SSI Units

SSI UnitsI. IntroductionINTRODUCTION TO SSI UNITSAfter gaining indep checkence India in 1947, thither was a felt need of economic prosperity and to revive the nation. Hence India focused on developing itself as a manufacturing base. The planners then took the decision of promoting the gloomy musical exfoliation industries. They were of the view that ssi cornerst atomic number 53 play a significant role in the economic progress of the country as it had huge potential in employment generation, which was the major problem faced during that block of time. Earlier the dainty overcome field was a orbit involved in traditional fag out with outdated machineries and inefficient techniques of production. But since then due to the coordinated efforts of the government and the commercial banks the position of SSI has improved. These efforts include* Reservation of items to be manufactured by the SSI* reliance marketing* applied science and entrepreneurship growth* fiscal, financial and infrastructural supportII. Small Scale Industries2.1Small Scale and Ancillary IndustriesSmall get over industrial units be those engaged in the manufacture, processing or preservation of goods and whose investment funds in demonstrate and machinery (original be) does not exceed Rs.1 crore. These would, inter alia, include units engaged in mining or quarrying, serving and repairing of machinery. In the type of ancillary units, the investment in plant and machinery (original cost) should also not exceed Rs. 1 crore to be classified under(a) sharp-scale industry.The investment limit of Rs. 1 crore for classification as SSI has been enhanced to Rs.5 crore in respect of certain specified items under hosiery, hand tools, drugs pharmaceuticals, stationery items and sports goods by the Government of India.2.2. fiddling EnterprisesThe status of Tiny Enterprises may be given to all clear scale units whose investment in plant machinery is up to Rs. 25 lac, irrespective of the spot of the unit.III. Small Scale Industries FinancingFinance is the blood for any organization. It is that resource which provides the resources for burst factors of production, hence its importance cannot be ignored. After the independence, the Government of India has built upon the lucre of institutions to provide financial service to the menialer scale industries.Since low-pitched scale industries need promotionary help from the government and government has other arenas to look upon for the overall study of the country and hence it has entrusted this duty upon the commercial banks. They induct evolved various methods of funding and left the traditional methods far behind and evolved themselves into developing banks.The importance of the SSI sector can be best explained by the census according to which this sector employees around 60 million persons. And if we talk in terms of value then this sector accounts for about 48% of manufacturing output and 42% of the tota l exports of the country.3.1 Types of Industrial FinanceDepending upon the time period fatality of funds the financing can be classified into the following three types1) Short term financing this refers to those funds which are required by the entrepreneurs for short term ie. For a period ranging less than one year. The motive of such(prenominal) funding is to meet the works capital requirements of the enterprise.2) Medium term financing this refers to those funds which are required by entrepreneurs for a period ranging from one to five years. This type is needed to fund the permanent working capital requirements, small elaborations, replacements, and modifications etc. these funds can be raised by dint of the following resources Issue of debentures Issue of divvy ups Borrowing from banks and other financial institutions Ploughing back of profits ie the retained earnings3) Long term financing it refers to that financing which is extended for a period ranging for much than 5 yea rs. Such funds are required by entrepreneurs for the purpose of investing into fixed as cut backs, for expansion purpose, for bringing about modernization in the enterprise and introduction of new technology.3.2 Means of finance Credit FlowThe main source of input to the free burning growth of small scale sector industries is CREDIT. Credit has already been classified into short term, long term and medium term on the basis of requirement of the enterprise. The institutional arrangement for providing the capital requirement of the SSI is as follows SSI are provided the working capital by the commercial banks and in some case this initiative is interpreted up by co intelligence agent banks and regional rural banks. In case of term loans the provision is do by the state financial corporations, small industries development corporations, national small industries corporation and NABARD. Financial assistance to SSI by NSIC is also made in the form of supply of machinery on hire leverage basis. nevertheless critical units are able to get loans from commercial banks along with working capital in the form of composite loans. Refinancing facilities to the above institutions are provide by Small Industries Development Bank of India(SIDBI) Term loans on long term basis are provided to the small scale units by SFCs mainly through and through single window intrigue and National equity fund. Under single window escape also the SFC provide some part of working capital for pre operative expenses. 