Unit-3

MSME Finance

3.1 Financial Sector

Financial sector plays an indispensable role in the overall development of a country. The most important constituent of this sector is the financial institutions, which act as a conduit for the transfer of resources from net savers to net borrowers, that is, from those who spend less than their earnings to those who spend more than their earnings. The financial institutions have traditionally been the major source of long-term funds for the economy. These institutions provide a variety of financial products and services to fulfill the varied needs of the commercial sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to the industries established in backward areas. Thus, they have helped in reducing regional disparities by inducing widespread industrial development. Here, researcher has made an attempt give a clear picture of financing institutions for MSME sector.

INSTITUTIONAL SUPPORT

Central Government as well as State Govt. has established a number of institutions for the promotion of industries whose decisions and functions influences industrial activities in the country/region/State. The role and functions of these institutions are discussed under this institution framework.

CENTRAL GOVERNMENT ORGANISATIONS/AGENCIES AND THEIR FUNCTIONS:

Govt. of India has created following Institutions/organization/Corporation/ boards to look into various aspects of promoting and developing industries. They formulate policies, co-ordinate and monitor the progress of industrial products falling under their purview.

• Khadi & Village Industries Commission                
• All India Handicraft   Board
• All India Handlooms Boards
• Central Silk Board
• Coir Board
• Jute Board
• All India Power looms Board  

All these Commissions/Boards promote only specific industries coming under their purview as is clear from the name of Commission/Board. These corporations frame policies and make programmes for the development of products/industries falling under their purview and coordinate these programmes and monitor the progress of these industries.

Beside these commissions and boards, there are certain other Agencies/Institutions at Central level which render service/assistance to industries in their respective fields.

NATIONAL SMALL INDUSTRIES CORPORATION LTD.:

National Small Industries Corporation Ltd., has its Head Office in New Delhi.  It has four regional offices located in Mumbai, Kolkata, Chennai and New Delhi. To avail the facility provided by the NSIC, H.P State is attached with its branch office located at SCO -378, Sector 32-D, Chandigarh.  Their main functions are as below:-

Supply of machinery on hire purchase basis

Registration of units for participation in purchase programme of central and State Govt. and other Institutions. This scheme is popularly known as Single Point Registration

Marketing assistance (Internal and export)

Development of prototype of machines and equipment etc.

BUREAU OF INDIAN STANDARDS (BIS) PARWANOO, SOLAN:

It is Central Govt. Department which specifies quality standards for different products. It helps in selecting appropriate machinery and equipment for installing quality facilities. It helps in setting up testing laboratories in units premises and also authorizes units to use ISI mark which manufacture products as per specified standards.

The Patent Sub-Office-112,33-C, Chandigarh

1. It registers the “Trade Mark” of interested units and provides legal protection in case of imitation by others.
2. H.P. Patent Information Centre, State Council for Science Technology & Environment, Kusumpti, Shimla-9
3. It creates awareness and facilitates in registration of Patent/Trade Mark    Copy Rights etc.

REGIONAL TESTING CENTRE, OKHLA  INDL. ESTATE, NEW DELHI:

It has its head office at New Delhi and four Regional Centers located at Mumbai,     Calcutta, Chennai and New Delhi. Its main function is to provide testing facilities to industrial units at nominal charges.

KNITWEAR FACILITY CENTRE, FOCAL POINT LUDHIANA, PUNJAB:

Its main function is to assist units manufacturing hosiery goods in obtaining quality mark   (wool mark) and testing their products.

BICYCLE AND SEWING MACHINE RESEARCH AND DEVELOPMENT CENTRE, FOCAL POINT, LUDHIANA, PUNJAB:

Its main function is to produce quality products in bicycles and sewing machines. It provides testing and training facilities in these areas.

FOOD AND NUTRITION BOARD, DEPTT. OF FOOD, MINSITRY OF AGRICULTURE, NEW DELHI:

Its main function is to provide testing assistance to units producing quality food products. It provides information on laboratory and machinery requirements for getting FPO license.

ELECTRONICS TEST & DEVELOPMETN CENTRE, CHAMBAGHAT, SOLAN, HIMACHAL PRADESH:

Its main function is to provide testing facilities, commercial facilities etc, to units manufacturing electronics products and also provides training in electronics and development of new electronic products.

CONTROLLER OF IMPORTS & EXPORTS, INDERPRASTH, BHAWAN, NEW DELHI:

Its main function is to assist units in import of raw materials and export of final products to other countries.

RESERVE BANK OF INDIA,40, SDA Complex, Kusumpatti, Shimla

Its main function is to provide guidelines to lending Institutions like IDBI, IFCI, ICICI, SIDBI, and Financial Corporations & Banks in lending money to industrial sectors and control money supply.

SMALL INDUSTRIES DEVELOPMETN BANK OF INDIA:

It provides finance to small scale industries through its various refinance schemes. It provides refinance through State Financial Corporations, Banks etc at concessional rates.

OTHER SPECIALISED INSTITUTIONS IN TRAINING AND DEVELOPMENT:

1. Central Tool Room, Ludhiana, Delhi, Calcutta and Bangalore
2. Central Institute of Hand Tools, Jalandhar
3. Central Food Technology Research Institute, Mysore
4. Central institute of Tool Designs, Hyderabad
5. Institute for Designs of Electrical Measuring Instruments  (IDEMT), Mumbai
6. Central Machine Tools Institute, Bangalore.
7. Central Institute for Plastic Engg. & Tools Chennai and Ahmadabad.
8. National Institute for Foundry and Forge Technology, Post Office, Hatia, Ranchi-834003
9. National Institute for Micro, Small & Medium Enterprises (NI-MSME), Hyderabad Entrepreneurship Development Institute of India, Ahmadabad,  Lucknow, Patna and Bhopal.
10. AGMARK  Department of marketing and Inspection, Sub-office 112, 33-C, Chandigarh.

NIMSME

National Institute for Micro, Small and Medium Enterprises (NI-MSME) is a national institute aimed to foster the progress of micro, small and medium enterprises in India under Ministry of Micro, Small and Medium Enterprises. NI-MSME is registered in Hyderabad, Telangana, under Public Societies Registration Act I of 1350 Fasli with effective from 1st July 1962. The affairs of the Society are managed, administered, directed and controlled through Governing Council constituted by the Government of India as per Rule 22(a & b) of Rules and Regulations of the Society. The Society, as provided under Rule 3 of Rules and Regulations, was constituted by the Government of India. The Institute has been working in the areas of capacity building, research, skill upgradation, job enrichment training in the field of Entrepreneurship and Skill including the development of women pursuing small trades at the cottage industry level from an Incubation centre at NI-MSME.

NI-MSME

To cope with the pressure of globalisation, the Government of India had enacted the Micro, Small and Medium Enterprises Development Act, 2006 in the Parliament, which became effective from 2nd October 2006. Accordingly, the Institute, in order to reflect the expanded focus of its objectives with name was rechristened as ni-msme from 11th April 2007 and re-designed its structure and organisation. It is an organisation of the Ministry of Micro, Small and Medium Enterprises (formerly Ministry of SSI & ARI), Government of India. The ni-msme (formerly as SIET) was registered at Hyderabad in Andhra Pradesh under Public Societies Registration Act I of 1350 Fasli with effective from 1st July 1962.

Activities Undertaken

1964-2008

• Research study in developing the first entrepreneurship model – Prof. David Mc-Clelland;s Kakinada Experiment (1964)
• First International Programme on SMEs in the country (1967)
• Programme for Young Engineers and Technocrats for the first time in the country (1970)
• Establishment of a unique Centre in the country named Small Enterprises National Documentation Centre (SENDOC) (1970)
• Initiated Area Development Programmes in Enterprise Promotion in the country (1971)
• First study on Growth Centres (1973)
• Establishing and sustaining a Branch Regional Centre in North-Eastern Region for the first time in the country (1979)
• Orientation on Small Industry Development for IAS Officers (1986-89)
• Preparation of case studies and video documentaries on science and technology entrepreneurs in Orissa. West Bengal and Andhra Pradesh (1986)
• Policy Research Studies on various aspects of Small Industry (1986, 1989, 1992, 1997)
• The first computerized Software Package Developed on simulation exercises for Small Industry Management (SIMSIM) 1987
• Project Apraisal and Evaluation (CAPE-1996)
• Recognition by the University of Hyderabad as Centre for Advanced Studies and Research in Small Industry Development (1991)
• Preparation of video on the progress of Integrated Industrial Development (IIC) Centres in States and the National Awards function New Delhi (1995)
• Compilation of the Directory of Small Enterprises of Excellence (1995)
• UNESCO Chair (1997)
• Enterprise Development Government and Effectiveness Programme (EDGE) for Sri Lankan Administrative Officials (1998)
• Export Production Villages (1999)
•            B2B Transactions with Uganda, Namibia, South Africa, Bhutan (2000), Nigeria (2001), Sudan, Cameroon, Ghana (2002)
•            Child Labour Eradication Programme by International Labour Organization (201), in selected districts of Andhra Pradesh, ILO, Project (2002-03).
•            Entrepreneurship Development Programmes (EDPs) for VRS/Rationalized Employees in State and Central Public Sector Units (from 2001 onwards)
•            Achieved self-sufficiency in recurring expenses (2001-02)
•            Ministry of Heavy Industry & Public Enterprises, Govt. of India recognized the Employee Assistance Cell (EAC) at ni-msme as Nodal Agency for training and rehabilitation of rationalized employees of Central Public Sector Undertakings (CPSUs) (2002)
•            Study on Identification of Projects for specific Resource Base in North-Eastern Region (2003)
•            Vision Document for Empowering Women in Mauritius (2003)
•            Project Profiles on SMEs for Mauritius (2004)
•            Hand-holding, Monitoring and Implementation of MSME Clusters (2004-07)
•            Entrepreneurship Development Inputs in Professional Colleges (2004)
•            Curriculum Development of Entrepreneurship: Comparative Study in selected States of India (2004)
•            Handholding for SFURTI, Handlooms, Handicrafts Clusters (2006 onwards)
•            Status of Women Entrepreneurship in Andhra Pradesh (2007)
•            Impact study of Entrepreneurship Development Programmes (EDPs) organized by MSME – Development Institutes on Self-Employment and Wage Employment (2008)
•            Evaluation of Entrepreneurship Development Institutes (EDIs) in India (2008)

