“Problem faced by The Entrepreneurs in Starting and Running the Small Scale Industries in Rajasthan” Name – Rajiv Gandhi Designation – Assistant Professor Institute – Jayoti Vidyapeeth Women’s University, Jaipur Address – 10/635, Swarn Path, Mansarover, Jaipur E-mail – firstname.lastname@example.org Introduction The Small-Scale Industries (SSI) gathered momentum along with industrialization and economic growth in India. It started growing due to the vision of our late Prime Minister Jawaharlal Nehru who sought to develop core industry and have a sustaining sector in the form of small-scale enterprises. Being a labor-intensive sector, they offer a higher productivity of capital than capital-intensive enterprises due to low investment per worker. The SSI today constitutes a very important segment of the Indian economy as they help in dispersal of industries, rural development, and the decentralization of economic power. Micro, Small and Medium enterprises (MSME) constitute the dominant form of business organization worldwide. For instance, 99% of enterprises in European Union and about 80% in USA were small enterprises. In India too, SSIs share is as high as 97%. Out of 42.12 million non-farm enterprises, 0.58 million are factory units. It is estimated that out of 5.8 lakh factory units, about 5 lakh are factory Small Scale Industries and Medium Enterprises as per the new definition of Micro Small and Medium Enterprises adopted by the Government of India in June 2006. Key Role of SSI in the Indian Economic Structure India has traditionally always had a very vibrant and competitive SSI. Even after the dawn of industrialization, British producers of textiles found hand made Indian textiles such a threat that they lobbied hard to have its import banned, succeeding in the late eighteenth century. During pre-economic liberalization period a wide variety of incentives, concessions and institutional facilities were extended for the development of SSIs. But these socialistic promotional policy measures, in many cases resulted in protection of weak units rather than the independent growth of units under competitive business environment. Such situation was continued up to the mid of 1991. Under the regime of economic liberalization, the focus was shifted from “protection” to “competitive promotion”. The public policy in India had been attaching lot of importance to village and SSI on the following grounds. SSI being labor- intensive, helped to increase the volume of employment, particularly in rural areas, it is estimated that about 2 crore persons are engaged in India in these industries. The handloom industry alone employs 50 lakh people. They account for 6% of GDP, 95 % of all industrial units, and 34% of total exports. Around 39 lakhs SSIs in India has emerged versatile producing over 8000 products, from traditional handicrafts to high-end technical instruments. % of Different Products Produced by MSEs Chemical & Chemical Products 12% Basic Metal Industry 36% 10% Metal Products Electrical & Machinery Parts 8% Rubber & Plastic Products 6% 6% Food Products 22% Others In developed economies, about 60 % of GDP is generated by small enterprises, i.e., enterprises with a maximum of 50 employees. The reason being large number of small enterprises guarantees a high degree of competition, and variety of economic activities that require millions of enterprises to be reasonable competitive and efficient. Growth Pattern of Sick SSI Units During the pre reform period there was 10.56 times increase in the number of sick SSI units in the country. After the liberalization period the number of sick units has decreased to 0.68 times. India’s obligation as a member of WTO to bring down tariff and non-tariff barriers gave another competitive environment for SSI. Thus after reform SSI has been exposed to intense competition both in domestic and international levels. The SSI, which was not able to withstand competition, has gradually become sick. According to the report of RBI (3rd census of SSI) the criteria to measure sickness were: delay in repayment of loan over one year; decline in net worth by 50%; and decline in output during the last three years. According to the census of RBI nearly 15% of registered SSI was identified to be sick. Lack of demand, shortage of working capital, non-availability of raw material, power shortage, labor problems and marketing problems are the main reasons for incipient sickness in SSI. Problems of Cottage and Small and Small Scale Industries in Rajasthan There are several problems of cottage and small scale industries which need to be tackled in the near future. They are discussed below: 1. Problems of Raw Materials Various industries do not get requisite quantity of raw materials at reasonable prices at the proper time. This leads to lower product-quality and high cost of production. 