History of Bank:

53
 Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should be able
to meet new challenges posed by the technology and any other external and internal factors.
The first bank in India, though conservative, was established in 1786. From 1786
till today, the journey of Indian Banking System can be segregated into three distinct
phases. They are as mentioned below:

• Early phase from 1786 to 1969 of Indian Banks

• Nationalization of Indian Banks and up to 1991 prior to Indian banking sector
Reforms.
• New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991.

Phase-I

The General Bank of India was set up in the year 1786. Next came Bank of
Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809),
Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it
Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of
India was established which started as private shareholders banks, mostly
Europeansshareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians,
Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906
and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian
Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced
periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly
small. To streamline the functioning and activities of commercial banks, the Government

53
of India came up with The Banking Companies Act, 1949 which was later changed to
Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve
Bank of India was vested with extensive powers for the supervision of India as
CentralBankingAuthority. During those day’s public has lesser confidence in the banks. As
an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided
by the Postal department was comparatively safer. Moreover, funds were largely given to
traders.

Phase-II

Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive banking
facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of
India to act as the principal agent of RBI and to handle banking transactions of the Union
and State Government all over the country.Seven banks forming subsidiary of State Bank
of India was nationalised in 1960 on 19th July, 1969, major process of nationalization was
carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi.14
major commercial banks were nationalized.

Second phase of nationalisation Indian Banking Sector Reform was carried out in
1980 with seven more banks. This step brought 80% of the banking segment in India under
the Government. The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country

1. 1949: Enactment of Banking Regulation Act.

2. 1955: Nationalization of State Bank of India.
3. 1959: Nationalization of SBI subsidiaries.
4. 1961: Insurance cover extended to deposits.
5. 1969: Nationalization of 14 major banks.
6. 1971: Creation of credit guarantee corporation.
7. 1975: Creation of regional rural banks.
8. 1980: Nationalization of seven banks with deposits over 200 crore.

53
 After the nationalization of banks, the branches of the public sector bank India rose
to approximately 800% in deposits and advances took a huge jump by 11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith and
immense confidence about the sustainability of these institutions.

Phase-III

This phase has introduced many more products and facilities in the banking sector
in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee
was set up by his name which worked for the liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to
give a satisfactory service to customers. Phone banking and net banking is introduced. The
entire system became more convenient and swift.

The financial system of India has shown a great deal of resilience. It is sheltered
from any crisis triggered by any external macroeconomics shock as other East Asian
Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves
are high, the capital account is not yet fully convertible, and banks and their customers
have limited foreign exchange exposure.

General Information of Bank of Baroda

53
 Bank of Baroda is founded by Maharaja Sayajirao Gaekwad in the 20th July,
1908 under the Companies Act, 1897. Bank of Baroda has its corporate centre in Mumbai.
Today it has its spread in almost 25 countries.

Bank‘s mission statement:

To be a top ranking National Bank of International Standards committed to
augmenting stake holders' value through concern, care and competence.

Bank logo
Banks new logo is a unique representation of a universal symbol. It comprises dual
‘B’ letterforms that hold the rays of the rising sun. It is called the Baroda Sun.
The single-color, compelling vermillion palette has been carefully chosen, for its
distinctiveness as it stands for hope and energy.
Board of director:

Shri.M.D.Mallya
(Chairman & Managing Director)
Global presence:
In the following countries Bank of Baroda have its branches:
Australia, Bahamas, Bahrain, Belgium, Botswana, China, Fiji Islands, Ghana, Guyana,
Hong Kong, Kenya, Mauritius, Malaysia, Seychelles, South Africa, Singapore, Sultanate of
Oman, Tanzania,Trinidad & Tobago, Uganda, United Arab Emirates, United Kingdom,
Zambia.

53
No. of branches network:
Metro: 676
Urban: 580
Semi-urban:721
Rural: 1128
Extension counters: 26
Total in India: 3131
Overseas: 80
Organizational Structure:
The Bank has a four tier structure – i.e.:
 Baroda Corporate Office / Head Office
 Zonal Offices
 Regional Office
 Branches
The Bank is headed by Chairman & Managing Director, supported by two
Executive Directors. The Supreme Authority is vested in the Board of Directors which is
having 14 members (including CMD and both the Executive Directors)

Gujarat Operations:
Gujarat Zone is the biggest of all the zones in the whole country. It is having operation
in all the 26 districts of Gujarat state i.e. this zone covers the entire state of Gujarat. Prior to
restructuring, Gujarat region was divided in 3 zones only. They were –
 ERSTWHILE – North Gujarat zone
 Centre Gujarat zone
 South Gujarat zone
These zones were restructured and were formed as Gujarat Operation on 10 th Aug,
2006. These zones are as follows:

Gujarat Regions:
1. Ahmedabad

53
 2. Baroda
3. Surat
4. Rajkot
5. Balsar
6. Anand
7. Mehsana
8. Panchmahal
9. J,J & K – Junagadh, Jamnagar and Kachchh
10. Bharuch
This zone is having a business share of above 1/6th of the total business in the country.
Presently, in Gujarat Operations, there are 701 branches which are bifurcated as follows –
Metros: 142
Urban: 065
Semi-Urban: 161
Rural: 333
Total: 701
Presently, the no. of employees in Gujarat Operations is 8621 which are categorized as
follows – Officers: 2857
Clerks: 3820
Sub – Staff: 1944
Total: 8621
Bharuch Region:
The Bharuch regional bank was established on 2nd April, 1984. Bharuch Region
comprises of 2 districts: 1st is the Bharuch District and the 2nd is the Narmada District.
Bharuch district is the front-runner in Industrialization and agricultural aligned activities.
However, Narmada district is one of the most backward districts in Gujarat.