2009 - present

2019-20

•            NI-MSME has trained over 10,000 international participants in its nearly six decades since inception with more than 5.3 lakh local people have trained in over 15,800 programmes. In year 2019, three modules were conducted 73 participants from 28 nations got trained. [6]
•            The responsibility of setting up this Moonj bank — a storehouse for the wild Moonj grass used for making a range of household and decorative products – has been entrusted to the National Institute for Micro, Small and Medium Enterprises (NIMSME), Hyderabad, which will strive to find suitable markets for the Moonj products. [7]
•            On the occasion of International Women's day 13 women entrepreneurs and achievers were felicitated at the Shakti National Convention held at NIMSME Campus, Hyderabad. [8]
•            NIMSME took a green initiative by planting 1200 saplings on the campus was launched by the Director-General.

Indian Institute of Entrepreneurship, Guwahati

Indian Institute of Entrepreneurship (IIE) is an autonomous organization under the Ministry of Skill Development & Entrepreneurship. The main aim of the Institute is to provide training, research and consultancy activities in Small and Micro Enterprises (SME),with special focus on entrepreneurship development. The Indian Institute of Entrepreneurship (IIE) registered under the Societies Registration Act,1860 was established in the year 1993 in Guwahati by the erstwhile Ministry of Industry (now the Ministry of Micro, Small and Medium Enterprises), Government of India. The Institute began operating from April 1994 with the North East Council (NEC), Governments of Assam, Arunachal Pradesh and Nagaland and SIDBI as its other stakeholders.

IIE has been transferred to the Ministry of Skill Development & Entrepreneurship on 22nd May’2015.

The headquarter of IIE is at Lalmati, Basistha Chariali, 37 NH bypass,Guwahati-781029.

OBJECTIVES

1. To promote and develop entrepreneurship.
2. To conduct research and provide consultancy for entrepreneurship development.
3. To coordinate and collaborate with other organizations in undertaking training, research and other activities to increase outreach of the institute.
4. To provide consultancy and monitoring service to MSMEs/ potential entrepreneurs and enhancing employability of participants.
5. To promote greater use of information technology in the activities/ functions of the IIE.
6. To comply with statutory responsibility.

FUNCTIONS

1. Designing and organising training activities for different target group and undertaking research in the relevant to entrepreneurship.

2. Improving the efficiency, effectiveness and delivery of the change agents and development practitioners i.e. trainers, support organizations engaged in enterprise building. etc.

3. Provide consultancy service to the prospective and existing entrepreneurs.

4. Increasing the outreach of activities of the institute through collaborative activities and increasing their effectiveness through use of different tools of information technology.

NIESBUD

The National Institute for Entrepreneurship and Small Business Development is a premier organization of the Ministry of Skill Development and Entrepreneurship, engaged in training, consultancy, research, etc. in order to promote entrepreneurship and Skill Development. The major activities of the Institute include Training of Trainers, Management Development Programmes, Entrepreneurship-cum-Skill Development Programmes, Entrepreneurship Development Programmes and Cluster Intervention. NIESBUD has provided training to 12,24,433 persons as of March 31, 2020 through 46,438 different training programmes since inception. This includes 5,011 international participants hailing from more than 145 countries throughout the globe.

Training:

• Assessing  the training programmes and identifying the gaps to systematically conduct training programmes, orienting them as well as motivating youth towards entrepreneurship.
• Developing and Designing various communication media tools for promoting the culture of entrepreneurship among different strata of society in the country.
• Supporting and playing a catalytic role towards organizations engaged directly or indirectly in developing and promoting entrepreneurship and self-employment in the Country.
• Providing consultancy services in the area of entrepreneurship and Skill Development especially for MSDEs.
• In addition to above, Also Providing consultancy services to other Institutions engaged in entrepreneurial training either in the Government or in the Private Sector.
• Designing, Conceptualizing and standardizing course curriculum for entrepreneurship and skill development programmes.

Research & Development:

• Promoting research and development activities in the area of entrepreneurship, particularly in MSDE sector. Undertaking documentation and disseminating information related to entrepreneurship/ enterprise development.
• Developing and publishing literatures, articles, journals and information material related to entrepreneurship/enterprise development/ Skill Development/MSDEs
• Providing an interactive platform for exchange of ideas and experiences for various targets groups mainly through seminars, workshops, conferences as well as through training programs.
• Identifying the Problem and developing feasible solutions by conducting research studies for generating knowledge and accelerating the development of entrepreneurship.
• Major Focus Areas :
• Creating a holistic environment to support entrepreneurship and skill development within the Institute.
• Evaluating and revising the training programmes sponsored by NIESBUD so as to fit in with the internal and external environmental changes with respect to entrepreneurship and small business Development
• The institute is actively engaged in creating a positive image among the general public on entrepreneurship and eliminating the misconception related to it. This helps in disseminating the information on entrepreneurship and skill Development fruitfully.

NSIC

National Small Industries Corporation (NSIC), is an ISO 9001:2015 certified Government of India Enterprise under Ministry of Micro, Small and Medium Enterprises (MSME). NSIC has been working to promote, aid and foster the growth of micro, small and medium enterprises in the country. NSIC operates through countrywide network of offices and Technical Centres in the Country. In addition, NSIC has set up Training cum Incubation Centre managed by professional manpower.

Mission: “To promote and support Micro, Small & Medium Enterprises (MSMEs) Sector” by providing integrated support services encompassing Marketing, Technology, Finance and other services.

Vision: “To be a premier Organization fostering the growth of Micro, Small and Medium Enterprises (MSMEs) Sector”.

Schemes of NSIC

NSIC facilitates Micro, Small and Medium Enterprises with a set of specially tailored scheme to enhance their competitiveness. NSIC provides integrated support services under Marketing, Technology, Finance and other Support service.

Marketing Support

Marketing has been identified as one of the most important tool for business development. It is critical for the growth and survival of MSMEs in today's intensely competitive market. NSIC acts as a facilitator and has devised a number of schemes to support enterprises in their marketing efforts, both domestic and foreign markets. These schemes are briefly described as under :

Consortia and Tender Marketing

Small Enterprises in their individual capacity face problems to procure & execute large orders, which deny them a level playing field vis-a'-vis large enterprises. NSIC forms consortia of Micro and Small units maufacturing the same product, thereby pooling in their capacity.

NSIC applies the tenders on behalf of single MSE/Consortia of MSEs for securing orders for them. These orders are then distributed amongst MSEs in tune with their production capacity.

Single point Registration for Government Purchase

NSIC enlists Micro & Small Enterprises (MSEs) under Single Point Registration scheme (SPRS) for participation in Government Purchases. The units enlisted under Single Point Registration Scheme of NSIC are eligible to get the benefits under Public Procurement Policy for Micro & Small Enterprises (MSEs) Order 2012 as notified by the Government of India, Ministry of Micro Small & Medium Enterprises, New Delhi vide Gazette Notification dated 23.03.2012 and amendment vide order no. S.O. 5670(E) dated 9th November 2018. The enlistment under SPRS is completely online. Login: www.nsicspronline.com

Issue of the Tender Sets free of cost.

Exemption from payment of Earnest Money Deposit (EMD),

In tender participating MSEs quoting price within price band of L1+15 per cent shall also be allowed to supply a portion upto 25% of requirement by bringing down their price to L1 Price , where L1 is non MSEs.

Consortia facility for Tender Marketing.

MSME Global Mart B2B Web Portal for MSMEs

Information today is becoming almost as vital as the air we breathe. We need it every minute of our working lives. With increase in competition and melting away of international boundaries, the demand for information is reaching new heights. NSIC, realizing the needs of MSMEs, is offering Infomediary Services which is a one-stop, one-window bouquet of aids that will provide information on business, technology and finance, and also exhibit the core competence of Indian SMEs through digital presence. The corporation is offering Infomediary Services through its MSME Global Mart www.msmemart.com; which is a Business to Business (B2B) web portal. The services are available through Annual Membership.

a. Create your Company's Web Page in minutes

b. Display Products & Services 24*7

c. Connect with Buyers & Suppliers Globally

d. Information’s on Events & Exhibitions

e. Keyword based Unlimited Tender Alert

f. Franchise & Distributorship Opportunities

g. Request For Quotations

h. Trade Leads

i. Platform to Buy/Sell Used Machinery

j. Service Available in Multiple Language

k. Free Membership for SC/ST Entrepreneurs for one year

Marketing Intelligence

Collect and disseminate both domestic as well as international marketing intelligence for the benefit of MSMEs. This cell, in addition to spreading awareness about various programmes / schemes for MSMEs, will specifically maintain database and disseminate information.