3.2.1 Credit to SSI heavens from Public Sector BanksThe table below gives the positions with regard to flow of credit to SSI Sector-At the end of March 2005At the end of March 2006At the end of March 2007At the end of March 2008At the end of March 2009Net Bank Credit1,69,0381,84,3811,89,684,2,18,2192,46,203Credit to SSI25,84329,48531,54238,10942,674 nary(prenominal) of SSI Accounts (in lakhs)32.2533.77N.A.29.64N.A.SSI Credit as percentageage of Net Bank Credit15.2915.9916.617. 517.33There is a boundary lineal decline in share of credit to SSI sector as a percentage of net bank credit.3.2.2 Credit to Tiny SectorThe Table below gives the status of credit flow to tiny sector since 1995-At the end of March 1995At the end of March 1996At the end of March 1997At the end of March 1998Net Credit to Tiny Sector77348183951510273.13Tiny credit as percentage of net SSI credit29.9327.7630.227.0The advances outstanding against Tiny sector increased from Rs.9515 crores at the end of March, 1997 to Rs. 10273 crores at the end of March, 1998. The share of tiny sector in the advances to SSI sector has, however, decreased from 30.2% at the end of March 1997 to 27.0% at the end of March, 1998. As per RBI guidelines, 40% priority sector bring going to SSI has to go to tiny units with investment in plant and machinery below Rs. 5 lakhs and another 20% to tiny units with investment in plant and machinery between Rs. 5 lakhs and Rs. 25 lakhs. Thus, against the target of 60% of SSI credit for tiny units, actual flow at 27% is very low.3.2.4 Steps taken by Reserve Bank of India to improve credit flow to SSI sectora) Investment limit has been enhanced from Rs.60 lakhs to Rs.300 lakhs and for tiny units from Rs.5 lakhs to Rs.25 lakhs. As per the RBI guidelines the funds normally lendable to SSI sector, 40% be given to units with investment in plant and machinery up to Rs. 5 lakhs 20% for units with investment between Rs. 5 lakhs to Rs.25 lakhs and remaining 40% for other units.b) to expand the extent of one Window Scheme of SIDBI to all districts to meet the term loan working capital financial requirements of SSIs.c) With a view to peg the cost of credit to SSI units, banks are advised to grant loans to only those SSI units with a good track record.3.2.5 MonitoringCredit to SSIs is subject to regular monitoring by Reserve Bank of India, Department of SSI ARI, National Advisory Committee of SIDBI, State Level Bankers Committee and District Level Coordin ation Committees of the Bank.3.2.6 Fresh initiatives announced in the cipher of 2008-2009In this budget speech the Finance Minister has announced the following measures for improving credit supply to SSI sectora) A new credit insurance policy scheme launched.The problem of inadequate provision of security to banks and the rate of low recovery are recognized as the constraints of flow of credit to SSI units.the problem is more complex in case of tiny sector units and export oriented units. And the above scheme is launched in the purview of this problem for the help of SSI units.b) Composite loan Scheme Limit Enhanced to Rs. 5 LakhsAnother provision made in the budget is that the composite loan scheme of SIDBI and commercial banks designed to clear up operational difficulties of the small borrowers by presiding term loan and working capital through a single window. The limit for composite loans has been enhanced from Rs. 2 lakhs to Rs. 5 lakhs.c) Working smashing Limit Enhanced t o Rs. 5 CroresIn the case of SSi units, the need for working capital is determined on the basis of 20% of the yearbook turnover. There is a provision in the banks to enhance this limit from 4 crore to 5 crore.d) Credit Delivery to Tiny SectorTo increase the outreach of banks to the tiny sector, jumper lead by banks to Non-Banking Financial Companies (NBFCs) or other financial intermediaries for purposes of on-lending to the tiny sector is being included within the definition of priority sector for bank lending.3.2.7 spicy level committee for credit (Kapur committee)Inorder to boost the financing activity of