Total no. of branches in the Bharuch region – as on date is

Urban - 05

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 Semi-Urban - 12
Rural - 28
Total: 45

Total No of employees in Bharuch region are – 416 categorized as follows :

Officers: 163
Clerks: 171
Sub – Staff: 082
Total 416

Bank of Baroda Bharuch region has 13 on-site ATMs and 3 off-site ATMs.

Business Details of Bharuch Region as on 31-03-2010:

Type Rs. In cores

Deposits 1791.57
Advances 811.29
Total 2602.86
Profit 42.86

Ankleshwar region:

The Ankleshwar Industrial Estate Branch is having large number of transaction.

The main focus this branch is advances and credit lending. There is special attention is to
be given to the SMEs sector. SMEs sector is headed by Mr. Devandra Gandhi, Seinor
Manager of SMEs. The whole branch is headed by the respected Chief Manager,
Mr. V .V. Rao.

53
Topic undertaken for summer internship programme:

53
 “Credit Flow To MSMEs Sector Whether It Is Adequate Or Not? Suggest
Remedies.”

General understanding of the topic:

Preamble:

The Micro, Small and Medium Enterprises (MSMES) segment has been a vital
component of Indian economy. This sector accounts for around 40.0% of total industrial
production, 34.0% of industrial exports, 95.0% of industrial units and 35.0% of total
employment in manufacturing and service sectors of India. The unorganized sector which
forms a major component of the MSE segment comprises almost 95.0% of total industrial
units and employs over 65 million people.
The contribution of Services Sector within the SMES segment is quite significant;
especially IT enabled services, hospitality services, tourism, couriering, transportation, etc.
The SMEs have also been playing a vital role in the job creation process.
Formerly, both government and RBI credit policy has given emphasis to broaden
the size the concept of SSI sector by including services and medium enterprise in a
composite of “Small and Medium Enterprise”.
Subsequently, MSMESD Act was operationalised with effect from 2nd October
2006, which defines an enterprise” instead of “industry” to give recognition to service
sector and also defines a “medium enterprise” to facilitate technology up gradation and
graduation.In order to address the issue of SMEs Sector and ensure growth of credit to this
sector, Hon’ble Union Finance Minister unveiled package for SMEs Sector in August,
2005.
To give a focused attention to emerging SMEs in India, the Bank has been
considering other commercial units with a turnover up to Rs 150 crores at par with the
SMEs.
To promote the growth of SMEs Sector, the Bank has launched a special and novel
delivery model, viz. SMES Loan Factory, which at present, is operationalised in 36 Centers

53
of the Bank and well accepted in the marketplace. The SMES Loan Factory is an
innovative model for streamlining processes and for timely sanctions of SMES loan
proposals

Objectives:
The SMEs loan policy is framed with the following objectives:
1. To improve flow of credit to SMEs Sector so as to double the credit to the Sector in
5 years, i.e. by the year 2010.
2. To formulate liberal norms of lending to SMEs Sector, to ensure availability of
adequate and timely credit to the sector.
3. To provide guidelines to the branches to dispense credit to SMEs Sector on
liberalized terms.
4. To devise an organizational structure at all levels for handling SMES credit
portfolio in a more focused manner.
5. To comply with terms of Policy package announced by Hon’ble Union Finance
Minister on 10.08.2005 and further guidelines received from Reserve Bank of India
from time to time for implementation of the Policy Package.
Scope of the policy:
1. Composition of SMEs Sector
2. Broad guidelines on lending to SMEs Sector
3. SMES Loan Factory Model
4. Pricing Policy
5. Identifying Thrust Industries
6. Discretionary lending powers
7. Reporting and Monitoring system

What is small and medium enterprise sector?

 Manufacturing Industries:

53
 0 1. Micro Enterprise is an enterprise where investment in plant and machinery (original
cost excluding land and building and the items specified by the erstwhile Ministry of
Small Scale Industries) does not exceed Rs. 25.00 Lacs.
1 2. Small Enterprise is an enterprise where the investment in plant and machinery (original
cost excluding land and building and the items specified by the erstwhile Ministry of
Small Scale Industries) is more than Rs. 25.00 lacs but does not exceed Rs. 5.00 crores.
2 3. Medium Enterprise is an enterprise where the investment in plant and machinery
(original cost excluding land and building and the specified items) is more than Rs.5.00
crores but does not exceed Rs.10.00 crores.

 Service Sector :

1) Micro Enterprise is an enterprise where the investment in equipment does not exceed
Rs. 10.00 lacs;
2) Small Enterprise is an enterprise where the investment in equipment is more than
Rs.10.00 lacs but does not exceed Rs. 2.00 crores and
3) Medium Enterprise is an enterprise where the investment in equipment is more than
Rs. 2.00 crores but does not exceed Rs. 5.00 crores.

53
 0

 1948-1991: The MSME development organization was set up in 1954 as an apex body
to sustain the growth of SMEs sector. Within next two years National Small Industries
Corporation, the khadi and village industries commission and the coir industries was set
up.
 1991-1999:

53
 i. Testing centre and tools room was set up for quality certification
ii. The Small Industries Development Bank of India (SIDBI) and technology up
gradation measure were created to accelerate finance to MSMEs sector
 1999 onwards:
i. A credit linked capital subsidy was launched to encourage technological up
gradation
ii. Credit guarantee scheme was launched to give collateral free loan.
iii. The exemption limit for payment of excise duty was raised to Rs. 1 crore.

The MSMESD Act, 2006 seeks to facilitate to facilitate the development of this
enterprise. It provides the exact definition of “enterprise” for service and manufacturing
sector. This act has given the exact definition of what is “MSME”.

Definition of MSMEs

 Manufacturing Industries:

3 1. Micro Enterprise is an enterprise where investment in plant and machinery (original

cost excluding land and building and the items specified by the erstwhile Ministry of
Small Scale Industries) does not exceed Rs. 25.00 Lacs.
4 2. Small Enterprise is an enterprise where the investment in plant and machinery (original
cost excluding land and building and the items specified by the erstwhile Ministry of
Small Scale Industries) is more than Rs. 25.00 lacs but does not exceed Rs. 5.00 crores.
5 3. Medium Enterprise is an enterprise where the investment in plant and machinery
(original cost excluding land and building and the specified items) is more than Rs.5.00
crores but does not exceed Rs.10.00 crores.

