific Institute of Management, New Delhi

Date: 09-01-14

CERTIFICATE

This is to certify Ms. Pooja Jha has undergone the winter project under my supervision and guidance from (November to December). This is an original winter project report to the best of my knowledge carried out by her in partial fulfillment and requirements of PGDM Programme at Asia-Pacific Institute of Management, New Delhi.

Sincerely,

Prof. Ravindra Bhatia

Date: 09-01-14

DECLARATION

I do hereby declare that I have completed the winter project titled MSME Finance - Government Initiative from (November to December). The project report submitted is my original work carried out under the supervision and guidance of Prof. Ravindra Bhatia in partial fulfillment and requirements of PGDM Programme at Asia-Pacific Institute of Management, New Delhi. It has not been submitted elsewhere for award of any degree / diploma.

Truly Yours,

Pooja Jha2K12BFS14

ACKNOWLEDGEMENTIt is a matter of great satisfaction and pleasure to present this report on MSME Finance- Government Initiative. I take this opportunity to owe my thanks to all those involved in my guidance.

This project report could not have been completed without the guidance of our WIP Faculty Supervisor Prof. Ravindra Bhatia. I express my gratitude towards my faculty supervisor who has helped me in completing this project. Pooja Jha

CONTENTSSerial No.DescriptionPage No.

1.Introduction, Need & Relevance and Objective of the studyLiterature Review7-12

2.Financing of MSME13-14

3MSME Financing in Eastern India, Government Institute and Schemes15-26

4Improving Credit Health for MSMEs

27-32

5Expanding The Financing Horizon & Use of Alternative Financing Options33-41

6Micro Research:Research Methodology, Results & Discussion Limitations, Findings & Suggestions, Problems relating to MSMEs42-49

7Conclusion & References50-51

8Appendix52-54

ABSTRACTThe MSME sector plays a significant role in the Indian economy. A catalyst for socio-economic transformation of the country, the sector is critical in meeting the national objectives of generating employment, reducing poverty, and discouraging rural-urban migration. These enterprises help to build a thriving entrepreneurial eco-system, in addition to promoting the use of indigenous technologies. The sector has exhibited consistent growth over the last few years, but it has done so in a constrained environment often resulting in inefficient resource utilization. Of the many challenges impeding the growth and development of MSMEs, inadequate access to financial resources is one of the key bottlenecks that make these enterprises vulnerable, particularly in periods of economic downturn. The term MSME is widely used to describe small businesses in the private sector. Regulators and financial institutions across the world use parameters such as employee strength, annual sales, value of fixed assets, and loan size proxies to define the sector in the context of finance. Micro enterprises mostly operate in order-driven industries such as retail trade, repair and maintenance, restaurants and textiles among others, and have a significant working capital demand. In this project it will be seen that what necessary steps have been taken to promote and grow MSME Finance by the Government of India.

INTRODUCTIONThe Micro, Small and Medium enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development in all over the world. Let there be any category of countries (Developed, Developing and Under Developed), the existence of MSMEs is inevitable. The major advantage of the sector is its pivotal role through its contribution in Industrial output, Exports, and majorly in Employment generation at low capital cost. The labor intensity of the MSME sector is much higher than that of the large enterprises.The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports.. Government focus on MSMEs intensified with the passage of the Micro Small and Medium Enterprises Development (MSMED) Act in 2006. This Act introduced the concept of enterprise Which expanded on industries to include both manufacturing and service entities And defined MSMEs based on their total investment in plant, property, and equipment. The 2006 Act also created the Ministry of Micro, Small, and Medium Enterprises (MMSME), which coordinates policy and regulation affecting MSMEs, and included provisions for: Preferences to MSMEs in government procurement activities Mechanisms to assist with delayed payment problems A scheme to help MSMEs with business closures Specific funds to promote, develop, and enhance MSME competitiveness.7The government has also worked to promote MSMEs by improving credit availability via higher loan limits and facilitating cooperation amongst MSMEs.8 Cluster development programs encourage MSMEs to physically locate themselves near each other in order to increase collective bargaining power, take advantage of infrastructure and technology upgrades, and avoid fragmentation. Such policies have translated into growth for both small and medium sized firms and the economy as a whole.

Definition of MSMEs (Based on Investment in Plant & Machinery and Equipments)

Manufacturing Sector

EnterprisesInvestment in Plant & Machinery

Micro EnterprisesDoes not exceed twenty five lakh rupees.

Small EnterprisesMore than twenty five lakh rupees but does not exceed five crores rupees.

Medium EnterprisesMore than five crores rupees but does not exceed tencrores rupees.

Service Sector

EnterprisesInvestment in Equipments

Micro EnterprisesDoes not exceed ten lakh rupees.

Small EnterprisesMore thanten lakh rupees but does not exceed two crores rupees.

Medium EnterprisesMore than two crores rupees but does not exceed five core rupees.

In accordance with the provisions of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006, the Micro, Small and Medium Enterprises (MSME) are classified into two Classes:

(a)Manufacturing Enterprises:The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951). The Manufacturing Enterprise are defined in terms of investment in Plant & Machinery.

(b)Service Enterprises:The enterprises engaged in providing or rendering of services defined in terms of investment and are in equipment.