the SSI RBI appointed one man committee to improve the delivery system and simplify the procedures for the credit availability for the SSI. The Committee has submitted its report to RBI on 30th June, 1998. Some of the major recommendations of the Committee are-i) Special treatment to smaller among small industriesii) Enhancement in the quantum of composite loans iii) Removal o f procedural difficulties in the trend of SSI advances iv) Sorting out issues relating to mortgages of land including remotion of stamp duty and permitting equitable mortgages v) Allowing attack to low-cost funds to Small Industries Development Bank of India (SIDBI) for refinancing SSI loans vi) Non-obtaining of collaterals for loans up to Rs.2 lakhs vii) Setting up of a collateral reserve fund to provide support to foremost party guarantees viii) Setting up of a Small Industries Infrastructure Development Fund for developing industrial areas in/around metropolitan and urban areas ix) transfigure in the definition of sick SSI units x) Giving statutory powers to State Level Inter-Institutional (SLIIC) xi) Setting up of a separate guarantee organisation and opening of 1,000 supernumerary specialised branches and xii)Enhancement of SIDBIs role and status to match with that of National Bank for Agriculture and Rural Development (NABARD).Kapur Committee has made 126 recommendations out of which RBI has already legitimate 40 recommendations for implementation.3.3 Small Industries Development Bank of India (SIDBI)SIDBI was square off up by an Act of Parliament, as an apex institution for promotion, financing and development of industries in small scale sector and for coordinating the functions of other institutions engaged in similar activities. It commenced operations on April 2, 1990. SIDBI extends get hold of/ confirming financial assistance to SSIs, assisting the entire spectrum of small and tiny sector industries on All India basis.The range of assistance comprising financing, extension support and promotional, are made available through appropriate schemes of direct and indirect assistance for the following purposes- direct credit to the SME(small medium enterprises) . support to micro-finance institutions for capacity building and on lending . provides financial support to the sick / small scale industries. Principal Financial institution engaged in d evelopment initiative in rural sector and improving the SSI unit. Also encouraging SSIS and generating employment in rural India. The Bank also performing the rehabilitation duty and improving the performance of small Industries.VARIOUS SCHEMES FOR FINANCING OF SSI3.3.1 Direct Assistance SchemesSIDBI directly assists SSIs under the following schemeProject Finance Scheme Equipment Finance Scheme Marketing Scheme Vendor Development Scheme Infrastructural Development Scheme engine room Development Modernisation Fund Venture Capital SchemeThese schemes aim at solving the key issues in SSI ie., the problems of high tech project, marketing, infrastructure development, tonicity improvement, export financing and venture capital assistance.3.3.2 Indirect Assistance SchemesUnder its indirect schemes, SIDBI extends refinancing facility of loans to small scale sector by SFCs, SIDCs and Banks. Till at stand for refinance is extended to 896 PLIs and these PLIs have their network extended to more than 67000 branches with the help of which they provide financing to these SSI.3.3.3 Promotional and Development ActivitiesSIDBI is also into providing other assistance to the SSI for its development besides limiting itself to the provision of simple financing. It involves itself in Entrepreneurship development programmmes, modernization programmes and micro credit schemes inorder to bring about economic empowerment of women specially in the rural areas by providing them opportunities of training and development.A.Refinance against term loans in respect of projects/activities eligible for assistance under the Scheme touch on on term loans for fixed asets and working capital advances (excluding interest tax) (% p.a.)Interest on Refinance (% p.a.)(i)Upto and inclusive of Rs. 25,00012.09.0(ii)Over Rs. 25,000 and upto Rs. 2 lakhNot exceeding 13.510.5B.Refinance against term loans (Applicable to all eligible institutions) (except RRBs)Interest on term loans (excluding interest tax) (% p.a.)Interest on Refinance (% p.a.)(i) Upto and inclusive of Rs. 25,00012.09.0(ii) Over Rs. 25,000 and up to Rs. 2 lakhNot exceeding 13.510.5(iii)Over Rs. 2 lakhNot exceeding 14.0*12.04.3.4 PerformanceSIDBIs efforts have resulted in increased flow of credit to SSI sector since inception as indicated belowYear imprimaturDisbursement2000-01241218192001-02284720382002-03290921462003-04335726722004-05470633902005-06626648012006-07648545882007-0874815243SIDBIs assistance to(i) Tiny Units about 89.2% of the total no. of projects under Refinance Scheme during the period of 2006-07 were tiny, receiving an assistance upto Rs. 5 lakh . The total sanctions for such projects accounted for 39.6% as against 36% of the total amount of sanctions in previous year.