 Service Sector :

1) Micro Enterprise is an enterprise where the investment in equipment does not exceed
Rs. 10.00 lacs;

53
2) Small Enterprise is an enterprise where the investment in equipment is more than
Rs.10.00 lacs but does not exceed Rs. 2.00 crores and
3) Medium Enterprise is an enterprise where the investment in equipment is more than
Rs. 2.00 crores but does not exceed Rs. 5.00 crores.

Equity investments could be useful for SMEs provided the fact that successful exit
strategies are laid down,Penetration of e-financing in the newer market, Transformation,
modernization, integration and clusterization of SMEs lead to more amount of
accountability and minimizes cost of raising capital. ( Prabal dutta) in his research paper
“strategies to increase credit flow in SMEs sector”Accordingly, an ‘Internal Group’ was
constituted on
February 2, 2005 under the Chairmanship of Shri C.S.Murthy, Chief General Manager-in-
Charge, Rural Planning & Credit Department, Reserve Bank of India, Central Office,
Mumbai.The main committees were set up to monitor the credit flow in SMEs sector the
committees are Nayak Committee , Kapur Committee,Ganguly committee
Reserve bank of India have issued guidelines to sanction credit free loan up to 5
lakhs the target adopted for the future in to increase the flow of credit to micro enterprises
all scheduled commercial banks should lend 60% of their MSE lending to micro enterprises
in stages viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in 2012-13.
The paper ( Mr. Aryan Banerjee) reinforces the significance of SMEs, the need to
setup capital market access for SMEs and delves particularly into the case for equity
market access. A solution is sought to reinvent the equity market access for SMEs the
benefit obtained here is disbursement of risk, and can be withstand the competition

The implementation of knowledge management can lead to the enhanced growth and
competitiveness , as put forward by ( Rekman Ahmad Kamil,Amir amin Malaysia.) this
paper had analysed twelve key result areas to focus with. Are Top Management Support,
Knowledge Friendly Culture, Financial Resources, Technological Infrastructure,
Communication between all Levels of Management, HRD, Hiring and Retention of
Knowledgeable People, Strategy for KM, Rewards to Encourage KM Practices, Systematic
KM Processes and Activities, Core Values of Business and Organizational Infrastructure.

53
 According to Alibaba.com-Synovate SME Outlook 2010 survey are highly optimistic
about 2010 bringing in better overall business activity and profitability. whopping 92 per
cent believe revenues will increase in 2010 and revenue growth will be around 6-15 per
cent.

Present policy and focus areas:

 Micro, Small and Medium Enterprise Development Act, 2006.

i. The MSMESD Act, 2006 seeks to facilitate to facilitate the development of
this enterprise. It provides the exact definition of “enterprise” for service and
manufacturing sector. This act has given the exact definition of what is “MSME”.
 Credit /Finance:
i. Priority sector lending
• Credit to SMEs sector is considered as Priority sector lending.40% of the
net bank credit is made available to Priority sector lending. This facility is being
developed by SIDBI.
• At the state level State Financial Corporation (SFC) are considered as the
major
• source of long term finance.
 Performance & credit rating scheme:
i. This scheme was launched in the year 2005. The objective is to assist the
SMEs in obtaining the performance cum credit rating which would help them in
improving the performance and also accessing the credit in better terms if rating is
high.
 ISO 9000/14000certifaction fee reimbursement scheme:
i. The scheme covers the fees up to 75% subject to maximum Rs. 75000 to acquire
the “quality management system, ISO 9000” or “environment management system
ISO 14000” certificate.

 Credit linked credit guarantee scheme:

53
i. The programme is to assist the SMEs to upgrade their existing technology
with modern technology with State assistance of 15% of the bank credit to
purchase the equipments. More than $50 million has been committed to this route.

53
Introduction:
The financing options that are available to SMEs presently can be listed as:
1. Long – Term:
a. Capital Market: Equity Shares, Preference Shares, Non-
voting Shares.
b. Quasi Capital: Investment Subsidiaries, Soft loans/ Equity
Fund Loans, VC.
c. Debts: Term Loans, Non-convertible Debentures, Leasing
and Hire Purchase,

53
 Floating Rates Notes, Structured Obligations, Bonds, Technology Up-gradation
and Modernization Credit from FIs, Development Institutions.

2. Short – Term
Working Capital, Commercial Paper, Inter- corporate Deposits, Trade Credit
Factoring, FCNR, Bills Discounting, and Public Deposits.

3. Foreign Funding

4. Miscellaneous:
Term loan assistance, refinances, loans for leasing and hire purchase, bill
discounting, foreign currency loans, and venture capital loan.

Background of SMES financing:

In 1957, ‘Liberalized Scheme of Assistance to SSI’ was launched where,

security oriented approach was given a go-by and viability became the sole
criteria.
In 1978, ‘Equity Fund Scheme’ was formulated to give the newly
established units operational freedom to work at the optimum level.

History of SMES in India:

With the advent of planned economy from 1951 and the subsequent industrial
policy followed by Government of India, both planners and Government earmarked a
special role for small-scale industries and medium scale industries in the Indian economy.
Due protection was accorded to both sectors, and particularly for small-scale industries
from 1951 to 1991, till the nation adopted a policy of liberalization and globalization.