Exhibitions and Technology Fairs

To showcase the competencies of Indian MSMEs and to capture market opportunities, NSIC participates in select International and National Exhibitions and Trade Fairs every year. NSIC facilitates the participation of the small enterprises by providing concessions in rental etc. Participation in these events exposes MSMEs to international practices and enhances their business prowess.

Buyer-Seller meets

Bulk and departmental buyers such as the Railways, Defence, Communication departments and large companies are invited to participate in buyer-seller meets to enrich small enterprises knowledge regarding terms and conditions, quality standards, etc required by the buyer. These programmes are aimed at vendor development from MSMEs for the bulk manufacturers.

Credit Support

NSIC facilitates credit requirements of small enterprises in the following areas:

• Financing for procurement of Raw Material (Short term)
• NSIC's Raw Material Assistance Scheme aims at helping Small Enterprises by way of financing the purchase of Raw Material (both indigenous & imported). The salient features are:
• Financial Assistance for procurement of Raw Material upto 180 days.
• MSMEs helped to avail Economics of Purchases like bulk purchase, cash discount etc
• Financing for Marketing Activities (Short term)
• NSIC facilitates financing for marketing actives such as Internal Marketing, Exports and Bill Discounting.

Credit Facilitation Through Bank

To meet the credit requirements of MSME units, NSIC has entered into a Memorandum of Understanding with various Nationalized and Private Sector Banks. Through syndication with these banks, NSIC facilitates MSME in accessing credit support (fund based or non-fund based limits) from the banks. NSIC assists MSMEs in completion of the documentation for submitting the proposals to the banks and also does the follow up with the banks. These handholding support are provided by NSIC without any cost to the MSMEs.

Technology Support

Technology is the key to enhancing a company's competitive advantage in today's dynamic information age. Small enterprises need to develop and implement a technology strategy in addition to financial, marketing and operational strategies and adopt the one that helps integrate their operations with their environment, customers and suppliers.

NSIC offers small enterprises the following support services through its Technical Services Centres and Extension Centres:

Advise on application of new techniques

Material testing facilities through accredited laboratories

Product design including CAD

Common facility support in machining, EDM, CNC, etc.

Energy and environment services at selected centres

Classroom and practical training for skill upgadation

NSIC Technical Services Centres are located at the following places:

3.2 Organizations Under the control of State Govt.

State Government / Institutions / PSUs:

Office of the Development Commissioner [MSME]

The Micro, Small and Medium Enterprises- Development Organisation (MSME-DO) is headed by the Additional Secretary & Development Commissioner (MSME). The Office of the Development Commissioner (Micro, Small & Medium Enterprises) assists the Ministry in formulating, co-ordinating, implementing and monitoring different policies and programmes for the promotion and development of MSMEs in the country. In addition, it provides a comprehensive range of common facilities, technology support services, marketing assistance, etc. through its network of 30 Micro, Small and Medium Enterprises-Development Institutes (MSME-Dls); 28 Branch MSME-Dls; 4 MSME Testing Centres (MSME-TCs); 7 MSME-Testing Stations (MSME-TSs); 2 MSME-Training Institutes (MSME-Tls); and 1 MSME-Technology Development Center-Hand Tools (MSME-TDC-Hand Tools). The % DC (MSME) also operates a network of Tool Rooms and Technology Development Centres (including 2 Footwear Training Institutes) which are autonomous bodies registered as Societies under the Societies Act. The Office implements a number of schemes for the MSME sector, the details of which have been duly incorporated in the booklet.

Khadi & Village Industries Commission

The Khadi & Village Industries Commission (KVIC), established under the Khadi and Village Industries Commission Act, 1956 (61 of 1956), is a statutory organization engaged in promoting and developing khadi and village industries for providing employment opportunities in rural areas, thereby strengthening the rural economy. The Commission is headed by full time Chairman and consists of 10 part-time Members. The KVIC has been identified as one of the major organizations in the decentralized sector for generating sustainable rural non-farm employment opportunities at a low per capita investment. This also helps in checking migration of rural population to urban areas in search of the employment opportunities. The main functions of the KVIC are to plan, promote, organize and assist in implementation of the programmes/projects/schemes for generation of employment opportunities through development of khadi and village industries. Towards this end, it undertakes activities like skill improvement, transfer of technology, research & development, marketing, etc. KVIC co-ordinates its activities through State KVI boards, registered societies and cooperatives. It has under its aegis a large number of industry-specific institutions spread in various parts of the country.

Coir Board

The Coir Board is a statutory body established under the Coir Board Industry Act, 1953 (NO. 45 of 1953) for promoting overall development of the coir industry and improving the living conditions of the workers engaged in this traditional industry. The Coir Board consists of a full-time Chairman and 39 part- time Members. The activities of the Board for development of coir industries, inter-alia include undertaking scientific, technological and economic research and development activities; collecting statistics relating to exports and internal consumption of coir and coir products; developing new products and designs; organizing publicity for promotion of exports and internal sales; marketing of coir and coir products in India and abroad; preventing unfair competition between producers and exporters; assisting the establishment of units for manufacture of the products; promoting co-operative organization among producers of husks, coir fibre, coir yarn and manufactures of coir products; ensuring remunerative returns to producers and manufacturers, etc.

The Board has promoted two research institutes namely, Central Coir Research Institute (CCRI), Kalavoor, Alleppey, and Central Institute of Coir Technology (CICT), Bengalooru for under taking research activities on different aspects of coir industry which is one of the major agro based rural industries in the country. The two major strengths of the coir industry are it being export oriented and generating wealth out of the waste (coconut husk).

National Small Industries Corporation Limited (NSIC)

NSIC, established in 1955, is headed by Chairman-cum-Managing Director and managed by a Board of Directors.

The main function of the Corporation is to promote, aid and foster the growth of micro and small enterprises in the country, generally on commercial basis.

NSIC provides a variety of support services to micro and small enterprises catering to their different requirements in the areas of raw material procurement; product marketing; credit rating; acquisition of technologies; adoption of modern management practices, etc.

NSIC implements its various programmes and projects throughout the country through its 9 Zonal Offices, 39 Branch Offices, 12 Sub Offices, 5 Technical Services Centres, 3 Technical Services Extension Centres, 2 Software Technology Parks, 23 NSIC-Business Development Extension Offices and 1 Foreign Office.

SIDBI

Small Industries Development Bank of India (SIDBI) is a development financial institution in India, headquartered at Lucknow and having its offices all over the country. Its purpose is to provide refinance facilities and short-term lending to industries, and serves as the principal financial institution in the Micro, Small and Medium Enterprises (MSME) sector. SIDBI also coordinates the functions of institutions engaged in similar activities. It was established on 2 April 1990, through an Act of Parliament. It is headquartered in Lucknow.SIDBI operates under the Department of Financial Services, Government of India.

SIDBI is one of the four All India Financial Institutions regulated and supervised by the Reserve Bank of India; other three are India Exim Bank, NABARD and NHB. But recently NHB came under government control by taking more than 51% stake. They play a statutory role in the financial markets through credit extension and refinancing operation activities and cater to the long-term financing needs of the industrial sector.

SIDBI is active in the development of Micro Finance Institutions through SIDBI Foundation for Micro Credit, and assists in extending microfinance through the Micro Finance Institution (MFI) route.Its promotion & development program focuses on rural enterprises promotion and entrepreneurship development.

In order to increase and support money supply to the MSE sector, it operates a refinance program known as Institutional Finance program. Under this program, SIDBI extends Term Loan assistance to Banks, Small Finance Banks and Non-Banking Financial Companies. Besides the refinance operations, SIDBI also lends directly to MSMEs.

State Bank of India is the largest individual shareholder of SIDBI with holding of 16.73% shares, followed by Government of India and Life Insurance Corporation of India.

SIDBI has floated several other entities for related activities, including:

• SIDBI Venture Capital Limited (SVCL)- for providing Venture Capital (VC) assistance to MSMEs;
• Micro Units Development & Refinance Agency (MUDRA) - for ‘funding the unfunded’ micro enterprises in the country;
• Receivable Exchange of India Ltd. (RXIL) to enable faster realisation of receivables by MSMEs;
• SMERA Ratings Limited (SMERA) - for credit rating of MSMEs, renamed as Acuite Ratings & Research Limited.;
• India SME Technology Services Ltd (ISTSL)- for technology advisory and consultancy services and
• India SME Asset Reconstruction Company Ltd. (ISARC) for speedier resolution of Non-Performing Assets (NPA) in the MSME sector.
• SIDBI supports the Government of India in its initiatives and work as a nodal agency for some of the schemes related to development of MSMEs, such as Make in India and Startup India.

CGTMSE

CGTMSE is an initiative of the Government of India in collaboration with the Ministry of Micro, Small and Medium Enterprises (MSME) and the Small Industries Development Bank of India (SIDBI) launched on 30th August 2000. The CGTMSE full form is Credit Guarantee Fund Trust for Micro and Small Enterprises, and as is evident from the name, it is a Trust which provides the financial institutions with credit guarantee to provide loans to SMEs and MSMEs.