(ii) Women entrepreneurs under various schemes available for financing of SSI the total assistance amounting to Rs. 19.07 crores was given to 1067 women entrepreneurs during 2006-07.(iii) Backward areas during 2006-07, the projects or iginating from retroflex areas for which the need for financing was felt, received an assistance to the level of Rs. 778 crores of the total sanction which accounted for 33% of total assistance under Refinance Scheme of SIDBI.3.3.6 Main Schemes of SIDBIA brief summary of the Schemes available with SIDBI. More details are available under the Section Policies Schemes.National Equity Fund Scheme providing support to those entrepreneurs which are into setting up of projects in tiny sector.Technology Development Modernisation Fund Scheme this scheme aims for providing financial assistance to existing SSI units for matters relating to technology upgradation/modernisation.Single Window Scheme aims to provide twain term loan as well as working capital loans to the small scale units through the said(prenominal) agency.Composite Loan Scheme this aims at providing loans for equipment and/or working capital and also for worksheds to artisans, village and cottage industries in Tiny Sector.M ahila Udyam Nidhi (MUN) Scheme this scheme aims to get up women as entrepreneurs by providing equity support to them for setting up projects in Tiny Sector.Scheme for financing activities the need is even felt for the assistance in the field of marketing the products produced by the SSI and these include marketing research, RD, product upgradation, participation in trade fairs and exhibitions, advertising branding, establishing distribution networks etc.Equipment Finance Scheme this scheme is available inorder to help SSI with ease in using the hi-tech machinery and equipment for facilitating timberland production.Venture Capital Scheme this is a provision made to encourage SSI ventures to modernize capital equipment,for building up of export capabilities/import substitution including cost of total quality management and acquisition of ISO-9000 certification and for expansion of capacity.Major schemesTechnology Development Modernisation FundSIDBI has set up Technology Developmen t Modernisation Fund (TDMF) scheme for the assistance os small scale sector units so as to alter them to modernize their production techniques with the help new and improved technology so that their products can stand the foreign competition and the quality of their products can be enhanced. This would also help them to reduce their cost of production and removal of the inefficiencies in the production techniques. Assistance is available for meeting the expenses on purchase of capital equipments, acquiring of technical know-how, upgrading of process technology.The Coverage of the TDMF scheme has been enlarged w.e.f. 1.9.1997. Non-exporting units and units which are graduating out of SSI sector are now eligible to avail assistance under this scheme.National Equity FundNational Equity Fund (NEF) under Small Industries Development Bank of India (SIDBI) provides equity type assistance to SSI units, tiny units at one per cent service charges. The scope of this scheme was widened in 199 8-99 to cover all areas excepting Metropolitan areas, raising the limit of loan from Rs. 1.6 lakhs to Rs. 2.6 lakhs and covering both existing as well as new units(a) The following are eligible for assistance under the scheme-i. New projects in tiny and small scale sectors for manufacture, preservation or processing of goods irrespective of the location (except for the units in Metropolitan areas).ii. Existing tiny and small scale industrial units and service enterprises as mentioned above (including those which have availed of NEF assistance earlier), undertaking expansion, modernisation, technology upgradation and diversification irrespective of location (except in Metropolitan areas).iii. Sick units in the tiny and small scale sectors including service enterprises as mentioned above, which are considered potentially viable, irrespective of the location of the units (except for the units in Metropolitan areas).iv. All industrial activities and service activities (except Road Trans port Operators).(b) Project cost (including margin money for working capital) should not exceed Rs. 10 lakhs in the case of new projects in the case of existing units and service enterprises, the outlay on expansion/modernisation/technology upgradation or diversification or rehabilitation should not exceed Rs. 10 lakh per project.