2. Old Techniques of Production Production techniques need to be upgraded and suitably changed so that the products can be made more competitive in the market. This would increase the demand for various types of products. 3. Marketing Problem Cottage and small scale industries have to face marketing problems for their products. They have to face competition from large scale units- domestic as well as foreign. By improving cost-efficiency and product-quality real solution can be found for the problem of marketing of products in future. 4. Lack of Capital In the organized factory-sector, the availability of capital has been increased in the plan- period. But there has been a dearth of working capital for small scale units and the market rates of interest are also high. Hence, in future the availability of capital should be increased at reasonable rates of interest. Units should not be allowed to be closed down due to lack of funds for financing their activities. 5. Lack of Skilled Labour Some units don’t have the facility for the supply of skilled labour to the desired extent. This deficiency should be removed by arranging the necessary training facilities for labour. As small scale industries, rural industries and handicrafts have a great potential for development in Rajasthan, there should be a comprehensive plan for their development for the next decade. Problem Faced by Small Scale Industries The problems faced by small scale industries when trying to obtain funds are as follows: SME’s rarely have a long history or successful track record that potential investors can rely on in making an investment; Larger companies (particularly those quoted on a stock exchange) are required to prepare and publish much more detailed financial information- which can actually assist the finance- raising process; Banks are particularly nervous of smaller businesses due to a perception that they represent a greater credit risk. Because the information is not available in others ways, SSIs have to provide it when they seek finance. They are required to give a business plan, list of the company assets, details of the experience of directors and managers and demonstrate how they can give providers of finance some security for amounts provided. Prospective lenders- usually Banks – then make a decision based on the information provides. The terms of the loan (interest rate, term, security, and repayment details) depend on risk involved and the lender also monitors their investment. A common problem is often that the Banks are unwilling to increase loan funding without an increase in the security given which the SSIs owners may be unable or unwilling to provide). A particular problem of uncertainty relates to businesses with a low asset base. These are companies without substantial tangible assets, which can be used to provide security for lenders. When SSIs is not growing significantly, financing may not be a major problem. However the financing problem becomes very important when a company is growing rapidly, for example when contemplating investment in capital equipment or an acquisition. Raising Finance for Small Scale Industries Whether a businessman starting a business or expanding one, sufficient ready capital is essential. When a company is growing rapidly, for example when contemplating investment in capital equipment or an acquisition, its current financial resources may be inadequate. Few growing companies are able to finance their expansion plans from cash flow alone. They will therefore need to consider raising finance from other sources. A key consideration in choosing the sources of new business finance is to strike a balance between equity and debt to ensure the funding structure suits the business. The financial or capital structure of a business is one of the key areas that influence the outcome of businessman’s efforts. The overall objective in raising finances for a company is to avoid exposing the business to excessive high borrowings, but without unnecessarily diluting the share capital. This ensures that the financial risk of the company is kept at an optimum level. But it is not enough to simply have sufficient financing, knowledge and planning is required to manage it well. These qualities ensure that entrepreneur to avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money. Business Plan: Once a need to raise finance has been identified it is then necessary to prepare a business plan. If management intends to turn around a business or start anew phase of growth, a business plan is an important tool to articulate their ideas, while convincing investors and other people to support it. The business plan should be updated regularly to assist in forward planning. The challenge for management in preparing a business plan is to communicate their ideas clearly and succinctly. The very process of researching and writing the business plan should help clarify ideas and identify gaps in management information about their business, competitors and market. During the finance – raising