role of Micro, Small and Medium Enterprises in all type of
economies is well recognized. The same is more prominent in case of
developing and emerging economies where MSMEs are considered as growth
engines. Worldwide MSMEs contributes significantly in employment
generation, equal distribution of national income, optimum utilization
of local resources, poverty alleviation, rural development as well as
mobilizing capital lying in the hands of private sector. MSMEs are
integral part of the supply chain of large scale industries and provide
vital forward and backward linkage to the overall industrial sector.
The importance of MSMEs in India is evident from the fact that
MSME sector contribute around 9% in national GDP, about 45% in
manufacturing output and 40% in total export of the country. In
2011-12, there were about 31 million MSME units employing about 70
million persons in the country. These MSME units manufacture more than
6000 products ranging from traditional to high tech items. Economic
Survey 2011-12 states “ MSME is
dynamic and vibrant sector that
nurtures entrepreneurial talent besides meeting social objectives
including that of providing employment to millions of people across the
| Micro, Small & Medium
Enterprises Development Act 2006
of small scale industries/business enterprises was
well recognized by Govt. of India since independence and different
acts/measures were enacted from time to time for promotion of these
units. In changing global as well as domestic economic environment for
promotion and development and enhancing the competitiveness of micro,
small and medium enterprises MSMED Act 2006 was enacted which came into
force on 2nd Oct. 2006.
The MSMED Act 2006 broadly classifies the enterprises in
manufacturing and service sector. The definition of micro, small and
medium enterprise is as under:
(Enterprises engaged in manufacturing
or production of goods)
(Enterprises engaged in rendering of services like Road Transport
Operator, Small Business, Professional & Self Employment, Retail
engaged in the manufacture or production of goods where the
investment in plant and machinery does not Exceed Rs.25 lakh.
engaged in providing or rendering of services, where the investment in
equipment does not exceed Rs.10 lakh.
engaged in the manufacture or production of goods where the investment
in plant and machinery is more than Rs.25 lakh but does not exceed Rs.5
engaged in providing or rendering of services, where the
where the investment in equipment is more than Rs.10 lakh but does not
exceed Rs.2 crore.
engaged in the manufacture or production of goods where the
investment in plant and machinery is more than Rs.5 crore but does not
exceed Rs.10 crore.
engaged in providing or rendering of services, where the
where the investment in equipment is more than Rs.2 crore but does not
exceed Rs.5 crore.
For calculating the investment in plant and
machinery, the cost
of pollution control, research and development, industrial safety
devices and such other items as may be specified, by notification,
shall be excluded and the original price thereof, irrespective of
whether the plant and machinery are new or second hand shall be taken
into account. In case of imported machinery, the following shall be
included in calculating the value:
duty (excluding miscellaneous expenses such as
transportation from the port to the site of the factory, demurrage paid
at the port)
clearance charges; and
||Sales Tax or
Value Added Tax.
|Some Facts about India’s Micro,
Small and Medium Enterprises.
According to 4th
All India Census of Micro, Small & Medium
Enterprises (Reference Period 2006-07) the size of
registered MSMEs was estimated to be 15.64 lakh units. This comprises
of 67% of Manufacturing enterprises and 33% of service enterprises.
About 45% of the units were located in rural areas. Of the total
working enterprises, the proportion of micro, small and medium
enterprises were 94.94%, 4.89% and 0.17% respectively. Similarly, about
90% of the registered enterprises in MSME sector were proprietary
concerns, 4% Parternership, 3% Pvt. Companies and balance were owned
by public limited companies, cooperatives, trust etc.
The above facts indicate the significance of
MSMEs and at the same time speaks the challenges being faced by MSMEs.
The sector is dominated by manufacturing enterprises (67%).
Manufacturing sector is always vulnerable to so many factors like
supply and cost of raw material, labourers, Power etc. Despite these
challenges the sector maintained a higher rate of growth in comparison
to overall industrial sector growth during the period 2004-08.