53
Certain products were reserved for small-scale units for a long time, though this list of
products is decreasing due to change in industrial policies and climate. SMEs always
represented the model of socio-economic policies of Government of India which
emphasized judicious use of foreign exchange for import of capital goods and inputs; labor
intensive mode of production; employment generation; no concentration of diffusion of
economic power in the hands of few (as in the case of big houses); discouraging
monopolistic practices of production and marketing; and finally effective contribution to
foreign exchange earning of the nation with low import-intensive operations. It was also
coupled with the policy of de-concentration of industrial activities in few geographical
centers.
It can be observed that by and large, SMEs in India met the expectations of the
Government in this respect. SMEs developed in a manner, which made it possible for them
to achieve the following objectives:
 High contribution to domestic production
 Significant export earnings
 Low investment requirements
 Operational flexibility
 Location wise mobility
 Low intensive imports
 Capacities to develop appropriate indigenous technology
 Import substitution
 Contribution towards defense production
 Technology – oriented industries
 Competitiveness in domestic and export markets.

At the same time it has to be understood that SMEs in India suffers from the
following limitations:
 Low Capital base
 Concentration of functions in one / two persons
 Inadequate exposure to international environment

53
  Inability to face impact of WTO regime
 Inadequate contribution towards R & D
 Lack of professionalism
 Own contribution in capital is too small
 Lack of expertise
 List is exhaustive add as and when I remember...

In spite of these limitations, the SMEs have made significant contribution towards
technological development and exports.
SMEs have been established in almost all-major sectors in the Indian industry such
as:
 Food Processing
 Agricultural Inputs
 Chemicals & Pharmaceuticals
 Engineering; Electricals; Electronics
 Electro-medical equipment
 Textiles and Garments
 Leather and leather goods
 Meat products
 Bio-engineering
 Sports goods
 Plastics products
 Computer Software, etc.

Those SMEs who have strong technological base, international business outlook,
competitive spirit and willingness to restructure themselves shall withstand the present
challenges and come out with shining colors to make their own contribution to the Indian
economy.

53
Role of SMEs for various stakeholders:

Stake
Local Holders
Commun Large
i-ties Buyers

Machine SMEs
s Credit
Provider Rating
s Agencies

MSMEs

Internal Financial
Buyers institutio
ns/Banks

Education
NGOs
Raw institution
materials
provider

Important of SME sector for the growth of India:

The SME sector plays a vital role in the growth of the country.
Small and Medium Enterprises (SMEs) are a key factor in the economic development and
innovation. The core of the political and economic transformation of any country is the
creation of the private sector, the development of entrepreneurship and creation of SMEs. It
contributes almost 40% of the gross industrial value added in the Indian economy. It has
been estimated that a million Rs. of investment in fixed assets in the small scale sector
produces 4.62 million worth of goods or services with an approximate value addition of ten
percentage points.
By its less capital intensive and high labour absorption nature, SME sector has
made significant contributions to employment generation and also to rural industrialization.
This sector is ideally suited to build on the strengths of our traditional skills and
knowledge, by infusion of technologies, capital and innovative marketing practices.

53
Global comparison:
In the global scenario SMEs have always played a crucial role in their respective
country’s economy. International comparisons reveal that SMEs create the majority of jobs.
In the USA, nearly half of the private workforce is employed in small firms, of which
three-fifth have less than five employees. In Japan, 78 percent of jobs are generated by
SMEs. The same sector in Korea accounts for 99 percent of all manufacturing enterprises
and 69 percent of employment in this sector. Therefore, SMEs must play a central role in
the country’s employment strategy. This will require modification of policies and
programmes to level the playing field, improve availability of credit, increase productivity,
raise quality consciousness and competitiveness, and enhance job quality.
Recent experiences of different countries in the context of globalization also
demonstrate that SMEs are better insulated from the pressures generated by the volatility of
world trade and capital markets. They are more resistant to the stresses, and more
responsive to the demands of the fast-changing technologies and entrepreneurial responses.
Indeed, they are observed to be a very important vehicle for new technology adoption and
entrepreneurial development. Ensuring the competitiveness of the SMEs is important as it
would help in overall growth of manufacturing sector as also the national economy.

Opportunities for SMEs in India:

Due to global financial crisis and economic slowdown, many companies are
affected in different degrees. But, with their inherent strength and resilience SMEs can
weather adverse situations, as they are not dependent on public money. Many overseas
companies are approaching Indian SME to outsource their manufacturing activities. In
service sector too, many are setting up BPO and KPO in India, which are a real boon for
the Indian SME sector.
Unless and until the SMEs equip themselves with the latest technologies, processes
and machinery, they will not be in a position to meet the stringent quality standards set out
by the buyers. Even if they are exploring new markets, the products and services have to be
suitably modified to meet the market requirements with innovative designs and features. It
is an excellent opportunity for the Indian SMEs to convert the present global melt down

53
condition to their advantage by catering to the needs of the markets, which are already
reeling under the recession.

Fact Sheet - Indian SMEs Sector:

 14 Million MSME Units
 Contribute 45% of Industrial Output
 Employ 60 Million People
 Produce more than 8000 products
 Create 1.3 Million jobs per annum
 Major role in industrial growth.
 Contribute 40% of Export
 Source for innovative products

Focus Sectors:

Focus sector for future perspective:

 Capital Goods
 Agro & Food Processing
 Automobile & Auto Ancillaries
 Engineering
 Machinery, Equipments & Hand Tools
 Electrical&
 Furniture &Furnishings
 IT Hardware &Peripherals
 Pharmaceutical &Chemicals
 Packaging ,Paper, Plastic &Rubber
 Textile & Garments
 Power and Energy
 Tours& Travels
 Service Sectors
 Water Equipments
 Machinery, Equipments &Hand Tools.
 Electronics.

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Stages of financial demands:
1. Start up: Own savings and venture capital.
2. Normal operations: Working capital financing, Equipment leasing,
discounting receivables and trade credit.
3. Expansion plans: Reinvestment of surplus funds, term lending and equity
investments.