The basic aim of CGTMSE is to encourage first-time entrepreneurs to establish SME and MSME, considered to be the bulwark of the Indian economy by availing of collateral free loans from the eligible financial institutions. The guarantee covers default by the borrower to repay the advance. Thus, the CGTMSE scheme primarily envisages the provision of loans to first generation entrepreneurs so that they can flourish in the competitive environment without the burden of security or third-party guarantees. In turn the financial institutions are provided cover for the absence of security to fund SMEs and MSMEs promoted by small Indian businessmen up to a certain limit.

One of the key objectives of CGTMSE coverage is the focus towards the creation of a robust credit relief system that promotes better credit flow to SME and the MSME sector. The stand out features of the CGTMSE scheme is:

1. Guaranteed repayment of 75% or 85% in some cases for the defaulted principal loan amount up to Rs.50 lakh.
2. The maximum guarantee is 50% for loan amount greater Rs.50 lakh but under Rs.1 crore.
3. Provides for 85% repayment for loans up to Rs.5 lakhs to micro-enterprises.
4. The guarantee amount for repayment is 80% of the loan amount in case the MSME is promoted by a woman or the location of the unit is in the North East Region (NER).
5. The repayment procedure or CGTMSE loan recovery covers the entire loan amount inclusive of the interest component for a period of 3 months and/ or the entire outstanding loan amount along with the accrued interest from the suit filed date or the day when the loan turns into an NPA, whichever is lower.
6. Rehabilitation of business units if the failure is beyond the control of the management to the extent of Rs.1 crore as support to the lender for assistance in resuscitating the enterprise.

CGTMSE Scheme Eligibility Criteria:

As per the CGTMSE guidelines, credit guarantee is deemed to back a borrower with a  collateral and third party guarantee free advance. Under the scheme, the member lending institution which can be an NBFC also, who lend to the SME and MSME sector are eligible for a maximum credit cap of Rs. 2 crores, which in any case is meant to cover a large proportion of the loan amount. The eligibility norms prescribed both for the credit providers and borrowers are.

Lending Institutions: It covers the whole gamut of scheduled commercial banks, specified Regional Rural Banks, SIDBI, NSIC, NEDFi, SFB and NBFCs who lend to the specific sector and have entered into an agreement with CGTMSE or the Trust for the purpose. These are designated as Member Lending Institutions (MLIs) and number 131 at present.

Lending Borrowers: The CGTMSE coverage is conditional to all new and existing SMEs:

1. The maximum credit facility is Rs.50 lakhs for a guarantee cover not exceeding Rs. 62.50 lakhs / Rs.65 lakhs.
2. For credit facility above Rs.50 lakhs, the guarantee cap is limited to Rs. 1 crore.
3. Term credit for the entire outstanding amount on the date the loan is declared to be an NPA or on the date of filing a suit.

Exclusions:

Some entities are excluded from the CGTMSE coverage. They are:

• Retail Trade.
• Educational Institutions.
• Agriculture.
• Self Help Groups (SHG).
• Training Institutes.

SMERA

SMERA is the nation’s initially Rating office fundamentally concentrating on the Indian Micro, Small and Medium Enterprise (MSME) section.

SMERA’s essential goal is to give Ratings that are exhaustive, straightforward and solid. This would encourage more prominent and less demanding stream of credit from the keeping money division to MSMEs. SMERA Credit Ratings gives an extensive and autonomous outsider assessment of the general state of the candidate. Presently, SMERA offers Obligor Ratings which considers the budgetary and non-money related elements that have bearing on the credit value of the candidate.

At current, SMERA offers following

• MSME Rating
• Greenfield and Brownfield Grading

• Microfinance Institutions (MFI) Rating
• Green Rating
• Risk Management Solutions

SMERA’s Rating will likely upgrade the market remaining of the candidate among banks, exchanging accomplices and forthcoming clients.

Moving toward a FICO assessment organization is a decent alternative for small and medium enterprises (SMEs) given the issues they confront in looking for back. As indicated by a RBI give an account of patterns and advance in saving money 2010, just 13% of the enrolled SMEs approach back from formal sources.

SMERA survey an association’s money related reasonability and ability to respect business commitments, give an understanding into its deals, operational and monetary sythesis, threreby evaluating the hazard component, and highlights the general soundness of the undertaking. They additionally benchmark its execution inside the business.

SMERA for the most part have eight evaluations, extending from SME 1-8, with 1 meaning the most elevated rating and 8 the least. For giving this service, the organizations charge an expense which depends on the company’s turnover and reaches from 44,000 to 1.21 lakh. These evaluations are substantial for a year and can be recharged by paying a suitable charge. It is cash well spent. For, a great rating implies a higher possibility of sacking a credit.

“There is a great deal of data asymmetry in the market. A decent FICO assessment furnishes us with the underlying certainty for the venture. It additionally goes about as a last affirmation,” says Sunil Munhot, executive and overseeing chief, Small Industries Developmental Bank of India (SIDBI).

Advantages of rating

Concessional financing: A great rating can help you increase speedier and less expensive credit for your wander. The offices that give rating to SMEs—Crisil Ratings, SME Rating Agency of India (SMERA), Icra, Credit Analysis and Research (CARE), Onicra, and Fitch—have tie-ups with a few banks to offer particular financing costs in view of ratings. For example, Crisil Ratings has such a working course of action with 35 banks and money related establishments, while SMERA has gone into such agreements with 29.

As per Crisil Ratings, the financing cost lessening for its customers ranges from 0.5-1.25% and around 35% of the undertakings have revealed a diminishment in the credit handling time. “Now and again, banks have moved toward them with assets,” says Ramraj Pai, executive, Crisil Ratings. SMERA criticism proposes that ventures appreciate loan fee concessions to the degree of 0.25% to 1%. “Much of the time, investment funds from the decreased obtaining cost surpasses the rating expense,” says Parag Patki, CEO, SMERA.

“In the event that a firm gets a decent appraising, he can even approach different banks to show signs of improvement rate deal than the one given by his current investor,” says Munhot.

Better business open doors: The free hazard assessment of SMEs by an impartial outsider loans validity to them and opens entryways for them while managing MNCs and corporates. “You can submit FICO assessment for tenders and make yourself sounder to get greater requests. It likewise gives less demanding access to different wellsprings of fund, for example, private value,” says Pai. “Better ratings have helped the SMEs hold clients and providers, and arrange better terms with them,” says Patki.

The administration likewise supports evaluated SMEs, confining certain agreements for such firms. It additionally works an execution and FICO assessments conspire through different FICO assessment organizations by means of the National Small Industries Corporation. The plan gives a one-time sponsorship to SMEs to get evaluated. “The rating organizations have by a wide margin made a decent showing with regards to as outside ratings have been matching with our interior hazard assessment instrument. This is an essential benchmark while giving advances,” says Munhot.

Instruments for self-change: Another favorable position of rating is that the highlighting of qualities and shortcomings goes about as a trigger for self-rectification. A general recharging of evaluations enhances a company’s execution as well as fabricates certainty inside the bank society and exchanging channel.

It resembles a report card for SMEs. The examination helps them to persistently develop in view of the evolving direction, business prerequisites and financial situation,” says Patki.

SMEs are typically discouraged by the meticulousness of rating order and dread of low evaluating, yet the last may not really be the consequence of powerless financials and can be credited to different reasons. “The issues can be effectively brought up in the rating report. The SMEs that need to maintain a manageable business take the criticism decidedly and attempt to ad lib. It is a chance to execute best business hone

SMERA’s-Green Rating

SMERA’s-Green Rating is a free, outsider complete measure of units’ affectability towards condition and the governmental policy regarding minorities in society embraced by the unit to lessen vitality utilization and outflow. The rating technique would incorporate accommodation of information by the candidate taken after by the site visit and connection with administration. The last evaluating appraisal is attempted by a board of trustees including outer specialists and on its conclusion, the rating will be scattered to the candidate.

The SMERA-Green Rating is on a size of 1-5, wherein “SMERA-Green Rating 1” is the top most evaluating signifying the unit’s effective use of vitality with insignificant outflow of GHG and reception of procedures to control air, water, and land contamination. “SMERA-Green Rating 5” shows most reduced review on size of 1-5 with the unit’s wasteful utilization of vitality because of its current procedures and innovation making extreme harm the earth.

Bottom line

SME Rating Agency of India Limited (SMERA), is a joint activity of Small Industries Development Bank of India, Dun and Bradstreet Information Services India Pvt Ltd. furthermore, driving open and private part banks, which is by and by offering endeavor evaluations to Micro, Small and Medium Enterprises, Ratings of Microfinance Institutions, Gradings of Greenfield and Brownfield Projects and Educational Institutions.

SMERA has finished ratings of more than 6500 MSMEs since initiation. SMERA has additionally marked MOUs with more than 26 banks and loaning establishments.

SSI Association in India

Small Scale Industries Association of India has different branches. One of a popular branch is Thane SSI which is popularly known as TSSIA was established in 1974 and registered in 1977. TSSIA is the largest registered MSMEs Association in the state of Maharashtra and has been functioning for past 44 years in Thane District. We have a membership of over 2500 MSME’s situated in Thane Dist and surrounding areas. Recognizing TSSIA’s contribution towards the cause of MSME, Government of Maharashtra has nominated TSSIA on MSME Facilitation Council for Konkan Region (2010-2012) under the MSMED Act, 2006.In the competitive era of globalization and liberalization our organization is playing a major role to protect the interest of Small-Scale industries and help them to update technology to sustain higher growth rate.