Rural location of the units (45%) leads to problems like infrastructure
availability, communication, transportation etc. At the same time it
also generates employment in rural areas, utilizes local resources and
is instrumental in promoting inclusive growth of the country.
The complete dominance of Micro enterprises (94.94%) indicates that
people start their own enterprises for self employment even with small
amount of capital and thus relieving the country by burgeoning
The majority of the MSMEs are proprietary concern (90%) which indicates
that MSMEs are mainly family business handled by one key person. This
develops the entrepreneurial skill from generation to generation in a
|Challenges Before MSMEs in India
It is interesting to see that the challenges
are similar in most countries whether developing or developed. India is
no exception. The major challenges before MSMEs in India may be
summarize as under;
In every developing country
infrastructure is a major challenge not only to MSME sector but to all
sphere of life. Much work has been done in India in this direction
since independence but still a robust infrastructure is required for
MSMEs. The challenge gets aggravated in case; the location of
enterprises is rural. In rural areas there is a problem of
transportation which hinders fast movements of goods produced as well
as raw materials or inputs required. Power is another area of concern.
Due to heavy power cut, the enterprises are forced to make alternate
arrangement like gensets which pushes the economics of scale. The World
Bank report on “Overall Doing Business Rank 2012” put India at 98th
rank (Out of 183 countries ranked) in the parameter Getting Electricity
to enterprises. The average number of days an enterprise gets
electricity in a year is 67 days while it is 145 days in South East
Asian Countries and 103 days in OECD.
Policies: The govt. policies particularly
Regulations and Taxes need to be more enterprise friendly. The web of
regulations puzzles the entrepreneurs. Under the constitution of India,
development of MSME is a state subject. However, the Union Govt.
provides the overall policy guidelines. The post reform period (Since
1991) witnessed rising power of regional parties and advent of
coalition government. This has brought to fore the power of the state
govt. both in formulation and implementation of policies. In the same
World Bank report on “Overall Doing Business Rank 2012” India ranks
166th in the parameter starting a Business. It is mind boggling to know
that Indian Entrepreneurs have to obtain 34 permits before construction
of an office building or godown as compared to just 14 in a developed
country. The World Bank report says that the total tax rate is 61.8% of
profit which Indian entrepreneurs require to pay. Here India Ranks
147th in “Overall Doing Business Rank 2012”.
stated earlier approx. 95% of MSME enterprises
falls under the category of Micro and approx.90% of the registered
MSMEs are proprietary concern. Majority of these entrepreneurs mobilize
finance from personal funds or funds from relatives or friends. Data
reveals that only 5% of the MSME units, registered as well as
unregistered, had availed finance from institutional sources, 2% from
non-institutional sources and rest of the units i.e. approx.93% had not
availed any finance and dependent upon self resources. In the absence
of a robust system of credit information about small enterprises in
India, banks have some concern while dealing with small enterprises
credit proposals. The concern gets aggravated in absence of offer of
any collateral security. In case of first generation MSME entrepreneurs
there is always a problem of collateral security. In such cases bank
either refrain from lending or add a higher risk premium in deciding
the rate of interest thereby thinning the margin of the business which
sometimes proves fatal to the unit. Considering the problem of
collateral security Reserve Bank of India has made it mandatory for
banks to finance Collateral free loan up to Rs.10 lacs. However, in
reality, it is not easy for any entrepreneur to get a collateral free
loan of Rs.10 Lacs from banking system. Despite all these, Getting
Credit is the parameter where India got its best rank (40th) in
“Overall Doing Business Rank 2012”. In South Asian Countries, India is
leader in this parameter and ranked 1st.
For micro and small unit it is not easy to establish
a strong marketing system as it requires man power as well as
substantial expenditure both of which lacks in MSMEs. Long term
survival of any unit needs a robust and well structured marketing
In general MSME sector in India is characterized by
low technology levels which acts as a handicap in the emerging global
In present global scenario, new technology evolves regularly and after
some time the existing technology becomes obsolete requiring adoption
of latest technology. For survival as well as to remain competitive,
MSMEs have to adopt latest technology which comes at a cost. MSMEs are
not in a position to go for the latest technology always as and when it
comes in the market due to non availability of fund.