In India, the MSMEs contribution is highly remarkable in the overall industrial economy of the country. In recent years the MSME sector has consistently registered higher growth rate compared to the overall industrial sector. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive the recent economic downturn and recession. In Indian market, MSMEs rapid growth could be seen as 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. The sector not only serves for urban market but also helps in industrialization of rural and backward areas, reducing regional Imbalances and assuring more equitable distribution of national income and wealth. MSMEs complement large industries as ancillary units and contribute enormously to the socioeconomic development of the country. MSMEs account for 45% of Indias manufacturing output, about 40% of Indias total exports; employ about 73 million people in more than 31 million units spread across the country, manufacture more than 6,000 products ranging from traditional to high tech items. The report also projects the total production coming from the MSME sector at 10,957.6 billion in FY12, an increase of more than 11% over the previous year contribution.Though, MSMEs contribution is phenomenal in the growth of Indian economy. Simultaneously, MSMEs are facing intense pressure and constraints to sustain their competitiveness in globalized world. Some other issues such as recession, low demand, finance, heavy competition from MILLIONCs etc. are becoming conspicuous dilemma to MSMEs in India. In this competitive world, MSMEs need to be able to confront the increasing competition from developed and emerging economies and to plug into the new market opportunities, provided by these countries. There is a direct link between internationalization and increased MSMEs performance. International activities reinforce growth, enhance competitiveness and support the long term sustainability of companies. Yet Indian MSMEs still depend largely on their domestic markets despite the opportunities brought by the enlarged single market and by globalization at large. De-reservation of items which were earlier reserved for MSMEs, increasing competition by liberalizing the policies and allowing foreign companies to operate in Indian market are some of the emerging challenges before MSMEs. Internationalization strategy is studied in this research as one of the important strategies for countering global challenges for MSMEs. This term basically is not new; it has been studied by various authors in different-different ways. Internationalization does not only mean exporting but it compasses trade across the border, cross-border collaboration, alliances, cross-cultural diversity and the different business environment beyond the home country environment. So to counter the global competition and to access the global market, internationalization strategy is become the need of the hour for MSMEs to use all the opportunities created due to globalization. A natural way of internationalization would be to first get involved in inward and outward activities which are nothing but imports and exports. There are also many enterprises which are inclined to born global concept, however this emerging concept requires more capital investment at the initial phase of the enterprises. Wherein the internationalization strategy goes through the steps and the MSMEs could make their presence globally at low capital cost.

NEED & RELEVANCEThe need and relevance of this study is to see in what ways Government of India could reduce poverty, generate employment and discourage rural-urban migration. OBJECTIVE OF THE STUDYThe main objective of the study is to see what necessary steps have been taken by Government of India to promote MSME Finance.

LITERATURE REVIEWIndias economy grew slowly for more than thirty years following its independence in 1947 due to tight government control and adherence to socialist policies. In the late 1970s, the Janta Party came to power and enacted a series of economic reforms that paved the way for further liberalization and higher growth throughout the next decade. Indias economy grew at a much faster pace until problems arose beginning in the late 1980s and culminating in 1991 with a severe external debt crisis. Yet rather than defaulting on foreign debt obligations, Indian leaders responded by embarking on a new period of economic liberalization marked by significant changes in the country's development strategy and increasing integration into the world economy. Within this context, the government also turned its attention toward the growth potential and economic importance of smaller enterprises. Parliament created the Small IndustriesDevelopment Bank of India (SIDBI) in 1990 as the main financial institution to promote, finance and develop small-scale industry. Today, according to SIDBIs annual report, it provides direct financing to the MSME sector and operates two funds of Rs 2,000 crores ($430 million) each to focus on risk capital financing and enhancing the MSME sectors refinancing capabilities.In 1991, the government created the Ministry of Small Scale Industries (SSI) and provided direct assistance to the MSME sector by giving smaller enterprises priority production rights to a list of about 4,000 goods and services over larger firms. In keeping with the countrys progression towards more liberal economic policies, this protection has been gradually phased out. As of March 2005, the list contains only 506 goods/services

Financing of MSMEs

MSMEs require timely and adequate capital infusion through term loans and working capital loans, particularly during the early and growth stages. Historically the MSMEs have relied on following sources for financing their needs: Retained earnings, funding through sale of assets Ancestral capital, personal savings, loans from relatives, loans from unregulated market Institutional financing from scheduled commercial banks Venture capital funds/ seed funds

Among the formal financial institutions, commercial banks constitute the largest source of financial assistance for the MSME sector at about 87% as of 31st March 2011. The outstanding MSE credit by SCBs recorded a strong growth of 34% in FY 2011 on a strong base of 3, 62,291 crores INR as of 31st March 2010. The traditional and emerging options for financing MSMEs in the eastern states of West Bengal,Bihar, Odisha, Jharkhand and Chhattisgarh, MSMEs have been discussed in the subsequent section.

Financing relatedLegal and tax related

Non-availability of adequate and timely credit High cost of credit; Collateral requirements; Limited access to equity capital.

Multiplicity and procedural complexity of labor laws;No mechanism for quick revival of viable sick units and speedy shutdown of unviable ones;Issues relating to taxation, both direct and indirect, and procedures thereof.

Operations relatedInfrastructure and technology related

Problems in supply to government departments and agencies; Cost efficient procurement of raw materials;Problems of storage, designing, packaging and product display.

Lack of access to global markets;Inadequate infrastructure;Lack of access to modern technologies;Lack of skilled manpower in manufacturing, services, marketing, etc.

Various action points were included in the Task Forces recommendations, but the financing problems still persist. MSME owners generally have limited access to credit. This forces them to borrow from unregulated lending markets.

MSME Financing in Eastern India

Traditional Financing Options

The number of new MSMEs has been consistently increasing across the nation. Financial support can be attributed as a reason for this. This has been possible through various debt instruments, limited equity capital and a slew of government schemes. However, the picture is less rosy in the eastern region of India. To address this, many schemes for the development of MSMEs have been launched by the central and state governments. Many central and state institutes provide varied assistance for the growth of MSMEs in eastern India.

Financial support from public sector banks

Public sector banks have been pioneers in providing financial assistance to several MSMEs which can approach the banks for loans under various schemes. The government of India has shown strong commitment to double the credit flow to this sector in the next five years. Hence the RBI has mandated scheduled commercial banks to achieve 20% year-on-year credit growth to the MSME sector. MSMEs needing financial assistance can approach the banks for aid as per the specific schemes constituted for different types of financial aid.

Government Institutes and Schemes

Central institutes and schemes

The following table captures in brief the nodal government bodies looking after MSME development and some of the central government financing schemes available.

Name of scheme/instituteNature of assistance

National Small Industries Corporation (NSIC)

Financial and marketing assistance to the small scale unit supplying requisite machinery on hire purchase and leasehold basis

Small Industries Development Agency (SIDA)

Single window service for SSI units

Credit Linked Capital Subsidy Scheme (CLCSS) (by various banks and institutes

Facilitates technology up gradation of micro and small enterprises. The scheme provides 15% capital subsidy on institutional finance availed by them for induction of well-established and improved technology in approved subsector products. The maximum limit of loan for calculation of capital subsidy under the scheme is 100 Lakh INR with a maximum subsidy of 15 Lakh INR.