process, accountants are often called to review the financial aspects of the plan. Their report may be formal or informal, an overview or extensive review of the company’s management system, forecasting methods and their accuracy, review of latest management accounts including working capital, pension funding and employee contracts etc. this due diligence process is used to highlight any fundamental problems that may exist. The corner stone of raising finance is a realistic and credible business plan, which will determine the strategic and financial needs of business, typically over a 3 to 5 years period. All providers of finance, whether Banks, venture capitalists or state funding agencies, will usually ask for a business plan which covers the main aspects of business being considered for funding. The funding requirements for each funding provider are different and the business plan may have to be tailored to address the needs of each investor. Conclusion Small Scale Industries (SSIs) sector contributes significantly to the manufacturing output, employment and exports of the country. It is estimated that in terms of value, the sector accounts for about 45 per cent of the manufacturing output and 34 percent of the total exports of the country. This sector has consistently registered a higher growth rate than the rest of the industrial sector. SSIs encourage entrepreneurial development and dispersal of the industries throughout the length and breadth of the country. It also generates a lot of employment opportunities and the capital cost per employee is minimum. With the service sector contributing a major share to the GDP and as this sector relies on the SSIs. Industrial state of Rajasthan on the eve of independence was very poor, but the Government at the centre as well as at the state level has made deliberate and concerned efforts to give the industrial structure a modern and mature look by promoting key and basic heavy industries, the small and medium industries, the handloom, cottage and village industries. Even today Rajasthan does not appear in the first ten industrially more developed states of India viz. Maharashtra, Gujarat, Tamilnadu, Utter Pradesh, Bihar, West Bengal, Madhe Pradesh, Karnataka, Andhra Pradesh and Punjab. In 2002-03 in net value added, Maharashtra’s share was about 1/5, while it was only 1/36 for Rajasthan. During 1990-91 to 2004-05 industrial investments have increased in Rajasthan and industrial position of the state is improving to some extent. Today the number of small scale units is quite large in Rajasthan. There are sharp regional variations in the development of factories in Rajasthan. In 2002-03 in the 9 districts, 79% of the total factories were located and in the rest of the 23 districts 21% remaining factories were located. There were only 5 factories in 3 districts; each district had less than 5 factories. Thus, some districts can be regarded extremely backward from the point of view of factory-sector development. During the period of 1970 to 2003, i.e. during 32 years the number of new factories increased at a rapid rate in the following districts; Jaipur, Jodhpur, Udaipur, Pali, Alwar, Bhilwara and Ganganagar. In 2002- 03 in net value added Jaipur district had the first place, second place went to Kota district. Small scale units are found in different types of industries. These are SSI based on Agro Products, Live- Stock based, Mineral based, Forest based, Khadi industries, Village industries and Handicrafts industries. Rajasthan has been famous for its cottage, rural and handicraft industries and they occupy an important place in the economy of the state. Gems and jewellary work, dyeing and printing of textiles, carpet-making etc. are quite important from the point of view of employment, income and export-earnings. Khadi and village industries taken together provide jobs to about 5.5 lakh people, which is more than double the employment in the factory-sector. The productivity of this sector needs to be increased so as to improve the economic conditions of the people engaged in them. The value output in khadi and village industries should also be enhanced beyond the 2000-01 level of Rs. 490 crore, for which technology up gradation and quality improvements in products would be essential. Government is promoting various handicrafts in the state by starting craft design development centres and encouraging exports by providing freight-subsidy on exports through Inland Container Depots (ICDs). Broadly speaking, the issues affecting the small scale sector can be categorized as Impact of globalisation, Credit, Marketing, Technology, Infrastructure, Regulatory regime, Cluster development, Access to information, Delayed payments and Skill & entrepreneurship development. There are several problems of cottage and SSIs which need to be tackled in the near future. These are problems of raw materials, old techniques of production, marketing problem, lack