Units: One of the major challenges in MSME sector
is growing sickness. Prolong sickness leads to mortality. It is a great
matter of concern for RBI as well as Govt. of India that Banks don’t
under take proactively viability study of sick units as soon as unit
falls to sickness. Timely rehabilitation measures may save the unit
from closure. The causes of sickness are the same challenges which are
enumerated earlier like limited financial resources, financial &
management skill and expertise, non availability of power supply,
shortage of raw materials, marketing challenges, obsolete technology
Other major issues which ail MSMEs are low
production capacity, lack of skilled manpower, absence of alternate
source of capital, lack of access to global market etc.
and Support system for MSMEs in India
MSMEs is recognized worldwide
and all developing
or developed countries have established support system for them. India
is no exception. We have an extensive support system for MSMEs though
many more are required with fast changing global economy. Some of the
important support system is as under:
of Protection/Reservation: After
Independence it was felt necessary to provide protection to small scale
industries of India so that in their nascent stage they can grow well.
In 1967, policy of product reservation for small scale units was
initiated with 47 items with specific objective of providing
competitive platform and lead time to relatively uncompetitive sectors.
The policy continued over the years and the list of reserved items
soared up to 900.With liberalization process (1991) govt. has started
phasing out policy of protection & reservation. At present only 20
items are reserved for small scale sector. We can say this policy has
helped Indian SSI in its infant stage to a great extent in fixing its
towards credit administration: A number
of initiatives have been introduced for credit administration to MSMEs.
micro and small enterprises have
been made part of priority sector finance causing thrust on financing
to this sector by banks.
committees have given their
recommendations looking into different aspects of MSMEs credit like
adequacy and timeliness of credit to SSI (Nayak Committee), delivery
system of working capital to SSI (Kapur Committee),
ways to improve credit flow to SSI sector (Ganguly Committee) etc.
Minister Task Force on MSMEs has set
three targets to be achieved by Public Sector Banks. These are:
growth in outstanding amount in Micro and Small enterprises on
growth in no. of accounts in Micro Enterprises on YoY.
of Micro in MSE outstanding should be 60% by
Framework for MSMEs: Small
Industries Development Bank of India (SIDBI), National Small Industries
Corporation (NSIC), Small Industries Development organization (Now
named as Office of DC-MSME), District Industries Center (DIC), Khadi
and Village Industries Commission (KVIC), Cluster Development
Organization, MSME Testing centers, Tool Rooms, Skill Building
Institutes and many more institutes were set up to provide all round
support to MSMEs.
Manufacturing Competitiveness Programme
(NMCP): For building international level capacity of Micro, Small,
& Medium manufacturing enterprises to sustain global competition,
the ministry of MSME is implementing the programme with objective of
ensuring healthy growth of MSME manufacturing sector. The programme is
being implemented in Public-Private-Partnership (PPP) mode.
Gandhi Udyami Mitra Yojana: The scheme is
launched for potential first generation entrepreneurs having completed
Entrepreneurial Development Training Programme (EDP)/Skill Development
Training Programme (SDP)/ Entrepreneurship-cum-Skill Development
Training Programme (ESDP)/Vocational Training Programme (VT) to provide
handholding support and assistance for setting up and running of
Guarantee Scheme: Credit Guarantee Trust
Fund for Micro & Small Enterprises (CGTMSE) was set up with the
objective to remove the hurdle of collateral security required by banks
while financing MSEs. Under the scheme banks can extend loan upto
Rs.100 Lacs to MSEs without asking for collateral security or third
Budget 2012-13: A number of pro MSME
initiatives were proposed in last year Union Budget. Some are as under:
Setting up India Opportunities Venture Fund
(IOVF) is association with SIDBI with a fund of Rs.5000 Crore to
enhance availability of equity to MSMEs.
