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Problems faced by small scale indutries

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					“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 – rajiv_gandhi23@yahoo.co.in
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.

				
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