• Government of India Ministry of Commerce has also entrusted TSSIA to Issue Certificate of Origin for Exporters.

• One of our activities involves, conducting various educational programs and seminars on Industrial Safety and Health, Technological Upgradation, Resource Mobilization, Environmental Protection, Energy Conservation, Export Promotion, Procedure and contracts, Laws, revenue, labour, ISO 9000 certification, EDP etc for the development of Micro, Small and Medium Enterprises.
• They arrange meetings and seminars with government officials to make them aware about the difficulties faced by SSI on various issues like Octroi, Electricity, Central Excise, Sales Tax, MIDC, ESIC and with various other State and Central, Local Govt. Departments and Authorities related to industries.

Mission of TSSIA

1. Build an Association of all small and tiny industries in Thane and offer them a platform to voice their aspirations, suggestions and grievances.
2. Act as a link and a communications channel between State and Central Government Departments, their local offices and our Members.
3. Study, assess, represent, suggest & solve various problems faced by Small Scale and tiny industries due to changing Government rules, regulations, policies and procedures.
4. Assist and help members in resolving day-to-day problems arising in their interaction with Government at all levels, including local authorities and government corporations.
5. Assist and help members in solving individual problems related to their industries.
6. Organize and arrange educational seminars and instructional programs for the benefits of members.
7. Publish a regular monthly House magazine to provide concise and useful information, relevant to industry and entrepreneurs.
8. Appreciate, felicitate and suitably recognize achievements of our members.
9. Act on the principle “Attack on one is an attack an all” by fighting united when even a single member is the victim of injustice.

Objective of TSSIA

• Entrepreneurship Development
• Solve Problems faced by Small Scale Industries
• Encourage Ethical Business Practices
• Fight against Corruption
• Practice Corporate Social Responsibility

Changing Role of MSME Associations

There is a huge gap in policy formulation and its implementation in large number developing and emerging countries. Through various policies and programmes governments support Small and Medium Enterprise (SME) sector so as to enable them to contribute significantly to their economy. But still government’s role in supporting the development of entrepreneurship limits to reaching only a fraction of SMEs due to many factors such as lack of knowledge about the schemes, lack of expertise to undergo capacity building, financial limitations, etc. SMEs generally lack a voice at national-level and have limited access to government services in most of the developing economies. To create a favourable environment for the SMEs to proliferate and develop, local empowerment plays a key role.

Main actors at the local level in the private sector are business/ industry associations, chambers and local non-government organizations (NGOs). The most effective and feasible long-term solution for improving the regulatory environment from SMEs’ point of view is public-private sector dialogue. Consistent communication and interaction between the government and the private sector, including associations and NGOs, can play a crucial role in building an effective policy framework, useful support measures and arrangements for the growth and development of small businesses. Inadequacy in such interactions divests the government of appropriate inputs for policy making for SME sector.

The usual role of industry associations is to further the interests of and respond to external events of their members. On behalf of their members, industry associations present business viewpoints and interests to governments and lobby them on the enabling environment. Apart from lobbying, some business associations also offer specific services to their members on market opportunities, tax and legal matters. They offer an assortment of services such as business-related information, consulting services, advice regarding support programmes or establishing new business ventures, generally acting as a mediator between SMEs and the government.

It is often difficult to effectively engage SMEs through their associations. Such associations tend to be particularly weak in transition and developing countries. It is difficult for them to articulate the needs of a highly differentiated sector. Also in most of the developing countries SME associations are constrained for the prevalent perception among the government officials that associations are not legal bodies and thus they do not approve of their being eligible for project implementation. With some remarkable exceptions, most business associations in developing countries are undersized, informally organised and does not have the human capacity, financial resources and know-how to deliver a wider range of support services to SMEs.

To ensure that they can play their role in ‘lobbying’ for business interests effectively, ISSME associates with such industry associations and help them fulfilling the purpose of their establishment. We have a plan to partner with all local level industry associations across all continents to render meaningful services to SMEs through them. Being an association of SME support institutions, ISSME enrolls these associations as its members and partners to give a meaningful direction to their functioning.

Policy Orientation & Resource Allocation

The role of micro, small and medium enterprises (MSMEs) in the economic and social development of the country is well established. The MSME sector is a nursery of entrepreneurship, often driven by individual creativity and innovation. This sector contributes 8 per cent of the country’s GDP, 45 per cent of the manufactured output and 40 per cent of its exports. The MSMEs provide employment to about 60 million persons through over 26 million enterprises producing over six thousand products. The labour to capital ratio in MSMEs and the overall growth in the MSME sector is much higher than in the large industries. The geographic distribution of the MSMEs is also more even. Thus, MSMEs are important for the national objectives of growth with equity and

inclusion. It would be an understatement to say that MSME sector in India is highly heterogeneous in terms of the size of the enterprises, variety of products and services produced and the levels of technology employed. Cutting across all sections of production and services, MSME sector is truly a strategic asset for the economy of the country.

On one hand, we have the village and rural industries including Khadi industry. Locationally, they are primarily in the rural landscape and provide an important ingredient of the local economic eco-system. In a significant number, they also are inter-related and inter-dependent on the agricultural/horticultural/other forest and nonforest produce. It adds wealth to the local economy and at the same time provides major employment and in the long run acts, as a bulwark against rural to urban migration. The challenge here is to provide grass-root and affordable technologies and ensure, at least primary processing at the village/cluster level to add value and reduce the costs of logistics. With the increase of educated youth power at the village level, the second challenge is to train them to set up their own rural level enterprises and encourage them through policy as well as fiscal instruments. Diverting unproductive labour forces from agriculture sector to productive enterprises would add to rural economy and simultaneously reduce the disguised unemployment in agricultural sector.

On the other hand, in extreme contrast and the opposite side of the spectrum are the Micro, Small and Medium Enterprises who are producing an extremely wide ranging variety of goods which are exported as well as have to reach out to the domestic consumers, withstanding the removal of protectionist measures such as reservation for small scale as well as lowering of entry barriers for imported goods due to the WTO regime in place. Withstanding such internal (from big domestic industries) and external competitions (imports) requires and necessitates them to be innately competitive whether in terms of design, manufacturing competence, marketing or market access.

A non-level playing field for MSME Sector, facing the odds like reluctance of banks/financial institutions for providing credit to MSMEs, lack of access to technology, inadequate marketing capabilities, etc., has pushed them towards the edge. Their threshold tolerance level to vicissitudes of markets and vagaries of banking system is so small that any adverse environment can have serious consequences leading to sickness or even closure.

With the addition of “Enterprises” as a definitional context of the ambit of the Ministry from 2006, (since the MSMED Act came into being) as also given the fact of the services sector growing at a far higher pace than the manufacturing sector, it poses completely different challenges for the Ministry for pro-active promotion of the Services Sector.

Financing MSME

There are two types of source of MSME finance in India. One is non-institutional which includes loan from local money lenders, friends and relatives who charge a high rate of interest. And other is institutional. The institutional lending to MSMEs in India are regulated by Reserve Bank of India include Scheduled Commercial Banks (Public Sector Banks, Private Sector Banks including Small Finance Banks, Foreign Banks, Co-operative Banks and Regional Rural Banks) and Non- Banking Financial Companies including NBFC- MFIs. In addition to this, Securities and Exchange Board of India (SEBI) regulates the institutions engaged in providing or mediating capital to MSMEs such as SME Exchanges, Angel Investors, Venture Capital and Private Equity.

Apex institutions such as SIDBI and MUDRA provide sectoral support and come within the purview of the Central Government. The MSMEs depend on both the sources as per their need from time to time. As per the 4th census of MSME only 5.18% of the units (both registered and unregistered) had availedof finance through institutional sources, 2.05% from non-institutional sources and the majority of units i.e. 92.77% had no finance or depended on self‐finance.

Why Lend to MSME sector?

The government has been trying to encourage banks and non-bank financial companies to lend to the micro, small and medium sector in the wake of the pandemic, not only due to the contribution of this sector to the national Gross domestic Product (GDP), employment and exports, but also due to its extreme vulnerability to the economic crisis that has ensued in the aftermath of the health crisis.

That credit availability has long been a barrier to MSME growth is well known. In fact, even as the government announced guarantees for MSME loans, the bank credit outstanding to the MSME sector has decreased since the onset of the pandemic as per RBI data, from Rs. 4.78 trillion on February 28, 2020 to Rs. 4.58 trillion on April 24, 2020.The moot point is, why does the financial sector shy away from lending to the MSME sector. Lending risks in the case of MSMEs may arise due to both the inability and unwillingness to repay on the part of the borrowers, resulting in high Non-Performing Assets (NPAs).

The big challenge for MSME lenders- whether banks or NBFIs – is to assess the credit worthiness of these enterprises given the lack of information regarding the financial performance of the business, and the ensuing risks in lending. At the same time, many of the enterprises which form part of the MSME sector, do not possess adequate collateral for borrowing. As such, underwriting of such loans in the absence of collateral, would require deep knowledge of borrower profile, behaviour and sentiments, especially for NBFCs dealing with them.