Emerging financial products for SMEs:

1. Banks facilitating formation of self-help groups amongst industrial clusters.
2. Industrial clusters collectively offered funding
3. Line of credit on credit/ hire purchase basis.
4. Equity support products

Financial products for SMEs offered by Bank of Baroda:

1. Baroda Vidyastahli loan
2. Baroda Arogyadham loan
3. Baroda laghu udhyami credit card
4. Baroda artisan credit card
5. Technical up gradation fund scheme for textile and jute industries
6. Credit linked capital subsidy scheme for SSI units
7. Composite loans
8. SMES short term loans
9. SMES medium term loans
10. Baroda SMES gold card
11. Scheme for financing energy efficient projects
12. Baroda overdraft against land and building
13. Baroda SMES loan pack

Challenges for Banks: In making SME advances:

1. Weak Financial Statements and Financial Irregularities.
2. Concealment of background or other operational details
3. Disproportionate Requirement of Financial Assistance

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 4. Competition Amongst Banks and Financial Institutions.

RESEARCH METHODOLOGY

• Problem identification:
Problem indentified is “Credit flow to MSMEs sector. Whether it is adequate or
not, suggest remedies”

• Objective of the study:

Following are the objective of the study:
a) To study the degree of financing done to SMEs sector in Ankleshwar.
b) To study the procedure adopted by the bank in sanctioning the loan
c) To study and analyze the problems faced by SMEs other than financial
aspects
d) To study the general working of the bank.

• Research design:
Since the study aimed to know the adequacy of credit flow to smes sector the
Descriptive Study was undertaken for the purpose. With reference to the topic and in order
to find out the reason for inadequate flow of credit survey was conducted for the smes
industries with regard the following justification.
 To know whether the borrowers company is adequately financed or not?
 To know and understand the problems faced by the firm in accessing the credit
with bank
 To know and understand the hurdles faced by the firm other than financial
aspect.
 To know the familiarity aspect with regards to the government guidelines and
various promotional scheme.
 To put forward the problems and suggestions expressed by the borrowers to the

53
 higher authority of the bank for its efficient functioning.

• Population:
The population size of SMEs in the Ankleshwar GIDC Industrial Estate is 300 of
which I have drawn sample size of 25 industries for the study purpose. The method adopted
for sampling is non probability sampling method i.e. convenient sampling method.

Research plan:
• Types of research study:
There are two types of research study that is census study and sample study. I have
adopted sample study for SMEs industries.

Data collection:
• Sources of data:
The data collected for the purpose of study is of primary nature. The response of
the industries has been taken through the questionnaire. The questions include both type of
questions i.e. open ended and close ended.
• Tool for data collection:
A Questionnaire was designed keeping in view all the aspects of SMEs.
Questionnaire was used as an interview sheet to collect data from the financial executive
of respective SMEs. Interview & observation technique was used to scrutinize the
responses.
• Data analysis:
Once the data was collected proper editing was done so as to screen out the
irrelevant information and filling up the blank questions if any is forgotten to ask. After
editing, all the information was arranged in Tabulated form & results was calculated
using frequency/percentage method. For statistical analysis purpose and for better
representation of the result in more appropriate manner Charts & Graphs have been used
wherever required.

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53
 Data analysis and interpretation:
As mentioned earlier the study was carried out to know whether
adequate credit is flowing to SMEs sector or not in the Ankleshwar region , the data was
collected through questionnaire by undertaking sample survey at Ankleshwar GIDC
Industrial Estate.
The analysis and interpretation of response obtained are shown below:
1) Sources of financing the firm:
• Interpretation:
Sources Frequency Percentage
Own capital 25 48
Money lender 1 1.92
Borrowed funds from bank 26 50
Public money 0 0
Table no 1.1

Graph 1.1

During the survey process and looking to the responses of the financial executive of the
respective industry, I found that;
 48% of the firm is financed through own capital.
 2% of the firm is financed through money lender
 50% of the firm is financed through borrowed funds from bank.
• Analysis: It is concluded that bank and other financial institutions are playing
pivotal role in financing SMEs. All though, people do invest their own capital too.

2) Cheapest source of finance:

53
 • Interpretation:
Sources Frequency Percentage
Public money 5 13.88
Borrowed fund from bank 15 41.67
Own capital 16 44.44
Approach to other bank 0 0

Table 1.2

Graph 1.2

During the survey process and looking to the responses of the financial executive of
the respective industry, I found that;
 14% of the firm believes that public money is the cheapest
source of finance.
 44% of the firm believes that own capital is the cheapest source
of finance.
 42% of the firm believes that bank loan is the cheapest source of
finance.
• Analysis: It is concluded that investing own capital is the cheapest source of finance
because for investing own capital there is no any requirement of payment of
interest, dividend or so. Even though bank borrowing is also the economical way of
financing because the risk aspect is less and firm can avail better credit
enhancement for future. MSEs primarily rely on bank finance for a variety of
purposes including purchase of land, building, plant and machinery as also for
working capital, etc.

53
 3) Types of banks and financial institutions with which SMEs are dealing:
• Interpretation:

Name of the bank Frequency Percentage

Bank of Baroda 8 32
State Bank of India 7 28
H.D.F.C. 02 8
I.D.B.I 04 16
Other 4 16
Total 25 100

Table 1.3

Graph 1.3

During the survey process and looking to the responses of the financial executive of
the respective industry, I found that;
 44% of the firm is engaged with Bank of Baroda.
 40% firm is engaged with State Bank of India.
 16% firm have opted the credit facility from G.S.F.C
(Gujarat State Financial Corporation).
• Analysis: Since the financial institutions are divided in to two category i.e. public
sector and private sector banks. Majority of the SMEs have taken the financial
accessibility from public sector banks only, like Bank of Baroda, State Bank of
India, Bank of Maharashtra etc.The main advantage they are getting is reduction in
rate of interest, security, low risk, and many other exemptions. Private players like
H.D.F.C charge more rate of interest and give less encouragement to small
enterprise.

