1. Introduction   

The 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 country.”


2. Micro, Small & Medium Enterprises Development Act 2006

Importance 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:

Sl No	Sector	Manufacturing Enterprise (Enterprises engaged in manufacturing or production of goods)	Service Enterprise (Enterprises engaged in services like Road Transport Operator, Small Business, Professional & Self Employment, Retail Trade)
1.	Micro	Enterprises engaged in the manufacture or production of goods  where the investment in plant and machinery does not Exceed Rs.25 lakh.	Enterprises engaged in providing or rendering of services, where the investment in equipment does not exceed Rs.10 lakh.
2.	Small	Enterprises 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 crore.	Enterprises 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.
3.	Medium	Enterprises 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.	Enterprises 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:

(i)	Import duty (excluding miscellaneous expenses such as transportation from the port to the site of the factory, demurrage paid at the port)
(ii)	Shipping charges;
(iii)	Customs clearance charges; and
(iv)	Sales tax or value added tax.

3. 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 unemployment.

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 family.

4. Challenges Before MSMEs in India

It is interesting to see that the challenges confronting MSMEs 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;

4.1.	Infrastructure: 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.
4.2.	Government 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”.
4.3.	Finance: As 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.
4.4.	Marketing: 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 system.
4.5.	Technology: In general MSME sector in India is characterized by low technology levels which acts as a handicap in the emerging global market. 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.
4.6.	Sickness of 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 etc.
4.7.	Miscellaneous: 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.

5. Initiatives and Support system for MSMEs in India

Importance of 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:

5.1.	Policy 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 foot.
5.2.	Policy towards credit administration: A number of initiatives have been introduced for credit administration to MSMEs.
	5.2.1.	Finance to micro and small enterprises have been made part of priority sector finance causing thrust on financing to this sector by banks.
	5.2.2.	Several 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.
	5.2.3.	Prime Minister Task Force on MSMEs has set three targets to be achieved by Public Sector Banks. These are
		(a)	20% growth in outstanding amount in Micro and Small enterprises on YoY
		(b)	10% growth in no. of accounts in Micro Enterprises on YoY
		(c)	Composition of Micro in MSE outstanding should be 60% by Mar.2013.
5.3.	Institutional 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.
5.4.	National 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.
5.5.	Rajiv 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 enterprise.
5.6.	Credit 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 party guarantee.
5.7.	Union Budget 2012-13: A number of pro MSME initiatives were proposed in last year Union Budget. Some are as under:
	5.7.1.	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.
	5.7.2.	Dedicated SME Exchange Platforms were launched by NSE & BSE exchanges to help MSMEs in raising funds from capital market.
	5.7.3.	Central Public Sector Enterprise and Ministries are required to make a minimum 20% of their annual purchase from MSEs.
	5.7.4.	Exemption of 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 & machinery.
	5.7.5.	The turnover 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), SME Rating Agency etc. are also started by Government of India or its sponsored agencies.

6. Further Strategies for Development of MSMEs

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.

6.1.	Access to 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.
6.2.	Rehabilitation 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 MSMEs.
6.3.	Exit 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.
6.4.	Mezzanine 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.
6.5.	Entrepreneurship 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 become entrepreneurs.
6.6.	Export 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 improve.

7. MSME 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.

7.1.	Instructions /Guidelines for MSEs in Place: The 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:
	7.1.1.	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 credit proposals. The MSE Policy is revised / updated every year and incorporates latest guidelines.
	7.1.2.	Debt 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.
	7.1.3.	Banking Codes 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 website.
	7.1.4.	Bank has included MSE units as thrust area of financing and every endeavour is made to achieve the target assigned in this sector.
	7.1.5.	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.
	7.1.6.	Branches have 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. Coverage under CGTMSE - (Rs. In Crs.) 2009-10 2010-11 2011-12 FY2012-13 (Till 31.12.2012) Cumulative till 31.12.2012 No. of A/c.s Amt. No. of A/c.s Amt. No. of A/c.s Amt. No. of A/c.s Amt. No. of A/c.s Amt. 4705 206 8210 315 8724 325 4340 203 31438 1191
	7.1.7.	Branches have been advised to sanction composite loan i.e. working capital and term loan to MSE borrowers.
	7.1.8.	Bank has been implementing the Credit Linked Capital Subsidy Scheme for technology up gradation of Micro & Small enterprises.
	7.1.9.	Instructions are in place to assess the credit need of MSE borrowers as per guidelines issued by RBI/different committees.
	7.1.10.	Bank has been implementing the Technology Up gradation Fund Scheme (TUFS) for textile and jute industries.
7.2.	Measures to support MSEs at Bank level. 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:
	7.2.1.	MSME Vertical: Separate MSME vertical has been established headed by General Manager at Corporate office to have focused attention on growth of MSE sector.
	7.2.2.	SARALs: To 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.
	7.2.3.	Business 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.
	7.2.4	Cluster 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 country.
	7.2.5.	Cluster 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.
	7.2.6.	Management & Skill 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.
	7.2.7.	MOU with 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.
	7.2.8.	MOU with 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.
	7.2.9.	Bank's growth under MSME Sector: The Bank has shown a 34% YTD Growth during this current FY 2012-13 under MSME.