The availability of timely and precise data capturing structured and unstructured information then becomes critical for ensuring that loans given to the MSME sector may be used productively and that such lending does not end up affecting the stability of the financial sector.

The authors carried out a research study on the financial impact of the pandemic on MSMEs, their business outlook during this period, as also their borrowing intent and sentiments. The data pertained to 14,444 enterprises, located in 17 states and covered 70 locations. This data was collected through phone and mail surveys administered in the second fortnight of May, when the lockdown had been partially removed.

The study helped in busting some myths associated with MSMEs, especially in their response to the pandemic.

1. One, most MSMEs do not see themselves as not surviving the pandemic. Many of them see the impact on their earnings as less than 20 per cent, while the majority see such impact as being in the range of 20- 50 per cent.

2.     Two, the business outlook, can be termed as non-negative, since the proportion of respondents citing their outlook as positive or neutral is 62.67 per cent. This despite the fact that the proportion of businesses resuming activities during the survey period was lower, at 58 per cent.

3.     Three, more than three-fourths of the respondents rated themselves average to above average on their Financial Health Scores. This reflected in their stated requirement of loans, with 51 per cent stating that they had no loan requirements.

4.     Four, A little less than half the respondents (47 per cent) have not availed of the moratorium offered by the government.

5.     Fifthly, MSMEs are a heterogeneous lot, differing from each other in terms of their response to the pandemic, as also their sentiments based on size, geographical region, industry sector they belong to and whether they are in the essentials or non-essentials business.

Debt Finance

When a company borrows money to be paid back at a future date with interest it is known as debt financing. It could be in the form of a secured as well as an unsecured loan. A firm takes up a loan to either finance a working capital or an acquisition.

Debt means the amount of money which needs to be repaid back and financing means providing funds to be used in business activities. An important feature in debt financing is the fact that you are not losing ownership in the company.

Debt financing is a time-bound activity where the borrower needs to repay the loan along with interest at the end of the agreed period. The payments could be made monthly, half yearly, or towards the end of the loan tenure.

Another important feature in debt financing is that the loan is secured or collateralized with the assets of the company taking the loan. This is usually part of the secured loan. If the loan is unsecured, the line of credit is usually less.

If a company needs a big loan then debt financing is used, where the owner of the company attaches some of the firm’s asset and based on the valuation of those assets, loan is given.

Let’s understand debt financing with the help of an example. If a company requires a loan of Rs 50 crore, it can raise the capital by selling bonds or notes to institutional investors.Debt financing is an expensive way of raising funds, because the company has to involve an investment banker who will structure big loans in a systematic way. It is a viable option when interest costs are low and the returns are better.

A company undergoes debt financing because they don’t have to put their own capital. But too much debt is also risky and thus, companies have to decide a level (debt to equity ratio) which they are comfortable with.

Equity Finance

Equity finance is a method of raising fresh capital by selling shares of the company to public, institutional investors, or financial institutions. The people who buy shares are referred to as shareholders of the company because they have received ownership interest in the company.

Equity financing is a method of raising funds to meet liquidity needs of an organisation by selling a company's stock in exchange for cash. The portion of the stake will depend on the promoter's ownership in the company.

One of the most sought after methods of raising cash, apart from public issue, is via Venture Capital. Venture Capital (VC) financing is a method of raising money via high net worth individuals who are looking at diverse investment opportunities.

They provide the company with much needed capital to sustain business in exchange of shares or ownership in the company.

A start-up might need various rounds of equity financing to meet liquidity needs. They (VC) may like to go for convertible preference share as form of equity financing, and as the firm grows and reports profit consistently, it may consider going public.

If the company decides to go public, these investors (Venture Capitalists) can use the opportunity to sell their stake to institutional or retail investors at a premium. If the company needs more cash, it can go for right offer or follow on public offerings.

When a company goes for equity financing to meet its liquidity needs, for diversification or expansion purpose, it has to prepare a prospectus where financial details of the company are mentioned. The company has to also specify as to what it plans to do with the funds raised.

Equity financing is slightly different from debt financing, where funds are borrowed by the business to meet liquidity requirement. Ideally, to meet liquidity needs an organisation can raise funds via both equity as well as debt financing.

Options For Financing MSME’s

There are various forms of financing in MSME sector . Those are as follows

• Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE)
• MUDRA Loans
• Stand-Up India

Collateral-Free Automatic Loans

To provide relief to millions of small businesses and reduce the impact of COVID -19 lockdown, the government has come up with the ‘Atmanirbhar Bharat’ also called as Self-Reliant India Movement, in which special economic and comprehensive packages of Rs 20 lakh crores are handed out to various sections including the MSMEs with 3 lakh crores

in specific to collateral - free automatic loans.

Eligibility Criteria

Borrowers with up to Rs. 25 crore outstanding and Rs. 100 crore turnover are eligible for the loan. These loans will have a tenure period of 4 years with a moratorium of 12 months on principal repayment. Also, 100% principal and interest coverage will be given to Banks and NBFCs. One can avail the services only till 31st October 2020. The intention is not only to provide relief to MSMEs but also to cover 45 lakh units in terms of business activities and securing jobs.

Other schemes introduced to help MSMEs during Lockdown are:-

Subordinate Debt Holders:

For functioning MSMEs which are stressed or NPA the Government will provide them equity support of Rs. 20,000 Cr. as subordinate debt. Promoters of MSMEs will be provided debt via banks which can be further infused as promoter equity in their businesses.

Equity infusion through Fund of Funds: / Fund of Funds(FOF)

As COVID -19 has affected the MSMEs with severe shortage of equity, a corpus of Rs. 10 Thousand Cr. has been set up to provide funds to MSMEs with growth potential & viability.

As Indian MSMEs and other companies have always faced high competition from foreign companies, the government has decided to ban global tenders up to Rs. 200 Crores. E-market as a replacement for traditional trade fairs & exhibitions will be promoted, to solve problems of marketing and liquidity issues.

Rs. 2500 crore EPF Support for Business & Workers will be provided for 3 more months. This will provide liquidity relief of Rs 2500 Cr to 3.67 lakh establishments and for 72.22 lakh employees.

Also Statutory PF contribution of both employer and employee will be reduced to 10% each from existing 12% each for all establishments covered by EPFO for next 3 months.

Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE)

The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE) was launched by the Government of India (GoI) on 30th August 2000 to make collateral-free credit available to the MSME sector. Both new and existing enterprises are eligible for this loan coverage. Under the scheme, the MSME Ministry and the Small Industries Development Bank of India (SIDBI) established a trust named the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the Credit Guarantee Scheme.

As of 31st May 2016, 133 institutions have been registered with the CGTMSE as Member Lending Institutions (MLIs), including 26 public sector banks, 21 private sector banks, 73 regional rural banks (RRBs), four foreign banks, and 9 ‘other’ institutions. The loans sanctioned by these MLIs to MSMEs are provided guarantee cover upto a certain percentage under this scheme so that they can lend without collateral or any third party guarantee. Under CGTMSE, MSMEs can avail of term loans and/or working capital loans up to Rs. 1 crore.

Guarantee Cover

CGTMSE guarantees a certain percentage of the loan amount in case of default based on the range in which the amount falls.

Guarantee Fee and Annual Service Fee

A Member Lending Institution under CGTMSE has to pay a one time guarantee fee and an annual service fee to the trust within a stipulated period of time else it will not be eligible for guarantee cover for that particular loan. The guarantee fee is 1% for loans upto Rs 5 Lakh and 1.5% for loans above Rs 5 Lakh. Besides this, an annual service fee of 0.5% upto Rs 5 Lakh and 0.75% for loans above Rs 5 Lakh is also to be paid to the trust every year. The lending institution can recover this amount from the borrower at its discretion.

CGTMSE Loan

To apply for a loan under CGTMSE, you should submit your business plan to one of the 133 MLIs covered by the Scheme. The banks will sanction the loan as per their policies and guidelines, and then apply for CGTMSE cover for the sanctioned loan. Once approved, you will be eligible under the CGTMSE scheme and will be required to pay the relevant guarantee and service fee if required by your lending institution.

MUDRA Loan Scheme

Possibly the most widely-known government loan scheme for small businesses is MUDRA (Micro-Units Development & Refinance Agency Ltd.) launched under the Pradhan Mantri Mudra Yojana or PMMY. Launched in April 2015 as a wholly owned subsidiary of SIDBI, MUDRA aims to develop and refinance the MSME sector by supporting the financial institutions lending to micro and small business entities engaged in manufacturing, trading and service activities. For this purpose, the Agency partners with banks, Micro Finance Institutions (MFIs), and other lending institutions at the state and regional levels to provide microfinance support to MSMEs in the country.

MUDRA offers loans under three tiers "Shishu", "Kishor" and "Tarun". These categories signify the stage of development of the business entity and accordingly their funding requirements have been defined.

More impetus has been given to units which come under Shishu category to promote entrepreneurship among aspiring youth of the country.

MUDRA provides MSME Loans in two forms:

Micro Credit Scheme (MCS)

Refinance Scheme for Commercial Banks, Regional Rural Banks (RRBs), Small Finance Banks and Non Banking Financial Institutions (NBFCs)

Micro Credit Scheme (MCS)

Under Micro Credit Scheme Mudra offers business loans upto Rs 1 Lakh through Micro Finance Institutions (MFIs) to small businesses. These loans are given to self help groups, joint liability groups and individuals for the purpose of developing a micro enterprise

Financial products and their Access

A financial product is an instrument in which a person can either:

• Make a financial investment (for example, a share);
• Borrow money (for example, credit cards, loans or bonds); or
• Save money (for example, term deposits).