4) Number of years the firm is dealing with bank:

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 • Interpretation:
No. of years Frequency Percentage
0-5 years 8 32
5-10 years 6 24
10-15 years 5 20
15-20 years 5 20
20> years 1 4
Total 25 100
Table 1.4

Graph 1.4

During the survey process and looking to the responses of the financial executive of
the respective industry, I found that;
 32% of the firms are engaged with the bank recently
 24% of the firms are accessing facility since last 5 to 10 years
 20% of the firms are dealing with bank since last 20 years.

• Analysis: It can be concluded that more encouragement are given recently so many
SMEs are developing. Banks have become more competitive and timely credit is
availed as compared to past. Many recent new policies are framed by the
government to increase an easy availability of credit flow.

Many schemes like

 ISO 9000 and 14000 fee reimbursement scheme.
 Credit linked capital subsidy scheme.
 Infrastructure development.

53
  Export promotion
 Technological up gradation fund scheme
 As per the extant Reserve Bank guidelines, banks are required to
extend at least 60% of their advances to the MSE sector to Micro
Enterprises.

5) Services opted from bank:

• Interpretation:
Services Frequency Percentage
Cash credit 20 40
Letter of credit 5 10.20
Term loan 24 48.98

Table 1.5

Graph 1.5

6) Stages of taking financial support from financial institutions:

• Interpretation:

Stages Frequency Percentage

Before creating a company 20 28.57
During the process of company set up 22 31.43
When my company started to grow 12 17.14
When my company started having problems 16 22.86
53
 Table 1.6

Graph 1.6

During the survey process and looking to the responses of the financial executive of
the respective industry, I found that;
 28.57% of the firms have asked for finance before creating the
company.
 31.43% of firms have asked for finance support during the process of
company set up.
 17.14% of the firms asked for finance support when their company
started to grow.
 22.86% of the firms have taken support when they have less cash on
their hand.
• Analysis: It is found that many enterprise have seek support during the process of
their company set up the reason behind this is that, in order to attain the specific
predetermined goal they need working capital requirements which is successfully
accomplished by banks. It is also observed that bank has also given support to
SMEs when they are lacking of finance.

7) Problems of taking finance

• Interpretation:
Problems Frequency Percentage
Insufficient collateral 3 9.09
Project proposal not accepted 3 9.09

Previous negative credit record 2 6.06

Own contribution too small 25 75.75
others 0 0 53
 Table 1.7

Graph 1.7

During the survey process and looking to the responses of the financial executive of
the respective industry, I found that;
 10.71% of the firms have faced insufficient collateral
 89.28% of the firms have experienced small portion of own
contribution.
• Analysis: It is observed that as 89.28% of the firms do not had their own capital and
therefore they had to appear to the financial institution to have an access and banks
have successfully sanctioned. Less number of firms has suffered from insufficient
collateral because the limit of collateral free loan has extended.
Presently, Bank’s guidelines for providing collateral free loans are as under:

a) Collateral free loan up to Rs.5.00 Lacs to Micro & Small Enterprises.

b) Collateral free loans (including third party guarantee/ security) upto a
limit of Rs. 25.00 lacs to units having satisfactory dealings with the branch
for last 3 years and having sound and healthy financial position.

53
 It is also decided to dispense with collateral security including third party guarantee
for loans to Medium Enterprises up to a limit of Rs. 25.00 lacs as in case of loans to
Micro & Small Enterprises in manufacturing activities
All the collateral free loans up to Rs.50.00 lacs sanctioned to Micro & Small
Enterprises are eligible for cover under the Scheme.

8) The organizations/schemes supporting SMEs:

• Interpretation:
Organizations Frequency Percentage
Banks 25 32
Other financial institutions 0 0
District Industries Centre 25 32
Technological up gradation fund 12 15.38
scheme
Credit linked capital subsidy 13 16.67
scheme
others 3 3.85

Table 1.8

Graph 1.8

During the survey process and looking to the responses of the financial executive of
the respective industry, I found that;
 32% of the firms are being supported by bank and district industries
centre

53
  For accessing the benefit of schemes it depend upon the nature and
type of industries.
• Analysis: It is observed that all industries have taken support from banks as finance
is the life line of business.

9) Familiarity of government programs by SMEs:

The entire sample unit which is selected for the study has not responded this question
at all. So there is 0% awareness of the government programs that have an effect on the
SMEs.
• Analysis: It is observed that there is no clear instructions from the Reserve
Bank of India (RBI) and the Ministry of Finance to encourage flow
of funds (through what is called achieving ‘priority sector’ lending
targets) from the commercial banks to small enterprises. There is
no transparency regarding the facilitation programs of
government.

10) View on expansion of the regulatory definition of SMEs:

• Interpretation:
Option Frequency Percentage
Yes 23 92
No 2 8
Total 25 100

Table 1.9

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 Graph 1.9

During the survey process and looking to the responses of the financial executive
of the respective industry, I observed that;
 92% of firms believe that the regulatory definition of SMEs should
be expanded.
 Only 8% are satisfied with the existing definition of SMEs.
• Analysis: It was observed from the response of the respondent that as per the
increase in the price level and change in the market condition the regulatory
definition should be expanded to make the micro and small enterprise more
competitive, to increase the sanction limit, to increase the investment in plant and
machinery, to make it globally competitive.

11) Issues in registering the firm or procuring license:

• Interpretation:
Duration of getting Frequency Percentage
license
Less than 1 month 2 8
1-2 month 8 32
2-3 month 13 52
3-4 month 2 8
Longer than 4 month 0 0
Total 25 100

Table 1.9

53
 Graph no 1.9

During the survey process and looking to the responses of the financial
executive of the respective industry, I observed that;
 8% of the firms got registered their within 8 months.
 32% of the firms were registered within 2 months.
 52% of the firms were registered within 3 months
 8% of the firms were registered within 4 months.