Exchange Platforms were launched
by NSE & BSE exchanges to help MSMEs in raising funds from capital
Public Sector Enterprise and
Ministries are required to make a minimum 20% of their annual purchase
capital gain tax on sale of a
residential property if the sale proceeds is used for subscription in
equity of a manufacturing SME unit for purchasing new plant &
limit for compulsory tax audit of
accounts as well as for presumptive taxation be raised from Rs.60 Lacs
to Rs.100 Lacs in case of MSME units.
|Besides these, a number
of other initiatives like Credit Linked Capital
Subsidy Scheme (CLCSS), SIDBI Venture Capital Fund Ltd. (SVCL) and SME
Rating Agency etc. are also started by Government of India or its
|Further Strategies for Development
Despite the above mentioned initiatives and support system, it is
strongly felt that new and innovative strategies along with refinement
of existing one needs to be implemented for betterment of the sector.
Capital: Options to bring capital to
the business in addition to the capital infused by Indian MSME
entrepreneur from its own sources are not available.
Fiscal and regulatory measures are required to give a way to Indian
MSME entrepreneur for arranging capital through Angel Fund.
of Sick Units: In general, there
is a lackadaisical approach by banks in rehabilitating sick MSME units.
Whatever the reasons may be banks should be encouraged to rehabilitate
sick units. Mechanism should be developed by govt. to incentivize
banks/branches who rehabilitate sick units. There is a need to
establish an independent Rehabilitation Fund for rehabilitation of
Policy for MSMEs: It is very much required
in India to have exit route for non-viable units. The existing
legislations of insolvencies and bankruptcies should be modified
properly to provide efficient liquidation of non viable businesses and
the affected promoter may look forward.
Financing: Mezzanine financing is not
popular in India. But it is advantageous for MSMEs as same is treated
like equity on company's balance sheet and make it easier to obtain
standard bank financing. Hence Mezzanine financing needs to be promoted
in the country.
Development: It will be a great
help if Entrepreneurship training in school curricula be incorporated.
It will help the young minds to develop the orientation and mind set to
Competitiveness: MSMEs contribute 40% of
total exports of country. This requires Indian MSMEs to be remain
competitive to maintain the share in total exports. It is observed that
the export competitiveness of Indian MSMEs has not improved
significantly. This is because the MSMEs have limited awareness
regarding changing product standard requirement in importing countries.
Efforts are required to create adequate awareness in this regard.
|In India, MSME
development requires a multi-prong
strategy that touches upon many areas and which can help the sector to
and Union Bank of India: As stated earlier,
in view of the importance of MSMEs (and more importantly in MSEs) in
any economy, Govt. of India has initiated a number of support measures
for MSMEs. Financial Institution in general and public sector banks in
particular are the pillars on which these support measures are based.
Thus it is very natural that guidelines are issued for PSBs regarding
MSEs which are to be complied invariably. Union Bank pro actively
participate in all endeavors initiated by GoI. The bank's support to
MSEs may be broadly divided into two groups.
||Instructions /Guidelines for
MSEs in Place.
guidelines or instructions are mostly GOI or RBI guidelines and like
all PSBs, Union Bank has also to comply these guidelines. Bank's
endeavor to go in tandem with govt. is envisaged to the instructions
issued by bank exclusively for MSEs. Among these the important are:
|| MSE Policy:
The bank has a well documented MSE Policy in place
which ensures compliance of all directives, guidelines issued by Govt.
RBI and other regulatory authorities on MSE credit matters. The policy
documents also acts as a reference for field staff in dealing with MSE
The MSE Policy is revised / updated every year and
incorporates latest guidelines.
Restructuring Mechanism Policy SMEs: MSEs
are vulnerable to different adverse conditions and get affected on the
very first sign of unfavorable situations. This leads to sickness of
the units. Bank has a policy for these units narrating the steps to be
initiated for hand holding and revival, rehabilitation of the units.