(c) There is no change in the existing level of promoters contribution at 10% of the project cost. However, the ceiling on soft loan assistance under the Scheme has been enhanced from the present level of 15% lakh per project to 25% of the project cost subject to a maximum of Rs. 2.5 lakh per project.3.4 State Financial Corporations (SFCs)SFCs were set up mainly to finance small and medium scale units. The area of operation of SFCs is generally limited to the States. SFCs also actively participate in assisting small scale units thereby helping them to modernize and upgrade the technology by making provision for term loans and soft loans and also restructuri ng the sick small scale units through rehabilitation and revival schemes through equity assistance under SIDBI seed capital scheme.At present, there are 18 SFCs (including TIIC which was set up as a company) in existence for more than 40 years and operate as Regional Development Banks. The SFCs have played an important role in the evolution and growth of small and medium scale industries in their respective states. They provide financial assistance to industrial units by way of term loans, direct subscription to equity, guarantees, etc. Over the years SFCs have expanded their activities and coverage of assistance.3.5 National Small Industries Corporation (NSIC)3.5.1 Bill FinancingBills drawn by small scale units for the supplies made to the reputed and well established enterprises and duly accepted by them exit be financed / discounted by NSIC for a maximum period of 90 days.3.5.2 Working Capital Financeworking capital financing of sound and well managed units, will be done on sele ctive basis in case of requirements emerging, to enable them to make payments for their purchases of consumable stores and spares and production related expenses particularly electricity bills, statutory dues, etc.3.5.3 Export Development FinanceFinance for export development to export oriented units for meeting their emergent requirements. Pre and post shipment finance shall also be provided to such units at usual terms conditions.3.5.4 Equipment Leasing SchemeThe object of the Leasing Scheme is to assist SSI Units to procure industrial equipment for modernisation, expansion and diversification of their industries.ELIGIBILITYExclusively for existing financially viable SSI units including ancillary units, duly registered as SSI units with the Directorate of Industries.BENEFITS 100% financing at very liberal terms with easy repayment schedule. Simple formalities and speedy sanction. Single window system for imported equipment. The Corporation undertakes to complete formalities like procuring import licence, opening of Letter of Credit etc. Tax rebate on full 5 year lease rental.VI. reappraisal of some of the obligates studied under the purview of the study1) ISSUES IN SSI FINANCINGSOURCE The Hindu Newspaper editorial dated 5 Dec 2006 synopsis the article argues that the provisions of the credit policy relating to the advances to the NBFC for on lending to SSI would be treated as priority sector. but financing of small units, especially those in manufacturing, is hardly an attractive proposition for NBFCs. Over the past few years, the concept of priority sector lending, implying a preferential access to bank funds that small entrepreneurs and other less privileged categories enjoyed , has been diluted by including in this category bank lending for individual housing, lending to State Finance Corporations (SFCs) and advances to NBFCs for financing small transport operators. This has helped banks fulfill their priority sector obligation without having to oblig e the thousands of needy individual entrepreneurs. Some of the deemed priority sector advances are in any case made by NBFCs or SFCs from public deposits and other resources that they command and deemed credit is thus unlikely to result in substantial additional financing of SSIs.2) SIDBI PLANS Rs 250 CRORE little FINANCING(SOURCE Business Line newspaper dated 7 th sep 2004)ANALYSIS as per the articles besides direct lending SIDBI is into provision of refinancing to the SFC for lending to SSI. It has been into lending to SSI or large corporate who buy goods from SSI including BHEL, Escorts, Bajaj electrical etcthe SME Fund has been operational since April 1. SIDBI aims to disburse Rs 10,000 crore in the next two years, which would include refinance. During the last 4 months, they have already disbursed Rs 605 crore mainly to SSI sector.3) SSI SHARE IN BANK CREDIT FALLING(SOURCE Business Line dated 25 aug, 2007)ANALYSIS according to this article the credit flow towards the small