PMEGP Training Programme

Beneficiaries can set up micro enterprises by availing of margin money subsidy of 25% (35% for special categories) of the project cost in rural areas. The maximum cost of the projects assisted under PMEGP is 25 Lakh INR in the manufacturing sector and 10 Lakh INR in the service sector.

Small Industry Development Bank of India (SIDBI) (Eastern Regional Office)

Promotion, financing and development of the small scale sector, and co-ordination of the functions of the institutions engaged in the promotion and financing or developing industry in the small scale sector.SIDBI also refinances institutions such as state financial corporations (SFCs), state industrial development corporations (SIDCs), and commercial banks against loans granted to the small-scale sector. SIDBI also acts as financer for small-scale projects directly on a selective basis.Products and services offered by SIDBI may be broadly classified:Institutional: Focuses on refinance schemes, like Mahila Udyam Nidhi, finance to small transport operators, technology up gradation fund for textile units, loans for acquisition of ISO certification, self-employment loan for ex-servicemen, single window finance for short term credit, all of them operated through SFCs or SIDCs or primary lending institutions or Banks or other microfinance institutions, depending upon the category of loans.Promotional: SIDBI acts as a nodal agency for several Government schemes such as Technology Up gradation Fund Scheme for the textile sector, Integrated Development of Leather Sector Scheme for the leather sector and Modernization/Up gradation of Food Processing Industry.SIDBI Venture Capital Fund Ltd (SVCL) manages two funds set up by SIDBI at the national level. The National Venture Capital Fund for Software and IT Industry (NFSIT) is worth 100 crores INR, established with the focus of supporting incubation projects of small-scale units in the IT and related business.

The SME Growth Fund has a corpus of 500 crores INR which targets growth-oriented businesses in the areas of life sciences, retailing, light engineering, food processing, IT, infrastructure related services, healthcare, logistics and distribution, for making primary equity and equity related investments.

National Bank of Agriculture (NABARD)

Assistance and refinance to farm and rural development agro processing sector

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

CGTMSE, established jointly by SIDBI and the government of India, extends credit facilities to the micro and small enterprises sector.The mandate is:Credit facilities, including term loans, fund and non-fund based working capital facilities up to 1 crores INR extended to micro and small enterprises are guaranteed up to 80% of the amount in default, subject to a maximum of 65 Lakh INR. With regard to loans up to 5 Lakh INR to micro units, the coverage is 85%. Loans guaranteed under the scheme carry zero percent risk weight and provision for the lending institution for the guaranteed portion. The scheme also facilitates lending institutions by the evaluation of the credit proposals on the basis of intrinsic merits of the projects, rather than merely on adequacy of collaterals.

Reserve Bank of India Rural Planning and Credit Dept

Providing refinance to nationalized banks and financial institutions in the industry sector and framing of policy decision in the working of banks

EXIM Bank

Credit facilities are available for financing all stages of the export cycle of Indian firms. The banks lines of credit (LOC) extend to commercial banks, financial institutions, regional development banks, and entities overseas serve as a market entry mechanism to Indian exporters and provide a safe mode of nonrecourse financing option to Indian exporters. The bank offers buyers credit and suppliers credit for exports on deferred payment terms. These facilities help SMEs, to offer competitive credit terms to the buyers and to explore newer geographical markets.

TUF(Technological Upgradation Funds)It facilitates those SMEs that look to improvise their technological skills. It provides 15% margin money subsidy for the SSI textile and jute sector in lieu of 5% interest reimbursement on investment in TUF compatible specified machinery subject to a capital ceiling of 200 Lakh INR and ceiling on margin money subsidy 15 Lakh INR. A minimum of 15% equity contribution from beneficiaries is ensured.

CLCSSUnder CLCSS, tiny units with investment in plant and machinery of less than 10 Lakh INR are eligible for a loan support of upto 8 Lakh INR.Tiny units with investment in plant and machinery between 10 Lakh INR to 25 Lakh INR are eligible for a loan support of upto 20 Lakh INR.Small units with investment in plant and machinery of above 25 Lakh INR are eligible for a loan support of upto 40 Lakh INR.

Interest subsidy scheme of IPR, which works effectively with the active assistance of banks and financial institutions.

The interest subsidy scheme helps in dispensation for labor-intensive industry by extending the facility of 2% interest subvention for handlooms, handicrafts, carpets and small and medium enterprises (SMEs).

NEF(National Equity Fund)Under NEF, loans are given to firms with a project cost (including margin money for working capital) not exceeding 50 Lakh INR in case of new projects. No interest is charged on the loan component except service charge of 5% p.a.

Scheme of Fund for Regeneration of Traditional Industries (SFURTI) through Coir Board

75% for CFC, technology upgradation, product development and 100% for capacity building, market development with component-wise ceiling. The components of funding are technology upgradation, setting-up of common facility centres (CFCs), development of new products and designs, new and improved packaging, etc, market promotion activities, capacity-building activities, other activities identified by the implementing agency (IA) as necessary for the development of the cluster

