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:
(Enterprises engaged in manufacturing or production of goods)
(Enterprises engaged in services like Road Transport
Operator, Small Business, Professional & Self Employment, Retail
|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.
||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.
|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:
||Import duty (excluding
miscellaneous expenses such as transportation from the port to the site
of the factory, demurrage paid at the port)
||Customs clearance charges; and
||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
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
4. Challenges Before MSMEs in
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
||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.
||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”.
||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.
||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.
||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.
||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.
||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:
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.
|| Policy towards credit administration: A
number of initiatives have been introduced for credit administration to
||Finance to micro and small
enterprises have been made part of priority sector finance causing
thrust on financing to this sector by banks.
||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
||Prime Minister Task Force on MSMEs has
set three targets to be achieved by Public Sector Banks. These are
||20% growth in outstanding amount in
Micro and Small enterprises on YoY
||10% growth in no. of accounts in Micro
Enterprises on YoY
||Composition of Micro in MSE outstanding
should be 60% by Mar.2013.
||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.
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.
||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.
||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.
|Union Budget 2012-13: A number of pro
MSME initiatives were proposed in last year Union Budget. Some are as
||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.
||Dedicated SME Exchange Platforms were
launched by NSE & BSE exchanges to help MSMEs in raising funds from
||Central Public Sector Enterprise and
Ministries are required to make a minimum 20% of their annual purchase
||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.
||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.
7. MSME and Union Bank
||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.
||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.
||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.
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 become entrepreneurs.
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
|In India, MSME development
requires a multi-prong strategy that touches upon many areas and which
can help the sector to improve.
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.
/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:
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:
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.
Codes and Standard Board of India
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
||Bank has 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.
||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.)
|No. of A/c.s
||Branches have 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.
||Instructions are in place to assess the
credit need of MSE
borrowers as per guidelines issued by RBI/different committees.
||Bank has been implementing the
Technology Up gradation Fund
Scheme (TUFS) for textile and jute industries.
to support MSEs at Bank level.
addition to above mentioned guidelines bank has initiated a number of
proactive measures exclusively for MSEs. Some of the important measures
are as under:
||MSME Vertical: Separate MSME vertical
has been established
headed by General Manager at Corporate office to have focused attention
on growth of MSE sector.
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.
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.
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 &
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.
& 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.
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.
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.
growth under MSME Sector:
The Bank has shown a 34% YTD
Growth during this current FY 2012-13 under MSME.