• Analysis: Looking to the response of the respondent, the registration process carried
on by the Ankleshwar GIDC estate is so long which give discouragement to the
upcoming enterprise. Looking to the results obtained, 52% of the firms had to wait
to up to 3 months to procure license. Paper work is too complicated which is very
tedious. This type of adverse circumstances gives birth to corruption and red
tapism.

12) Satisfaction and dissatisfaction level of the firm with their existing bank:
• Interpretation:

Level Frequency Percentage

Satisfaction 17 68
Dissatisfaction 8 32
Total 25 100

Table no 2.1

53
 Graph no 2.1

During the survey process and looking to the responses of the financial
executive of the respective industry, I observed that;
 68% of the firms are satisfied with their existing bank.
 32% of the firms are dissatisfied with their existing bank.
• Analysis: It is observed that majority of the firms are satisfied with their existing
bank for financing. It can be concluded that banks are taking care of the
requirements generated by the firms. So it can be known that firms are enjoying
every limits prescribed by their respective banks. However 32% of the firms are not
satisfied with their banks because either there are facing the problems or not having
enough collateral, previous negative credit record, not providing required
documents to the bank at time to get the sanction, or providing falsified balance
sheet.

53
From the above observation it is found that;

53
 Since the objective of the project involves of studying whether enough credit is
granted to the SMEs sector or not? Looking to the trends adequate and sufficient credit is
flowing to the SMES sector. But however not only finance support helps on growing the
SMEs there are very other burning issues which are taken care of.
The findings are:
i. SMEs are typically set up as proprietorships, partnerships, or private limited
companies. These companies are required to follow all the rules of the Companies
Act, 1956.
ii. It is found out that bank and other financial institution are playing key role in
enhancing credit to SMEs sector. Looking to the trend of past years , enough credit
is flowing to the SMEs sector.
iii. Year/month iv. Amount
v. 2006-07 vi. Rs 1,27,000 crore
vii. 2007-08 viii. Rs 2,13,000 crore
ix. 2008-09 x. Rs. 2,56128 crore
xi. 2009-10 xii. 323565 crore
xiii. February 2010 xiv. Rs 369866 crore.

xv. The hurdles procedural issues faced in raising loans include lot of paperwork,
collateral security and high processing fees and prepayment charges. This is
because the document which is required to submit to the bank to sanction the credit
is too much. The time taken by Government officials to process the request of legal
document is adversely affecting the growth in this sector.
xvi. Majority the firms are not familiar with the government programmes and other
subsidized scheme which may help them to get subsidy.
xvii. No special concentration is given to SMEs sector since the applicability of the rules
is same for large scale and SMEs type of industry.
xviii. What the SMEs lack is funds for technical up gradation. The government policies in
providing training and technical knowledge to SMEs are not enough. Owing to this
fact, SMEs are finding it difficult to upgrade their skills to enhance their
manufacturing output.
xix. Moreover, the SMEs lack the knowledge of safety measures and hygiene for
workers and pollution-control.

53
 xx. SMEs' usually feel that non-financial services such as training or consultancy are
not directly linked to their business enhancement and can raise their productivity
and growth. This is mainly because they lack in information provided by the
government
xxi. The fixed cost of acquiring information creates serious cost disadvantage to this
sector. The ability of these firms to enter and compete effectively in export markets
is discouraged by the high cost of acquiring information on foreign buyers,
distribution channels, quality standards etc.
xxii. Another hurdle faced by the SMEs is low levels of research and development
(R&D), limited access to technology and product innovations

53
Recommendation:
♦ Government should take initiative to operationalised the SMEs related transaction
in a large scale and professionally run rather than bureaucratically.

53
 ♦ Adoption of “Single Window Clearance” of the documents required to get
sanctioning of loan should be carried out in order to avoid delays.
♦ Less paper work and doing away with multiplicity of inspections by large number
of inspector.
♦ Re-shaping of the existing policy framework is required.
♦ The coverage of Technology Up Gradation Fund Scheme (TUFS)is needed to be
broaden
♦ Enhance managerial skill and knowledge to access capital market to distribute risk,
improved capital allocation.
♦ separate stock exchange for the sector to help them increasingly move towards a
strong financial situation
♦ Implementation of Knowledge management to enhance growth more effectively
with improved knowledge.
♦ There is a need for greater participation of banks in the affairs of their constituents
by convergence of credit services and non credit services. The banks should not
only provide differentiated products for MSMEs, but also provide counselling &
guidance to new and established businesses, extending marketing support etc.
♦ Lastly, adoption of cluster approach to avail benefits like availability of low cost
finance, competition, market linkages, product quality management etc.

Conclusion:

53
 As much number of SMEs are expanding and newly setting up in
Ankleshwar, Ankleshwar GIDC would be the biggest cluster of SMEs in future. In order
to attain the desired growth rate of 12 %, and increase the GDP contribution (to 7%+) of
this sector to the national economy future focus has to be in areas of Cluster development,
Finance, Technology, Operating Environment & the implementation of the Micro, Small &
Medium Enterprises Development (MSMED) Act 2006.

53
 A. Questionnaire
The SME Survey Questionnaire
1. COMPANY PROFILE
1 1.1 Company name :
2
__________________________________
Address:

__________________________________
Fax #________________________
Telephone#___________________
E-mail________________________
1.2 Person contacted______________ Person interviewed_____________

53
 1.3 Legal status of your firm___________________________________________
1.4 Number of employees:
A. <10
B. 10-49
C. 50-99
D. 100-149
E. 150-199
F. >200

1 1.5 Type of activity:

2 A. manufacturing
3 B. Service
4 C. commerce & trade
5 D. Others (specify):

1 1.6 Main products & Activities :

1.7 Investment in Plant & Machinery:

A. up to 25 lakh (micro enterprise)
B. 25 lakh to 5 crores (small enterprise)
C. 5 crores to 10 crores (medium enterprise)