ABOUT CGTMSEUnder this scheme, loan up to 100 lakh is available and it can be obtained for working capital requirements, purchase of machines, expansion plans, etc.Fundraising has always been a huge challenge for small and medium enterprises (SMEs) in India. The SMEs in the country have limited owned capital available to start a business and sustain it during initial years. They find it extremely difficult to find money when they need it most.Though there are a number of banks, angel investors and venture capitalists being operational in the country to provide financial aid to small units in the country, their operations are not praiseworthy. They ask for collateral before deciding to fund SME business. It is quite clear that no lender will be ready to risk their money by providing loans to the small enterprises for fear of defaults. However, we cannot put the entire blame on these lenders, as defaults on loans as well as non-performing assets (NPAs) have become a common scene these days.As a boon to the sector, the government and a few public sector banks, such as the State bank of India (SBI), have already announced collateral-free loans. The CGTMSE (Credit Guarantee Fund Trust for Small and Medium Enterprises) is one such scheme.Launched in 2000 by the Ministry of MSMEs, the CGTMSE scheme is aimed at providing collateral-free loans to small businesses. Loans under this scheme are available to SMEs in both the start-up as well as existent phases.The loans are given through Member Lending Institutions (MLIs). All leading banks offer loans under the scheme. The list of MLIs is available on the website of CGTMSE. Loans given by MLIs under the scheme are guaranteed by CGTMSE subject to limits.Under the scheme, loans offered to SMEs are collateral-free. Small enterprises are not required to bring in their own collateral to avail loan. The credit given to them becomes prime security for the banks. Loan up to 100 lakh is available under CGTMSE. Loans can be obtained for working capital requirements, purchase of machines, expansion plans, etc.Loans given by MLIsIt is to be noted that small businesses involved in retail trade are not eligible for this scheme. The loan under the scheme is disbursed through MLIs. Guarantee fee and annual service fee need to be paid by the borrower, who avails loan under the scheme. Guarantee fee can be up to 1.5 per cent of the loan amount and annual service fee can be 0.75 per cent. This depends on the MLIs. Loans up to Rs 100 lakh can be obtained simultaneously from more than one MLI.

Assistance in West Bengal

Name of scheme/ instituteNature of assistance

West Bengal Handicrafts Development Corporation LtdPromotion and development of handicrafts through skill development and organization of direct haats in rural and urban areas, to provide artisans a market

West Bengal Industrial Development Corporation Ltd (WBIDC)Nodal agency of the state government for the promotion and financing of medium and large-scale industries. Provides support to industries by facilitation, financing, disbursing incentives and by setting up industrial parks

The West Bengal Small Industries Development Corporation Ltd (WBSIDC)Providing infrastructural support, marketing assistance, supply of raw materials and other promotional assistance for SSI units

West Bengal Industrial Infrastructure Development CorporationProviding supporting infrastructure relating to roads, drainage, water and power supply, street lighting, CFC of 12 established growth centres in the state

West Bengal Financial Corporation (WBFC)Providing term loan assistance to small-scale industries in the state

Modular Food Park Modular Industrial Infrastructure Ltd.Sponsored by the FPI department, it provides infrastructure at Dankuni and other support of food

Assistance in JharkhandThere are no specific institutes in Jharkhand but the state government itself undertakes promotion and support of the MSMEs through following activities. Coordination support for MSMEs to micro finance institutions, raw material focused market access. Special emphasis is given on providing common facility centres (CFC) mainly through public-private-partnership (PPP) initiatives to MSME projects of a cluster. Implementation of schemes such as ASIDE, Credit Guarantee Fund Trust Scheme, Cluster Development Programme for MSMEs. Other financial support for MSMEs: Tender forms for biding will be made available free of cost. Exemption from payment of Earnest Money Deposit (EMD) and Security Deposit (SD) Bill discounting facility will be made available on government orders. 10% price preference i.e. where the bid of micro and small enterprises are within 10% of L1 (Least priced bid), the local micro and small enterprises will be given an offer of reasonable part of the order at L1.

Assistance in Odisha

Name of scheme/ instituteNature of assistance

District Co-ordination Committee (DCC)New small-scale units in priority sectors are entitled to interest subsidy at the rate of 5% per annum for a period of five years from the date of commercial production on term loans availed from recognized financial institutions and banks.Small-scale industrial units (existing or new) which undertake modernization are eligible for interest subsidy at the rate of 5% per annum for a period of five years from the date of completion of modernization on term loans availed from recognized financial institutions and banks.The interest subsidy will be limited to 20 Lakh INR in case of small-scale units and 10 Lakh INR in case of tiny units.Industrial units operating in Kalahandi, Nuapada, Bolangir, Sonepur, Koraput, Malkangiri, Rayagada, Nawarangpur, Gajapati and Deogarh will get additional interest subsidy at the rate of 5% of the term loan or 5 Lakh INR, whichever is less, as an incentive for backward area development.

Odisha Small Industries Corporation (OSIC)The OSIC has the following objectives: To provide quality raw materials To provide quality building materials To assist in marketing the products To act as a syndicate leader as per the IPR of the government of Odisha To act as a contract exchange for the MSME sector

Odisha State Financial Corporation (OSFC)The provide term loans on below loan limit5Minimum: 5 lakh INRMaximum: 1000 lakh INR (to corporations, companies, co-operative societies)Maximum: 400 lakh INR (to proprietorship concerns and partnership firms and trusts)Rate of interest shall be fixed on risk-based rating of the project which will vary from 13.5% p.a. to 15.5% p.a.

Assistance in Bihar

Name of scheme/ institute

Nature of assistance

Chief Minister Cluster Development Scheme 6 SME requirements are the focal point of this proposed scheme.

Bihar State Financial CooperationHelps in planning and arranging finance

SL Industry SubsidyThose who allotted land and shed in Industrial Area Development Authority (IADA), Export Promotion Industrial Park, Food Park, Agri-Export Zone, etc are eligible for subsidy after commercial production of unit. Small/Tiny unit, 50% with a ceiling of Rs. 15 lacs All large/Medium/Mega units 25% with a ceiling of Rs. 30 lacs

NABARD schemesInitiatives like the urban cooperative bank, Self Help Group (SHG) were strengthened further to ensure wider financial inclusion and also reduce the incidence of informal credit lending and high interest rates in Bihar. The MSME units were made entitled to credit cards similar to the kisan credit card. The power loom sector needs to be included in the list of the beneficiaries eligible for credit linked subsidy scheme of the PMEGP as the power loom sector has already benefitted from the same scheme in the neighboring state of West Bengal. The central scheme interest subsidy of 3% to enable weavers to access loans at the rate of 7 to 8% interest for the next three years had been implemented.