sc ale units have declined in the past few decades. This fact can be back up by the figure that the level of financing was 16.2% in 1991 and till 2006 it declined to 8.5%. Total financing of the priority sector has declined accounting for the total disbursements by the scheduled commercial banks was 14,45,847 crore. Out of this only 6.24% was made available to the SSI.VII. Financing NormsFOR LENDERS1. The all India financial institutions stipulate a promoters contribution norm of 20% of the total project cost for industrial estates set up in notified less developed area and a 22.5% norm in other cases. In the case of estates costing less than Rs. 300 lakhs, the following margin money have been stipulated by IDBI to make them eligible for financing* 15% margin for estates set up by technician entrepreneurs or unemployed engineers where the sheds are to be acquired by them on hire basis.* 20 to 30% margin for co-operative estates where the sheds are entirely by small scale units.* 30 to 35% margin for estates set up by joint stock companies whose shareholders occupies majority of the sheds.* 40 to 50% margin for estates set up by proprietary and partnership concerns.I. SFC/ SIDC should maintain separate and distinct accounts of fresh disbursements made to SSI units and outstanding amounts there against.II. Periodical statements to be obtained from SFC/ SIDC to monitor the position.III. Annually, a certificate issued by SFC/ SIDC statutory auditors certifying that the outstanding borrowings from banks were fully cover by the non-overdue loans outstanding in respect of fresh disbursements made to SSI units from out of term finance/ lines of credit granted by banks.IV. The rate of interest to be charged by banks on such term finance/ loans/ lines of credit will be in conformity with the directives on interest rates issued by the Reserve Bank from time to time.* In order to ensure adequate credit to this sector, the credit requirements of village industries and other SSI units having aggregate fund-based working capital limits upto Rs. 5 crores from the banking system, will be computed on the basis of a minimum of 20 percent of their projected annual turnover for new as well as existing units.VII. Analysis of growth of SSIsDuring Budget 2008-20091. The proposal that has been cornering much interest of industry players is minimum alternate tax (MAT), which has now been levied on technology companies. though all technology firms have been brought under the ambit of MAT, the impact will not be much for big IT firms.2. The Budget doesnt allow pass-through status to VC start-ups in sunrise sectors of BPO, media, advertising, financial services and mobile value added services.3. Another budgetary reform that could also prove to be a thorn in the path for the SMEs is the 12.5% service tax on leased premises. President of Nasscom, Kiran Karnik, calls the increase as unjust. It is usually the small guy who leases property. The big companies own their lan d,4. FM has proposed to condone from service tax all services provided by technology business incubators. In turn, their incubatees whose annual turnover does not exceed Rs 50 lakh will be exempt from service tax for the first three years.How it affects SSIs1. It was presented against a backdrop of high expectations with the economy having moved into the high growth trajectory of 8.5 per cent, supported by a strong growth in services and industry sector.2. Yet many observers believe that big-ticket reform in Budget 2007-08 have not been taken on the way they should have and tax changes have left most quarters wanting, as substantial giveaways had been anticipated.3. Small players felt dependable impact on their net profits as now they would also have to shell out 11.33 percent MAT in addition to the 12 percent tax which they already pay. Also the small-sized BPO players suffered due to this levy.4. The IT industry is happy with the proposal to grant pass-through status to VCFs inv esting in biotechnology and IT companies. But removal of this pass-through status for other areas such as mobile VAS and BPO had a negative impact.Targets under priority sector lendingThere are no targets set by domestic banks (both public sector and secluded sector banks) and foreign banks for lending to SSIs. as given in data belowThe targets and sub-targets set under priority sector lending for domestic and foreign banks operating in India are furnished belowDomestic banks (both public sector and private sector banks)Foreign banks operating in IndiaTotal Priority Sector advances40 percent of NBC32 percent of NBCTotal agricultural advances18 percent of NBCNo targetSSI advancesNo target10 percent of NBCExport creditExport credit does not form part of priority sector