1 1.8 Annual turnover :_____________________

2. THROUGH WHICH SOURCE YOUR FIRM IS FINANCED?

A. Own capital
B. Money lender
C. Borrowed funds from bank
D. Public money

3. ACCORDING TO YOU WHAT IS THE CHEAPEST SOURCE OF FINANCE?

A. Public Money
B. Borrowed funds from bank
C. Own capital
D. Approach to other banks (why?)

4. PRESENTLY WITH WHICH BANK YOU ARE DEALING?

A. Bank of Baroda
B. State Bank of India
C. H.D.F.C
D. I.D.B.I.
E. Axis Bank
F. Other_________

53
5. SINCE HOW MANY YEARS YOUR FIRM IS ENGAGED WITH BANK?
A. 0-5 years
B. 5-10 years
C. 10-15 years
D. 15-20 years
E. 20> years

6. WHAT TYPE OF SERVICE HAVE YOU OPTED FOR?

A. Cash credit
B. Letter of credit
C. Term loans
D. Any other specify________

7. AT WHAT RATE OF INTEREST?

A. For CC _____
B. For L.C._____
C. Any other______

8. TOTAL AMOUNT OF FUNDS TAKEN FROM THE FOLLOWING IS:

A. For C.C.___________
B. For L.C.____________
C. For term loan___________
D. Any other___________

9. AT WHAT STAGE HAVE YOU ASKED FOR SME SUPPORT?

A. before creating a company
B. during the process of company set up
C. when my company started to grow
D. when my company started to have problems

10. WHAT WERE YOUR PROBLEMS, IF ANY?

1 A. Insufficient collateral
2 B. Project proposal not accepted
3 C. Previous negative credit record
4 D. Own contribution too small
E. Other (please specify)______________________________________

11. IN YOUR OPINION, WHICH OF THE FOLLOWING ORGANIZATIONS

HAS SUPPORTED YOUR FIRM?
A. Banks
B. Other financial institutions.
C. District Industries Centre.

53
 D. Technological Up gradation Funds Scheme (TUFS).
E. Credit Guarantee Fund Trust for Micro and Small Enterprises
(CGTMSE).
F. Others (Specified) _____________________.

12. PLEASE LIST THE GOVERNMENT PROGRAMS THAT YOU ARE

FAMILIAR WITH THAT AFFECTS YOUR INVOLVEMENT WITH SMEs?
a)__________________________________________________
b) __________________________________________________
c) __________________________________________________
d)___________________________________________________

13. IF YOU THINK THAT THE GOVERNMENT PROGRAMS AFFECT YOUR

INVOLVEMENT IN SMEs?
A. Yes positively
B. No negatively

14. DO YOU THINK THAT THE REGULATORY DEFINITION AFFECTS THE

GROWTH OF YOUR FIRM?

A. Yes
B. No
Please explain_____________________________________

15. ARE THERE ANY ISSUES IN REGISTRING YOUR FIRM?

A. Yes
B. No

16. IF “YES” HOW LONG DID IT TAKE TO GET THE LICENSE?

A. Less than 1 month;
B. 1 – 2 months;
C. 2 – 3 months;
D. 3 – 4 months;
E. Longer than 4 months.

17. ARE YOU SATISFIED WITH THE FACILITIES AVAILED FROM BANK?
A. yes
B. no

18. HOW YOU ARE SATISFIED? JUSTIFY.

____________________________________________________
____________________________________________________
____________________________________________________

19. WHY ARE YOU NOT SATISFIED? JUSTIFY.

53
 ____________________________________________________
____________________________________________________
____________________________________________________

20. IN YOUR OPINION, WHAT MEASURES SHOULD BE TAKEN BY BANK

TO INCREASE AN EASY AVALIABILITY OF CREDIT FLOW?

6 Thank you very much for your time.

0

B. BIBLIOGRAPHY &
REFERENCES
♦ The circular on MSMEs by The Government of India.
♦ Research article on “ Strategies On Increasing The Credit Flow To SMEs Sector”
by Prabal Dutta MBA , Batch (2005) Faculty Management Studies , Delhi.
♦ Reading material provided to the staff of Bank of Baroda , Jaipur.
♦ Journal of Knowledge Management Practice, Vol. 11, No. 1, March 2010
Implementation Of Knowledge Management In Small And Medium
Enterprises,Mobashar Rehman, Ahmad Kamil B Mahmood, Savita K Sugathan,
Aamir Amin, Universiti Teknologi Petronas, Malaysia
♦ Report on ” Global SMEs Technology Summit 2010”.
♦ Working Paper No. 2010/03 “Importance of Technological Innovation for SME
Growth” Evidence from India ,M. H. Bala Subrahmanya,1 M. Mathirajan,2 and
K. N. Krishnaswamy3.
♦ www.rbi.gov./speeches/lendingtosmes

53
 ♦ RBI/2009-10/59 RPCD.SME & NFS. BC. No.10/ 06.02.31/ 2009-10. The
Master Circular on “ Lending to SMEs”
♦ www.sidbi.com/press
♦ K C Chakrabarty: Bank credit to Micro, Small and Medium Enterprises
(MSMEs) – present status and way forward
♦ www.bankofbaroda.co.in/smebanking
♦ www.dnb.com/emergingsme
♦ http://ssrn.com/abstract=962033 research article on capital access to SMEs
sector.
♦ Mukesh Tiwari (pgp19086@iiml.ac.in) IIM Lucknow research article on “
stratigies to increasing credit flow”.
♦ www.global-innovation.net paper on “Barriers to Innovation in SMEs”
Rajnish Tiwari Stephan Buse
♦ www.rbi.gov./internalgroupreview/sme .
♦ www.cgtmse.com/products
♦ www.sbi.co.in/smebanking

Limitation of the study:

• The main limitation faced was time constraints. Since there was less time
available, sample size taken is not ideal to represent the whole population.
• Complication of the topic has taken more time to take further steps.
• Hesitation of the respondent.
• Lack of literature available on SMEs sector.
• The non- availability of quality data at the firm and lack of resources is also
another problem.

53