Improving credit health for MSMEsCredit related issues

MSMEs depend predominantly on internal sources of finance (personal savings, loan from relatives, and loan from local money lenders) than that of institutional financing by banks and other financing institutions. An indication is that even in recent times, MSME credit as a percentage of net bank credit of commercial banks has been below 15%. Banks perceive MSMEs as risky field of investment due to the following: Low growth rate of small firms Firms following informal business practices Inability of MSME owners to maintain collateral securities Lack of credit worthiness and goodwill Relatively high processing costs (in background checks, etc) Lack of transparency due to poor reporting of firm data

Some of the reasons cited above are uncontrollable from the perspective of MSMEs. MSMEs generally operate on tight budgets, and are often unable to procure adequate financial resources for the purchase of machinery, equipment, raw materials, or even day-to-day operational expenses. This is because on account of their low goodwill and limited fixed investment base, they find it difficult to borrow at reasonable rates from institutions. Hence, for an MSME, any unforeseen event (large order, rejection of consignment or inordinate delay in customer payment) may result in the unit having close operations due to lack of funds. Also, the dearth of capital also implies there is little scope for growth and expansion.Role of credit rating in financingOne of the most important procedures taken by financial institutes that offer credit to MSMEs is to scrutinize their credit rating status in order to get a clear picture of the creditworthiness of the enterprises. Credit rating is done by the credit rating agency (CRA) which assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves to form a basis to prove the authenticity of the new firms who seek financial help from different organizations for their business. Hence, credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments.Credit rating is done on the basis of credit scores that are numerical values assigned to the MSMEs based on a statistical analysis to notify their credit worthiness. These scores are often evaluated on the basis of the credit reputation of a company, commonly known as a credit report, available from the Credit Bureau of India. The government of India also operates a specialized rating agency known as the SME Rating Agency of India Limited (SMERA), which is a third-party rating agency exclusively set up for micro, small and medium enterprises in India for ratings on creditworthiness. It provides ratings which enable only MSME units to raise bank loans at competitive rates of interest. SMERAs MSME rating scale consists of two parts, a composite appraisal/condition indicator and a size indicator. SMERA rating categorizes MSMEs based on size, so as to enable fair evaluation of each MSME amongst its peers. SMERAs MSME rating scale is specified below:

Condition indicator

MSME 1Highest

MSME 2High

MSME 3Above average

MSME 4Average

MSME 5Below average

MSME 6Inadequate

MSME 7Low

MSME 8Lowest

Size indicator (based on net worth)

A20Cr INR and above

BBetween 5 Cr INR and 20 Cr INR

CBetween 1Cr INR and 5Cr INR

DLess than 1Cr INR

Some of the important credit rating agencies working in India are CRISIL, CARE, ICRA, FITCH RATING, NDIA and ONICRA.A scheme for performance and credit rating mechanism for SSIs has been formulated by the government of India in consultation with the Indian Banks Association (IBA) and various rating agencies. The National Small Industries Corporation (NSIC) has been appointed the nodal agency for implementation of this scheme. Under the scheme, the NSIC provides subsidy in the rating fees to the small scale industrial units (SSIs) obtaining credit ratings from the agencies which are empanelled by them.

Guide to better credit worthinessThere are several guidelines laid down by the United Nations, the RBI and many others to safeguard the working of MSMEs. The most common teething problem faced by MSMEs is getting access to credit. One of the best ways to ensure credit worthiness, as recommended by many organizations, is to go for credit rating by a third party. Some others include the following: Credit rating not only ensures the credibility of the SME, but also helps them to get interest relaxation against credit from banks even in future credit applications. Credit rating assists the MSMEs in building their business credibility and hence, reduces the perceived risk of default from the banks perspective. Credit worthiness may be further improved by increasing the level of transparency and process rigor in record keeping and financial reporting. Most micro enterprises are weak in this aspect and this may be greatly improved through rating. Rating involves analysis for which the starting point is the financial statement of the firm. The last line should be: Hence, this process also increases the level of discipline and record keeping standards in MSMEs. Financing institutes also apply qualitative parameters extensively in gauging the credit worthiness of an MSME applicant since the financial statements furnished may not reflect the correct business strength. Such parameters would include typically organization structure, background check of promoters (and family), management strength, resilience of the firm, quality of product, supplier and client network, trade relationships, previous credit defaults (by any director or kin), etc. Hence, maintaining transparency is of utmost importance in building credit worthiness. The other aspect is of having well-defined processes and adhering to them that would ensure quality of product, consistency of delivery, etc. Credit rating also helps an MSME by getting more financial support as banks may increase their credit limits due to higher comfort factor in transacting with a well rated MSME. The rating also allows the MSMEs to expand their market base, get new contracts from export markets.

Current Institutional RolesGovernmentAcademiaIndustry

Little promotion of the MSMEsector domestically andInternationally.Limited outreach of policies and programs across areas of operations of MSME.Low investment in technologyleading to low productivity andpoor quality of products.Colleges/ Schools/ ITIs primarily suppliers of human capital to the MSME industryLack of spin-offs from academia Majority of facultys time spent on teaching rather research and entrepreneurshipLow rate of business incubators in educational institutions of reputeR&D and training institutionSpending by private enterprises is low. Few linkages among thestakeholders as well as betweenfirms and end-users.Low penetration in theinternational market.

Expanding the Financing Horizon

Any start-up generally seeks financial support. Usually in the MSME sector, start-up capital is funded by personal savings, borrowings from the unregulated market or family members. Sometimes, such funding may be sufficient, but most of the time, the requirement for financial support is not met. Organizations can seek financial assistance depending on the project and the financial support provided by various financial institutes.

Management EvaluationThe management quality of the MSME is the first and foremost checkpoint for the financing institution. The background and previous track record of the management and the promoters in terms of heading businesses as well as their credit history forms an important value add for the firm. The organization structure is significant as well as it is checked for balance of control and responsibility. The incorporation documents for the company have to be in line with the companys intended business vision and areas. Memorandum and articles of association: Object, authorized and paid-up share capital, promoters contribution, borrowing powers, list of directors on the board, terms of appointment of directorsSMEs company as the promoter: Corporate plan of the company, projects promoted, implemented, under implementation, bankers report on dealings and repayment of past loan assistance, details of group companies, operations, balance sheet and profit and loss account of the promoter company.

New promoters: Educational background, any industrial experience, family background, sources of income, details of personal properties, bankers reference, Income tax and Wealth tax returns.Management and organization set-up: Broad composition of the board, details of fulltime directors and their responsibilities, details of chief executive and functional executives including qualification, experience, organization set-up for existing company and during project implementation for new company.