Financial products are issued by banks, financial institutions, governments or companies.

Access to finance is the ability of individuals or enterprises to obtain financial services, including credit, deposit, payment, insurance, and other risk management services. Those who involuntarily have no or only limited access to financial services are referred to as the unbanked or under banked, respectively.

MSME loans are business loans offered to the MSMEs or Micro, Small and Medium enterprises or to the SMEs or Small and Medium Enterprises in the form of SME loans. These loans are offered for the advancement of business and other activities like purchase of machinery and raw material, to meet the working capital requirements, and to invest in fixed assets. Banks and financing institutions like NBFCs offer MSME Business loans. However, the interest rates and loan amount vary across the banks and NBFCs. These loans are usually offered to small business owners, women entrepreneurs, and startups. Eligible enterprises for this scheme are Sole Proprietorships, Partnership Firms, Manufacturing or service-based micro and small enterprises excluding Retail traders, educational institutions, training institutions, agriculture & Self Help Groups.

MSME loan products and their Nature

MSME Schemes by Banks in India

Features as well as Nature of MSME Loan

• MSME loans are an effective source of funds for business owners who wish to expand or even set up their businesses on a small scale. Some of the features of MSME loans are listed as follows:
• The MSME loans aim to facilitate credit flow in the MSME sector
• These loans aim to bring in the upgradation of technology to the small business sector
• MSMEs loans provide overall development to the small scale industry through skill development and training programs
• MSME loans are offered to all borrowers who are related to small scale industries: Sole Proprietorship Firms, Partnership Firms, Private Limited Companies, Public Limited Companies. Further, Manufacturing or service-based micro and small enterprises are eligible excluding Retail traders, educational institutions, training institutions, agriculture & Self Help Groups
• The MSME loans are offered for a maximum period of 15 years.
• The MSME loans can be both secured and unsecured, depending on the borrower's repayment capacity and on the bank's terms and conditions.
• The interest rates on MSME loans vary across lenders that begin from 13.50%
• Similar to the interest rates, the loan amount can also vary across the lender and the borrower. However, it cannot increase ₹ 500 Cr.

     Common guidelines / instructions for lending to MSME sector 

Issue of Acknowledgement of Loan Applications to MSME borrowers

Banks are advised to mandatorily acknowledge all loan applications, submitted manually or online, by their MSME borrowers and ensure that a running serial number is recorded on the application form as well as on the acknowledgement receipt. Banks are further advised to put in place a system of Central Registration of loan applications, online submission of loan applications and a system of e-tracking of MSE loan applications.

Collateral

Banks are mandated not to accept collateral security in the case of loans up to Rs.10 lakh extended to units in the MSE sector. Banks are also advised to extend collateral-free loans up to Rs. 10 lakh to all units financed under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC.

Banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to Rs.25 lakh (with the approval of the appropriate authority).

Banks are advised to strongly encourage their branch level functionaries to avail of the Credit Guarantee Scheme cover, including making performance in this regard a criterion in the evaluation of their field staff.

Composite loan

A composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window.

Revised General Credit Card (GCC) Scheme

In order to enhance the coverage of GCC Scheme to ensure greater credit linkage for all productive activities within the overall Priority Sector guidelines and to capture all credit extended by banks to individuals for non-farm entrepreneurial activity, the GCC guidelines were revised on December 2, 2013.

Credit Linked Capital Subsidy Scheme (CLSS)

Government of India, Ministry of Micro, Small and Medium Enterprises had launched Credit Linked Capital Subsidy Scheme (CLSS) for Technology Upgradation of Micro and Small Enterprises subject to the following terms and conditions:

(i) Ceiling on the loan under the scheme is Rs.1 crore.

(ii) The rate of subsidy is 15% for all units of micro and small enterprises up to loan ceiling at Sr. No. (i) above.

(iii) Calculation of admissible subsidy will be done with reference to the purchase price of plant and machinery instead of term loan disbursed to the beneficiary unit.

(iv) SIDBI and NABARD will continue to be implementing agencies of the scheme.

Streamlining flow of credit to Micro and Small Enterprises (MSEs) for facilitating timely and adequate credit flow during their ‘Life Cycle’:

In order to provide timely financial support to Micro and Small enterprises facing financial difficulties during their ‘Life Cycle’, guidelines were issued to banks vide our circular FIDD.MSME & NFS.BC.No.60/06.02.31/2015-16 dated August 27, 2015 on the captioned subject. Banks are advised to review and tune their existing lending policies to the MSE sector by incorporating therein the following provisions so as to facilitate timely and adequate availability of credit to viable MSE borrowers especially during the need of funds in unforeseen circumstances:

i) To extend standby credit facility in case of term loans

ii) Additional working capital to meet with emergent needs of MSE units

iii) Mid-term review of the regular working capital limits, where banks are convinced that changes in the demand pattern of MSE borrowers require increasing the existing credit limits of the MSMEs, every year based on the actual sales of the previous year.

iv) Timelines for Credit Decisions

Debt Restructuring Mechanism for MSMEs

(i) All scheduled commercial banks are advised to follow the guidelines / instructions pertaining to SME Debt Restructuring, as contained in circular DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015 on ‘Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ and as updated from time to time.

(ii) All commercial banks are also advised in terms of our circular RPCD.SME&NFS.BC.No. 102/06.04.01/2008-09 dated May 4, 2009 to do the following:

put in place loan policies governing extension of credit facilities, Restructuring/Rehabilitation policy for revival of potentially viable sick units / enterprises (now read with guidelines on Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises issued on March 17, 2016) and non- discretionary One Time Settlement scheme for recovery of non-performing loans for the MSE sector, with the approval of the Board of Directors and give wide publicity to the One Time settlement scheme implemented by them, by placing it on the bank’s website and through other possible modes of dissemination. They may allow reasonable time to the borrowers to submit the application and also make payment of the dues in order to extend the benefits of the scheme to eligible borrowers.implement recommendations with regard to timely and adequate flow of credit to the MSE sector.

Framework for Revival and Rehabilitation of MSMEs

The Ministry of Micro, Small and Medium Enterprises, Government of India, vide their Gazette Notification dated May 29, 2015 had notified a ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to facilitate the promotion and development of MSMEs. After carrying out certain changes in the captioned Framework in consultation with the Government of India, Ministry of MSME so as to make it compatible with the existing regulatory guidelines on ‘Income Recognition, Asset Classification and provisioning pertaining to Advances’ issued to banks by RBI, the guidelines on the captioned Framework along with operating instructions were issued to banks on March 17, 2016. The revival and rehabilitation of MSME units having loan limits up to Rs.25 crore would be undertaken under this Framework. The revised Framework supersedes our earlier Guidelines on Rehabilitation of Sick Micro and Small Enterprises issued vide our circular RPCD.CO.MSME& NFS.BC.40/06.02.31/2012-2013 dated November 1, 2012, except those relating to Reliefs and Concessions for Rehabilitation of Potentially Viable Units and One Time Settlement, mentioned in the said circular.

The salient features of the Framework are as under:

i) Before a loan account of an MSME turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Framework

ii) Any MSME borrower may also voluntarily initiate proceedings under this Framework

iii) Committee approach to be adopted for deciding corrective action plan

iv) Time lines have been fixed for taking various decisions under the Framework

Structured Mechanism for monitoring the credit growth to the MSE sector

In view of the concerns emerging from the deceleration in credit growth to the MSE sector, an Indian Banking Association (IBA)-led Sub-Committee (Chairman: Shri K.R. Kamath) was set up to suggest a structured mechanism to be put in place by banks to monitor the entire gamut of credit related issues pertaining to the sector. Based on the recommendations of the Committee, banks are advised to:

• strengthen their existing systems of monitoring credit growth to the sector and put in place a system-driven comprehensive performance management information system (MIS) at every supervisory level (branch, region, zone, head office) which should be critically evaluated on a regular basis;

• put in place a system of e-tracking of MSE loan applications and monitor the loan application disposal process in banks, giving branch-wise, region-wise, zone-wise and State-wise positions. The position in this regard is to be displayed by banks on their websites

Factoring

Factoring as a form of business financing dates back to 4,000 years.  The Romans were the first to sell promissory notes at a discount and widespread documented use of factoring occurred in the American colonies before the Industrial revolution. With the advent of the industrial revolution, factoring became more focused on the issue of credit. Factors could guarantee payments for approved customers by assisting customers in determining their creditworthiness and setting credit limits. In India, prior to the 1930s, factoring occurred primarily in the textile and garment industries which later spread to other industries also. The factoring arrangement accelerates cash flows through faster collections ensures liquidity to boost working capital, facilitates exports by offering competitive terms of trade, protects against credit losses and optimize receivables management process. Factoring can be considered as a form of short-term commercial financing based on the selling of trade credit at a discount, or for a prescribed fee plus interest (Forman and Gilbert, 1976).  Factoring is a financial option which converts credit sales into cash.  The account receivable in factoring can be for a product or service. Factoring is a service that covers the financing as well as non-financing services in domestic and international trade. The first factoring company SBI Global Factors Ltd. started operation in April 1991. The other factoring companies which made considerable presence are Canbank factors Ltd and India Factoring and Finance Solutions.