of skilled labour and lack of capital problem. The SSI, which was not able to withstand competition, has gradually become sick. According to the report of RBI (3 rd census of SSI) the criteria to measure sickness were: delay in repayment of loan over one year, decline in net worth by 50%, and decline in output during the last 3 years. According to the census of RBI nearly 15 % of registered SSI was identified to be sick. Credit is the prime input for sustained growth of SSI and its mobilization for meeting fixed and working capital needs poses the foremost problems. Credit provided for creation of fixed assets like land, building, plant and machinery is called long term credit. Credit provided for running the industry for its day-to-day requirement for purchasing raw material and other input like electricity and water etc. and for payment of wages and salaries is called short-term credit or working capital. The SSI is provided working capital by commercial banks and in some cases by cooperative banks and regional rural banks. Term loans are provided by State Financial Corporations (SFCs), Small Industries Development Corporations (SIDCs), National Small Industries Corporation (NSIC) and National Bank for Agriculture and Rural Development (NABARD). Financial assistance from NSIC and to some extent from SIDCs is available in the form of supply of machinery on hire purchase basis/deferred payment basis. Small sized SSI and tiny units also get some term loans from commercial banks along with working capital in the form of composite loans. The Small Industries Development Bank of India (SIDBI) provides refinance to these institutions. Such refinance comprises assistance provided to State Financial Corporation Bills, Finance Scheme, Special Capital/Seed Capital Scheme, and new debt instruments and to National Small Industries Corporation. Long-term loan are provided to the smalls scale industrial units by SFCs mainly through Single Window Scheme and National Equity Fund as also direct assistance provided to State Financial Corporations in the form of refinance. Some part of working capital for pre-operative expenses is also provided by State Financial Corporations to Small Scale Industrial Units under the Single Window Scheme. The government has also provided measures such as greater infra-structural support, more and easier availability of credit, lower rates of duty, technology up-gradation, assistance to build entrepreneurial talent, facilities for quality improvement, and export incentives. The scope for small and medium enterprises (SME) finance by the commercial banks has increased tremendously. Public sector banks’ overall credit to SME sector grew by 26% in 2006-2007. Among the large public sector banks, State Bank of India’s SMEs exposure grew by 24% and all banks are targeting SMEs credit growth by 25%. RBI has advice all commercial banks to achieve 20% annual growth in SME lending till 2010, so that the SME sector exposure to commercial banks is doubled. Major complaints of the SMEs sector relating to bank finance are that it is inadequate, delayed and costly. Some other disturbing trends noticed with regard to bank credit to SMEs are: (i) inadequate working capital which is currently ranging between 10- 13% against RBI norm of 20% of projected turnover to be given as working capital, (ii) high cost of credit normally ranging between 13-16% as against relatively lower rate of interest of 6 to 9% charged from large units on the ground of latter’s better creditworthiness and 7% from agricultural sector, (iii) insistence on collaterals even on loan up to Rs. 5 lakh in spite of the RBI guidelines to this effect (loans without collateral out of total loan below Rs. 5 lakh to SSI was 25.9% in 2004-05), and (iv) neglect of small loan as the share of loan below Rs. 25000 had declined from 21% of total outstanding of banks’ credit in June 1985 to 3.7% in March, 2005. Banks, it seems, are not favourably inclined to finance the small enterprises, particularly, smaller among the small enterprises for various reasons. Notable among them are (i) inability of small entrepreneurs to meet collateral requirement (ii) high non-performing assets in SSI sector which is currently at 15% as against 8% for large industries (iii) high incidence of sickness (though official RBI data indicates a decline in the number of sick SSI units from 3.04 lakh in 2000 to 1.39 lakh in 2004 (iv) higher transaction cost to banks in processing large number of small loan applications. Normally, the cost of processing small loans has been found in the range of 18 to 21% whereas the rate of interest on small loans below Rs. 25,000 is 12% and other loans up to Rs. 5 lakh is 15 to 16% (v) difficulty in establishing the creditworthiness of the project proposals. Poor borrowers do not require project finance; instead they need production, consumption and housing loan. Of all the elements that go into a business, credit is perhaps