Technical feasibilityThe technical feasibility is tested by the financer by a standard assessment procedure of mapping the local unmet demand for the specific service/ product being sold by the applying SME with factors like local competition, availability of raw materials and required manpower, logistics and infrastructure etc. The other important cog that is tested here for soundness is the background of the contractors setting up the plant/ facility and their project track record. The last and of increasing importance, is the environmental impact of the proposed project and clearances needed thereof. Technology and manufacturing process: Proven and new technology, basis of selection of technology, competing technologies, performance data of plants based on the technology, details of licensor of technology, process flow chart and descriptionLocation of the project: Location advantage, availability of raw material and other utilities, infrastructure facilities, availability of labor, environmental aspectsPlant and machinery: List of machinery and equipment, details of suppliers, competitive quotations, technical & commercial evaluation of major equipmentRaw material, utilities and manpower: Details of raw materials and suppliers, electricity and water supply, basis of manpower estimates, details of manpower, e.g. managerial, supervisory, skilled or unskilled, training needsContracts: Agreement with contractors detailing on know-how, engineering, procurement, construction, financial soundness and experience of contractorsProject monitoring and implementation: Mode of implementation, details of monitoring team, detailed schedule of implementation Environmental aspects: Air, water and soil pollution, list of pollutants or hazardous substances, their safety, handling and disposal arrangements, compliance with national and international standards, clearances and no objection certificates required and obtained, etc.

Commercial viabilityExisting and potential market demand and supply for the proposed product in respect of volume and patternShare of the proposed product of the company in the total market through marketing strategySelling price of the product and export potential, if anyBuy-back arrangements, if any.

Financial appraisalThe financial appraisal is the most crucial aspect from the point of view of the financer. Here the overall costs, revenue projections are checked for realistic estimates, and also tested with sensitivity analysis by changing some crucial project parameters like CAGR, service cost inflation, raw material costs etc. The project is also measured in terms of payback period, break even period and internal rate of returns, to give an idea about the revenue and profit generating capacity of the project.Cost of the project: This includes the cost of land and site development, building, plant and machinery, technical know-how and engineering fees, miscellaneous fixed assets, preliminary and preoperative expenses, contingencies and margin money for working capital. SMEs are expected to submit realistic estimates. The cost of the project will be examined with reference to various factors such as implementation period, inflation, various agreements, quotations, etc.Means of financing: This shall have to conform to proper mix of share capital and debt. This includes share capital, unsecured loans from promoters or associates, internal accruals, term loans, government subsidy or grant. The reasonableness of promoters contribution in the form of equity and interest-free unsecured loans, if any, is ascertained in view of commitment to the project. Profitability projections: Past records of financial performance of SME will be examined. SMEs need to submit profitability estimates, cash flow and projected balance sheet for the project and for the company as a whole. Based on the projections, various financial ratios such as debt -equity ratio, current ratio, fixed asset coverage ratio, gross profit, operating profit, net profit ratios, internal rate of return(over the economic life of the project), debt service coverage ratio, earning per share, dividend payable, etc. will be worked out to ascertain financial soundness of the project.

Economic viabilityThis aspect is checked for projects where there is either export orientation or probability of international players entering the domestic market in same area of service/ product as the SME. Hence this is particularly relevant for IT related businesses as well as any FMCG or light engineering venture.SMEs will have to take real value of input as against the value accounted in financial analysis for the economic evaluation of the project.SMEs should carry out social cost benefit analysis as a measure of the costs and benefits of the project to the society and the economy.Economic analysis is aimed at the inherent strength of the project to withstand international competition on its own.Apart from the mandatory documents MSME borrowers can make convincing business cases for funding by keeping the following things in mind while approaching any lender.MSME borrowers can meet their borrowing requirements and avail the best possible terms if they approach banks or financial institutions in an appropriate manner. They must clearly understand the various criteria that banks employ to screen, rate and process their loan applications and the importance of furnishing precise and correct information. As commercial credit bureaus (particularly CIBIL) expand their database, it will become progressively easier for financial institutions to track past repayment or default behavior of loan applicants.

Business Plans

They should ideally have an updated business plan for their company, showing intended capital investments and forecast revenue and expenditure for the next three to five years. This is an excellent document to produce during discussions with a banker or financial adviser. Having a feasibility study of the project the fund is intended for might prove to be useful as well. Feasibility studies are usually carried out in connection with medium- or long-term projects and are consequently prepared, among other reasons, as an aid to raising medium- to long-term project loan finance. They may wish to start a new project or expand an existing activity, and need capital to finance the additional capital goods required (e.g., machinery, tools, spares and raw materials). MSMEs will need a feasibility study to present to their banker. They will also need to give copies of draft or actual loan agreements with other lending institutions. These are important because the loan agreements may stipulate that they cannot borrow from another lender unless the loan is subordinated to them. This may mean that they cannot pledge fixed or current assets if the first lenders have fixed and floating charges on such assets. They may be limited to providing their bank with a second charge or some other, less secure, form of guarantee. In many respects, the feasibility study is not dissimilar in its presentation to the business plan. The main difference lies in its purpose.

USE OF ALTERNATIVE FINANCING OPTIONS

In spite of the various policies created to augment financial support to SMEs and the growth in the credit limits of banks, SMEs still face challenges when it comes to accessing timely and sufficient credit at a reasonable cost. The credit flow to them is not aligned to the needs of the economic activities undertaken by them. According to a RBI report,11 statistics reveal that small businesses rely on multiple sources of financing ranging from internal sources namely personal funds and funds from friends, to external sources ,both formal and informal, which include financing from banks, NBFCs, venture capital funds, trade credit factoring, etc. The raw sample includes more than 14,000 non-financial firms. In particular, trade credits (bank loans) are less (more) important for Indian firms based on the World Bank surveys. These findings are one of the many indicators of the increasing importance of alternative source of financing for SMEs in India.