The various ways in which factors could raise funds are:

(a) Promoters’ contribution towards equity

(b) Equity capital from public

(c) Raising Public deposits

(d) Issue of debentures to public

(e) Line of credit from banks and

(f) Borrowings from short-term money market.

In 2009-10, SBI Global Factors the total income from factoring is Rs. 4931 million compared to 2008-09 which was Rs.6765 million. In 2009-10, Can Bank Factors the total Income from factoring is of the order of Rs. 84.56 million compared to 2008-09 which was Rs.85.08 million. In 2008, the total factoring business was worth Rs 33,228 crore which is 1.24 percent of the total bank credit. In this scenario,  this  paper focus on the conceptual framework, process and procedures and problems and the role of factoring as a financing option especially to Micro Small and Medium Enterprises (MSME) and the changes brought about to bring in vibrancy to this financing option.

In factoring, a factor buys the accounts receivable of a company and pays up to 80 percent of the amount immediately on agreement. Factoring company pays the remaining amount to the client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client and the type and range of factoring services available in India are based on the need of business organizations.

Types of services:

1. Domestic Factoring against Letter of Credit or Bank Guarantee: It allows factoring to be extended against the LC or Bank Guarantee established by the buyer. In case the buyer fails to pay, the LC or Bank Guarantee will be invoked. 

2. Recourse Factoring: It allows the factor to recover from the seller (client) in case of nonpayment by the buyer (customer).

3. Non recourse Factoring: It puts the risk of non-payment, in the event the debtor becoming insolvent, on the factor. If the debtor cannot pay the invoice due to insolvency, it is the factor that has to absorb the loss.

4. Export Factoring: It offers the options of availing factoring services for export invoices drawn on overseas buyers.

Benefits Of Factoring

Benefits To Buyers

Availability of Factoring to the Client (Seller) ensures continuous supplies to the buyer for his uninterrupted production. The buyer need not go through the cumbersome process of opening LCs or incur additional costs for the same

Factoring limit sanctioned in respect of every buyer gets automatically renewed on receipt of payment from the buyer on the due date. Thus, it is a revolving facility and can be turned around 4-6 times in a year

Buyer gets the benefit of extended credit period which facilitates a smooth cash flow management

Seller’s improved cash flow puts him on a stronger footing to offer better terms of trade to the buyer

Benefits To Sellers

An NBFC-Factor undertakes a transaction based on the quality of the receivables, unlike banks which take credit decisions based on a customer's financial history/strength, cash flow and collateral

Factoring facilitates sales on open account terms and makes funds available to the seller against sales in domestic and international markets

Enables the seller to receive the funds almost immediately after shipment instead of waiting until the payment dates agreed with the buyer.

Credit Process

The credits or loans can be used for setting up new enterprise or stepping up (expansion, diversification, modernization, technology upgradation). These can be for the following:

• Acquisition of factory, land and construction of building spaces,
• Purchase of Plant and Machinery including lab equipment, testing equipment, furniture, electric fittings, etc
• Meeting working capital requirements, like raw materials, stock-in-progress, finished goods, etc
• Trade Finance (Bill discounting) – for paying the creditors, while awaiting payment from debtors
• Launch of new product range, expansion of business, warehousing need, credit for marketing and advertising purpose
• Additional monitory assistance for any eligible purpose.

MSME (Micro, Small & Medium Enterprises) are classified in two ways:

Manufacturing Enterprises engaged in the manufacture or production of goods pertaining to any industry or deploying plant and machinery in the process of value addition to the final product having a distinct name or character or use; and

Service Enterprises engaged in providing or rendering of service

As per the revised Classification w.e.f. 1st July 2020, MSMEs are now defined on the basis of Composite Criteria of “Investment in Plant & Machinery / equipment and Annual Turnover”.

MSME Classification (Manufacturing Enterprises and Enterprises Rendering Services):

Value of Plant and Machinery or Equipment

In terms of RBI Circular dated August 21, 2020 , the value of Plant and Machinery or Equipment for all purpose of MSME classification and for all the enterprises shall mean the Written Down Value (WDV) as at the end of the Financial Year and not cost of acquisition or original price, which was applicable in the context of the earlier MSME classification criteria.

Credit Assessment

A Credit Assessment provides an indication of creditworthiness on an unrated entity or proposed financing structure. Credit Assessments are not credit ratings.

It is an indicator of our opinion of creditworthiness that may be expressed in descriptive terms, a broad rating category or with the addition of a plus (+) or minus (-) sign to indicate relative strength within the category.

It reflects our view of the general credit strengths and weaknesses of an issuer, obligor, a proposed financing structure, or elements of such structures.

It may also pertain to limited credit matters or carve out certain elements that would ordinarily be taken into account in a credit rating.

Companies considering a full, interactive ratings analysis may have reservations about the process involved and whether the ultimate result will meet their needs. Some companies might be concerned over the amount of management time involved in a full ratings analysis, the cost and the likelihood of their achieving a rating grade that they perceive "acceptable". A Credit Assessment gives companies the opportunity to examine their credit particulars without committing to the more resource-intensive full rating analysis. The process may help management identify strategic "issues". Moreover, if the Credit Assessment level is acceptable to management, a more detailed, public ratings analysis can be completed.

A Credit Assessment usually represents a point-in-time evaluation (i.e., we generally do not maintain ongoing surveillance or updates of credit assessments), and is confidential. A credit assessment is generally requested by the entity, or the sponsor of an obligation, to be assessed. Credit Assessments are expressed using our traditional credit rating symbols, but in lower case.

Cost and Risk Specific to MSME lending

The micro, small, and medium enterprise (MSME) sector is estimated to comprise of over 63 million enterprises and contributes 28.8% to the GDP of the country. Most importantly, the sector employs around 111 million people, 26% of the total workforce. Yet, according to a 2018 report by TransUnion CIBIL-SIDBI, credit to MSME entities accounts for only 14% of total formal credit in India. As per the report, an additional 10% of loans go to MSME owners in their individual capacity, often against collateral of property and vehicles. While funding to the MSME segment over the last one year has increased at a rate of more than 20%, the highest growth has come from loans to individual MSME owners. This indicates a need for reducing information gaps regarding MSME entities to enable bankers to make more informed credit decisions without a reliance on the personal collateral of owners.

Many of the policy measures taken in the past have primarily focused on increasing the volume of funds to the sector. The MUDRA Bank initiative sought to increase funding availability to last-mile providers of MSME loans such as banks, non-bank finance companies (NBFCs) and micro finance institutions. The number of last-mile providers has also been increased with the licencing of new banks, especially small finance banks that have a special focus on the sector. Several NBFCs focused on MSMEs have also emerged. However, availability of funds does not guarantee that increasing amounts of loans will be made available to the MSME sector as lenders need to be convinced of the bankability of the loans. A major hurdle for MSME financing is the information opacity prevalent in the sector as many of the units do not have complete accounting records, audited financial statements, or well-articulated business plans. This makes credit assessment by potential lenders very difficult. There is hence a need to take steps to reduce the information asymmetry in the sector.

Risk Rating

Risk Rating is assessing the risks involved in the daily activities of a business and classifying them (low, medium, high risk) on the basis of the impact on the business. It enables a business to look for control measures that would help in curing or mitigating the impact of the risk and in some cases negating the risk altogether.

In situations where the risk cannot be mitigated or negated the business has to accept that the risk is open and there are no control functions to curb the impact. It depends on the likelihood of the risk event occurring and the severity of the impact on the business and its employees.

Risk is rated on the impact on the business which can be economic or reputational and its likelihood of occurring in the near future. This is the common pattern of risk across businesses.

Thus, Risk Rating refers to the classification of risks and their impacts on the business in terms of reputational or economic damage to an organization or a sector.

Organizations should consider in conducting at least a yearly review of the risk rating due to the fast-paced business environment.

It enables a business to be well informed about all the potential risks that can cause an impact to the business along with the likelihood of the event’s occurrence.

Impact of Risk Rating

Low: A low rated event is one with little / no impact on the business activities and the reputation of the firm.

Low/Medium: Risk events that can impact on a small scale are rate as low/medium risk.

Medium: An event that would result in risks that can cause an impact but not a serious one is rated as medium.

Medium/High: Severe events that can cause a loss of business but the effects are below a risk that is rated as high.

High: A major event that can cause reputational and economic damage that will result in huge business and client base losses.

Likelihood Rating

This rates the risk on the basis of its recurrence which can change depending on the type of the business that is being considered. For example, for a fast-food company, a frequent likelihood rating will be something that can happen every day whereas for an investment bank it would be something that happens in a month or so.

• Frequent
• Likely
• Possible
• Unlikely
• Rare

Advantages

• Studying the risk involved in a business activity helps in taking appropriate measures to either curb the effects of the risk or completely eliminate the risk.
• Event risk helps in a better understanding of the risk and working towards enhancing the current procedures.

Disadvantages

• This is an assumption of the impact it can have on the business which if not done diligently can cause economic and reputational damage to the organization which may eventually result in loss of business.
• This is a complex process and requires a high level of experience and thoughtfulness to foresee potential risks that can impact the smooth functioning of the business.

References

1. https://www.researchgate.net/
2. https://www.economicsdiscussion.net/