the most crucial. The best of plans can come to naught if adequate finance is not available at the right time. SSIs need credit support not only for running the enterprise & operational requirements but also for diversification, modernization/up gradation of facilities, capacity expansion, etc. In respect of SSIs, the problem of credit becomes all the more critical whenever any episodic event occurs such as a large order, rejection of consignment, inordinate delay in payment, etc. In general, SSIs operate on tight budgets, often financed through owner’s own contribution, loans from friends and relatives and some bank credit. Government of India recognized the need for a focused credit policy for SSIs in the early days of promotion of SSIs. This in turn led to a credit policy with the following components:- Priority Sector Lending: Credit to the SSI sector is ensured as part of the priority sector lending by banks. Banks are required to compulsorily ensure that specified percentage (currently 40% for domestic commercial banks and 32% for foreign banks) of their overall lending is made to priority sectors as classified by Government. These sectors include agriculture, small enterprises, retail trade, etc. Institutional Arrangement: Small Industries Development Bank of India (SIDBI) is the principal financial institution for promotion, financing and development of the SSI sector. Apart from extending financial assistance to the sector, it coordinates the functions of institutions engaged in similar activities. SIDBI’s major operations are in the areas of (i) refinance assistance (ii) direct lending and (iii) development and support services. The commercial banks are important channels of credit dispensation to the sector and play a pivotal role in financing the working capital requirements, besides providing term loans (in the form of composite loans). State Financial Corporations (SFCs) and twin-function State Industrial Development Corporations (SIDCs) at the State level are the main sources of long-term finance for the SSI sector. With the liberalization of the Indian economy, greater emphasis was placed on meeting the credit needs of MSEs. This was manifest through the following initiatives: 1. Earmarking of credit for micro enterprises within overall lending to micro and small enterprises. 2. Opening of specialized SME branches. 3. Enhancement in the limit for computation of the aggregate working capital requirements on the basis of minimum 20% of the projected annual turnover. 4. Enhancement of composite loan to Rs.1 crore (Rs.10 million). 5. No collateral security for loans up to Rs.5 lakh (Rs.0.5 million) [Banks may on the basis of good track record and financial position of the units, increase the limit of dispensation of collateral requirement for loans up to Rs.25 lakh (2.5 million)]. In the changing competitive scenario, the Rajasthan Financial Corporation identified certain specific sectors like loan for commercial construction of residential houses/ flats/ housing complex and scheme of financing against assets. The corporation has been able to achieve its target by extending loans to the larger entrepreneurial sections in the State. Reaching out to the tiny, small and the medium sectors through its net work of 35 Branch Offices, 5 Sub-Offices and 2 offices, the Corporation has played instrumental role in industrial development of the state. Since its inception, the Corporation has sanctioned a sum of Rs. 4649.25 crores to 77100 units and disbursed Rs. 3193.32 crores to 59737 units, contributing substantially to the industrial economy of the State. During the year 2007-08, the Corporation cleared 856 proposals aggregating to Rs. 438.21 crore. It is envisaged that these units would generate employment opportunity for about 6670 persons in the State. The total investment supported by this financial assistance is expected to be the tune of Rs. 878.38 crore approx. References: Entrepreneurship Development, The ICFAI Journal. Vol. 4, March 2007. Report of the Nayak Committee set up by RBI in December 1991 (Report Came in September, 1992). Report of the Kapur Committee Set up by RBI in December 1997. Report of the Expert Committee under the Chairmanship of Shri. S. L. Kapur, Former Secretary (SSI), GOI, to suggest measures for improving the delivery system & simplification of the procedure for credit to SSI, June 30th 1998. Report of the “Working Group on Flow of Credit to SSI Sector” constituted as per the announcement made by the Governor, RBI, in the Mid- Term Review of the Monetary and Credit Policy 2003-2004. ANNUAL REPORT: RBI – Annual Reports IDBI - Annual Report. SBI - Monthly Review. ICICI- Annual Report. PNB- Monthly Reviews Indian Banks’ Association, Mumbai Monthly Bulletins. RFC Annual Report NABARD Annual Report WEB SITES www.sidbi.com. www.ifciltd.com. www.nabard.org. www.icicibank.com. www.globalchange.com. www.ebay.in. www.swedishcreditunion.com www.rbi.org.in.