FactoringFactoring is a form of receivables finance whereby a business sells or assigns its accounts receivables (i.e. invoices) to a finance company (a factor) at a discount in exchange for immediate money with which to finance continued business.12 The delayed payment cycle by the large scale customers of SMEs have an adverse effect on their operational facets and fund recycling efforts.A CRISIL study on 5000 small and medium enterprises (SMEs) reveals that SMEs can enhance profits by at least 15 per cent if they receive payments on time from their large corporate customers. CRISIL estimates that timely payments from large customers will help SMEs reduce interest costs, improve profitability and have a positive impact on the long-term health and sustainability of Indias SME sector. SMEs with large corporate customers have receivables of 90 to 120 days of sales on their balance sheets, as against 45 days stipulated by the Micro, Small, and Medium Enterprises Development (MSMED) Act. Factoring is capable of providing SMEs with the liquidity needed against their receivables and can be efficient alternate source of working capital. Factors buy the right to collect on invoices raised against any sales by the SME and releases 80-90% of the invoice value to the firm. It is on account of its superior conversion time of receivables into cash, absence of geographical restraints, non requirement collateral security etc makes it a much preferred and superior product than bank finance.The Indian factoring market is still at a nascent stage. As per the Factors Chain International (FCI), a global network of factoring companies worldwide, the turnover of India is only 2750 million Euros, which is less than half of the turnover of Singapore and not even 2% of Chinas turnover. There are nearly 10 factoring companies in India with Can bank factors and SBI Global Factors being two of the oldest.

Supply chain financeSupply chain finance can prove to be another route to facilitate SMEs access to enhanced working capital from bank and non bank sources. This mode of financing enables SME suppliers to large OEMS to receive short-term credit against the volume supplied during the payment receivable period. HSBC for instance has a distributor finance programme (DFP) which assists in creating the support framework for financing and collection for any SME clients delivery chain. Regular MIS helps the SME update their sales ledgers and avoid reconciliation issues.

Angel funds or venture capital fundsSMEs involved in commercializing innovations and high-end technologies need to be able to access venture or risk capital fund effectively. These firms need finance during the initial stages of conceptualizing their product offerings (seed phase) and during development and marketing phase. These concept and ideas generally need an incubation period before they can be utilized for generating revenue or profit. This is where venture capital comes in to provide them with funds required to enter new markets and attain accelerated growth. The GOI in terms of the recommendations of the PMs task force has been working towards clearing the SME route towards accessing this kind of much needed fund. In the Union Budget 2012-13 the Finance Minister had announced to set up a 50 billion INR India Opportunities Venture Fund with SIDBI to enhance the availability of equity to the MSME sector.With the government of India putting the development of the MSME sector as top priority, and the state governments of the eastern region aligning themselves to this objective through implementation of various schemes, the future for MSMEs in the east is brightening up. The MSME companies need to be aware of the schemes and financial aids being offered through various banking and non-banking channels to fund their innovation. With increasing participation of SMEs in the innovative exchange platform, along with their active opt-in for third party credit ratings, access to capital, both equity and debt, should no longer be a bottleneck for growth and expansion. These financial aids and processes will not only give the MSMEs a much needed reprieve from their liquidity crunch, but also help them in instilling the rigor of process, transparency and quality.

MICRO RESEARCHMETHOD OF STUDYIn the process of completing this project, the research has been referred to several credible sources of data, including existing research literature and industry publications. In addition, a series of secondary data was collected in order to understand and evaluate the size of the MSME finance market.

RESEARCH STATEMENTThe Government of India has developed key strategies to promote and support the MSME sector to promote competitiveness. This has resulted in a dramatic positive change in the sector. Key characteristics of Indian MSMEs such as high contribution to domestic production, significant export earnings, low investment requirements, operational flexibility, location wise mobility, capacities to develop appropriate indigenous technology, import substitution, contribution towards defense production, technology-oriented industries, and competitiveness in domestic and export markets help them tap opportunities in various sectors.

Some of the key announcements for MSMEs in the Union Budget, 2010-11 are: Allocation for MSMEs to be increased from Rs 1,794 crores to Rs 2,400 crores for the year 2011 Corpus for Micro Finance Development and Equity Fund to be doubled to Rs 400 crores for 2011 extension of existing interest subvention of 2 per cent for one more year for exports covering handicrafts, carpets, handlooms and small and medium enterprises Limit of turnover for the purpose of presumptive taxation of small businesses enhanced to Rs 60 lakhThe increase in the extension of existing interest subvention of 2 per cent to the small and medium enterprises is a positive development. Setting up of High LevelCouncil on MSME to monitor the implementation of the recommendations of Prime Ministers High Level Task Force and increase in the allocation for MSMEs augurs well for the overall development of this sector.

Problems Relating to MSMEsMicro, small and medium enterprises (MSMEs), including khadi and village as well as rural enterprises, play a pivotal role in the overall industrial development of the country. They have been the significant contributor to the national income, with their huge involvement in country's industrial production, exports, etc. They not only help in providing employment opportunities to millions of people across the country, especially to the village artisans and rural people, but also check the problem of economic concentration in the hands of a few. They create a sound entrepreneurial base in the economy by developing and nurturing the talents, skills, etc. of small and medium scale entrepreneurs. The labor intensity in the MSME sector is estimated to be considerable higher than the large enterprises. Thus, this sector has been regarded a priority status by both the Central and the State Governments.Inspite of this, the MSMEs continue to face several problems in their day-to-day operations, that is, in production and marketing of their products. They find it difficult to sell their output at remunerative prices and cannot spend much on advertising, marketing research, etc. They also face stiff competition from large firms. Inadequate infrastructural facilities and access to credit are other major problems. MSMEs are often unable to procure adequate financial resources for the purchase of machinery, equipment and raw materials as well as for meeting day-to-day expenses. Further, they find it difficult to recruit and motivate skilled managerial and technical personnel. They are mainly reluctant to adopt modern methods of organization and management.Although, the primary responsibility for promotion and development of MSMEs lies with the concerned State/ Union Territory (UT) Governments. But, the Central Government has always taken active interest in supplementing the efforts of State/UT Governments through its various regulations, as MSMEs have huge potential both in terms of creation of wealth and employment as well as for the proper growth of related sectors of the economy. In India, theMinistry of Micro, Small and Medium Enterprises are the main central authority which assists the States/UTs in their efforts to promote growth and development of MSMEs. It has been implementing several schemes/programmers and policies so as to enhance the global competitiveness of the MSMEs. These relate mainly to simplified systems and procedures, easy access to capital, positioning the MSMEs in the global value chain by enhancing their productivity, technology up gradation, quality improvement, skill development, access to both domestic and international markets, etc.