Bank has totally restructured around 30167 MSE Accounts amounting to
Rs.682 Crs as on Sept 2012.
and Standard Board of India
(BCSBI): Bank is a member of BCSBI and thus adopted the code of bank's
commitment to Micro and Small Enterprises. The contents of the code are
obligatory on bank's part. The code explains how banks are expected to
deal with MSEs for their day to day operations and in times of
financial difficulty. The code also ensures complete transparency in
levying charges like interest rate, processing charge, service charge
etc. by the bank to MSE borrowers. The code is available at bank's
included MSE units as thrust area of financing and
every endeavour is made to achieve the target assigned in this sector.
||The MSE loan
applications falling within the branch head
delegation should be disposed of within 7 days and proposals within the
delegated authority of Regional Office should be disposed of within 5
days on receipt of same at RO (Total 12 days). The Bank is also in the
process of making available the facility of online submission of loan
application to the prospective customers for faster processing and
disposal of the loan application.
been instructed not to accept any collateral in
case of loans upto Rs.10 Lacs extended to MSEs. Branches are also
advised to provide collateral free loans up to Rs.100 Lacs under Credit
Guarantee scheme for MSEs.
|(Rs. In Crs.)
been advised to sanction
composite loan i.e. working capital and term loan to MSE borrowers.
||Bank has been
implementing the Credit Linked Capital Subsidy
Scheme for technology up gradation of Micro & Small enterprises.
are in place to assess the credit need of MSE
borrowers as per guidelines issued by RBI/different
||Bank has been
implementing the Technology Up gradation Fund
Scheme (TUFS) for textile and jute industries.
||Measures to support MSEs at
In addition to above mentioned
guidelines bank has initiated a
number of proactive measures exclusively for MSEs. Some of the
important measures are as under:
Vertical: Separate MSME vertical has been established
headed by General Manager at Corporate office to have focused attention
on growth of MSE sector.
accelerate credit flow, enhance
turnaround time (TAT) centralized processing centers namely SARAL have
been established. Presently there are 18 SARALs established at major
centers and headed by experienced executives. The SARALs are being
remodeled for better efficiency, focused sales & marketing, speedy
disposal and hassle free process for MSEs.
Banking Branches: To cater the
financial need of the business enterprises in general and MSEs in
particular, bank has identified 350 business banking branches across
the country. These branches have focused growth in MSE credit and have
been provided with SME trained credit officers. The performance of BBBs
are monitored at Central Office level.
Development: Bank has designed
different cluster specific schemes taking into account the market
environment, customers’ requirement etc. The scheme are approved with
relaxed rate of interest, collateral security, bank charges etc. So far
Bank has approved more than 30 cluster specific scheme across the
Series events with Dun &
Bradstreet: Bank organizes events for SME entrepreneurs in different
clusters with D & B. In the event, approx. 100-125 SME
entrepreneurs are invited for the events and opportunities ,challenges
in the particular cluster, bank's scheme for the SMEs are discussed by
the entrepreneurs, bankers, industries association, etc. The event
creates awareness about banking schemes and at the same time bank knows
about the expectations of the SME entrepreneurs.
Development Institute at Jangipur, West Bengal: Bank has established,
in association with SIDBI, a management & skill development
institute at Jangipur. The institute imparts training to unemployed
local youth for entrepreneurship development. After completion of
training, finance is made available to the trained youth from banks.
SIDBI: Bank has entered into MOU with
SIDBI for aggressive marketing and co financing of MSEs. Under the MOU
viable projects are jointly identified and co-financed.
External Credit Rating Agencies:
External credit Rating enables MSEs to compete with market players on
global level. With a view to motivate MSE customers, bank provides
incentive by way of concession in interest rate in case the unit is
rated highest two ratings by an approved rating agencies.
under MSME Sector: The Bank has shown a 34% YTD
Growth during this current FY 2012-13 under MSME.