RESULTS & DISCUSSIONSThe government has taken several measures to solve the problems faced by micro, small and medium enterprises and enable them to play an effective role in the country's economy. These measures may be broadly classified into: Protective Measures: which are designed to protect small scale industries from the competition of large firms. Promotional Measures: which have been undertaken to promote the growth of the small scale sector in the country. Institutional Measures: which have been taken by the government in the form of setting up of several institutions or agencies to provide liberal and manifold assistance to small scale industries.Recently, major initiatives have been taken by the government to revitalize the MSME sector. They include: Implementation of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. A "Package for Promotion of Micro and Small Enterprises" was announced in February 2007. This includes measures addressing concerns of credit, fiscal support, cluster-based development, infrastructure, technology, and marketing. To make the Credit Guarantee Scheme more attractive, the following modifications have been made: (a) Enhancing eligible loan limit fromRs.25 lakh toRs.50 lakh; (b) Raising the extent of guarantee cover from 75 per cent to 80 per cent for (1) Micro enterprises for loans up toRs.5 lakh, (2) MSEs operated or owned by women and (3) All loans in the North-East Region; and (c) Reducing one-time guarantee fee from 1.5 per cent to 0.75 per cent for all loans in the North-East Region. The phased deletion of products from the list of items reserved for exclusive manufacture by micro and small enterprises is being continued. 125 items were de-reserved on March 13, 2007, reducing the number of items reserved for exclusive manufacture in micro and small enterprise sector to 114. Further, 79 items were de-reserved on February 5, 2008, 14 items in October 2008, followed by a revision in July 2010. Some other suggestions generally put forward are: Arrangements may be made by the government to ensure the supply of trained and professional managers for the small scale sector. It would be necessary to consider policy initiatives to incentivize MSMEs to achieve economies of scale by expanding production. To facilitate the MSME sector to garner resources, it is imperative that a separate trading exchange be set up exclusively for the MSMEs. Provide special incentives for encouraging larger flow of Venture Capital & Private Equity funds into the sector. There is an urgent need to devise measures to tackle the problem of loss of fiscal benefits when the micro and small-scale units graduate into larger units, etc.

LIMITATIONSThe study has limited data which is collected as a secondary data from various sources and no changes can be made in the given tables and data shown in the report as these have been collected on the basis of research done on MSME.

FINDINGS & SUGGESTIONSAs expected, banks remain a dominant source of finance for MSMEs with over 70% of respondents accessing finance from banks. However, banks also bring their own set of problems. In terms of institutional sources, 17.6% accessed NBFCs for finance and 13.7% looked at private placements for meeting their funding requirements. Other hardships faced by MSMEs include a high rate of interest, a lack of personalized service and often a lack of justification for denial of finance.

Though the information is available in various websites but awareness amongst the public at large and in Businessmen is lacking about MSME which government needs to promote it in a better way through the medium of Advertisements on televisions, newspapers, magazines etc.

CONCLUSIONDespite the sectors strategic importance in overall industrialization strategy and employment generation, as well as the opportunities that the Indian landscape presents, the MSME sector confronts several challenges. Technological obsolescence and financing problems have been associated with the sector since long. Also, constraints such as high cost of credit, low access to new technology, poor adaptability to changing trends, lack of access to international markets, lack of skilled manpower, inadequate infrastructure facilities, including power, water, roads, etc., and regulatory issues related to taxation (state central), labor laws, environmental issues etc. are also linked with its growth process. There is a need to develop potential strategies in order to improve linkages and coordination between the Government, Industry and Academia. There is also a need to develop an alternate delivery channels through capacity building of the MSME Associations and the public-private partnerships in the institutional structure as also the schemes. Given the nature of the enterprises, there is a need to facilitate start-ups and evolve a time-bound exit mechanism.

REFERENCES Various Bank Sites:Reserve Bank of India, State Bank, Canara Bank, Allahabad Bank, Union Bank of India. International Finance Corporation Report www.ciol.com www.business.gov.in www.ficci.com

APPENDIXLIST OF ABBREVIATIONS

ASIDEAssistance to States for Infrastructure Development of Exports

CFCCommon facility Center

CGST Central Goods and Services Tax

CGTMSECredit Guarantee Fund Trust for Micro and Small Enterprises

CIIConfederation of Indian Industries

CLCSSCredit Linked Capital Subsidy Scheme

CSTCentral Sales Tax

DCCDistrict Co-ordination Committee

DFPDistributor finance Programme

EFSEquipment Finance Scheme

EMDEarnest Money Deposit

GDPGross Domestic Product

GOIGovernment of India

IADAIndustrial Area Development Authority

LOClines of credit

MSMEDMicro, Small, and Medium Enterprises Development

MSMEsMicro, Small and Medium Enterprises Development

NABARDNational Bank of Agriculture

NEFNational Equity Fund

NFSITNational Venture Capital Fund for Software and IT

NSICNational Small Industries Corporation

OSICOdisha Small Industries Corporation

PMEGPPrime Ministers Employment Generation Programme

PwCPricewaterhouseCoopers

SDSecurity Deposit

SFURTIScheme of Fund for Regeneration of Traditional Industries

SIDASmall Industries Development Agency

SIDBISmall Industry Development Bank of India

SLBCState Level Bankers Committees

SMERASmall and Medium Enterprises Rating Agency

SMEsSmall and Medium Enterprises

SVCLSIDBI Venture Capital Fund Ltd

TUFTechnology Upgradation Fund

VATValue Added Tax

VCVenture Capital

WBFCWest Bengal Financial Corporation

WBIDCWest Bengal Industrial Development Corporation Ltd

WBSIDCWest Bengal Small Industries Development Corporation Ltd

LIST OF TABLESPage No.Topic

8Definition of MSME

14Financing of MSMEs

16-20Govt. Institutions & Schemes

23,25-26MSME financing in Eastern India

29Credit Rating

32Current Institutional Roles

1