INTRODUCTION

The Small and Medium Enterprises (SME) play a vital role in the industrial development of any country. The importance of SME sector is well recognized world over from its significant contribution gratifying various socio-economic objectives, such as higher growth of employment, output, promotion of export and fostering entrepreneurship. There is a growth recognition worldwide that small and medium enterprises (SMEs) have an important role to play in the present context given their greater resource-use efficiency, capacity for employment generation, technological innovation, promotion inter-sectoral linkages, raising exports and developing entrepreneurial skills. Their locational flexibility is an important advantage in reducing regional imbalance. The future of SMEs is of major policy concern given strategic importance is any discussion of reshaping the industrial sector. This is more so in the case of India, which has one of the longest histories of government support to the small-scale industrial sector since independence compared to most developing countries.

DEFINITION
In the Indian context, we have not so far defined medium enterprises clearly. What is neither small nor large is being loosely defined as medium. Further, enterprise encompasses businesses, services and industries. In the broadband of small , the discussion extends to medium as well. Another possible connotation for the SMEs is the small manufacturing enterprises. Small and Medium enterprises, both in size and shape, are not uniform across the globe. This asymmetry comes in the way of any effort of their integration. The way they are defined depends on the stage of economic development and the broad policy purposes for which the definition is used. According to a World Bank study, there are said to be more than 60 definitions of small and medium industries used in 75 countries surveyed (cited in Kim Seung Jin and Suh Jang Won, 1992, 9). The most commonly used definitions relate to either size of employment and/or quantum of capital investment /fixed assets. As the process of economic development leads to change in industriak sector shares in GDP and the contribution of sub sectors within industry, the definition is extended to include not only manufacturing industries but all enterprises which fall within or below the defined cut-off point. In the ASEAN countries in general, definition is restricted to SMIs in the manufacturing sector only, whereas in the OECD group, the definition is broadened to include all Small and Medium Enterprises. In India, small-scale industries (SSIs) were given due importance in the process of industrialization as far back as 1951 when post-independence economic planning was initiated. The Industries Development and Regulation Act legislated by the Center in that year, became the framework for the small-scale industrial sector s development. The Act determined licensing policies for the sector and the reservation of products, among several other important provisions. The definition of small-scale industries is mainly invested ceilings, which have changed over the years to keep pace with economic development. Though employment are turnover are also used to define small industries, as these

indicator are implicit in the requirement for registration under the Factories Act, the core definition of SSIs in India remains based on investment limits- historical costs of plants and machinery. Therefore, the contribution of SME sector to the GDP in the different countries is not on comparable parameters. Still, in both developed and developing economies, they were accorded special status, specific dispensations and particular attention. Although the broad of canvas of enterprise suggests that we look at the contribution of both industry and trade, more particularly exports, in the growth of GDP, lack of separate data on SME s contribution in the developed economies like the US, Canada, Japan and Germany restricted the scope of this paper to having a look at some policy interventions in ASEAN and OECD economies.

SIGNIFICANCE OF SMES
SMEs are considered the engine of economic growth in the both developed and developing countries, as they: Provide low cost employment since the unit cost of persons employed is lower for SMEs than for large-size units y y y y y Assist in regional and local development since SMEs accelerate rural industrialization by linking it with the more organized urban sector. Help achieve fair and equitable distribution of wealth by regional dispersion of economic activities. Contribute significantly to export revenues because of the low-cost labour intensive nature of its products. Have a positive effect on the trade balance since SMEs generally use indigenous raw materials. Assist in fostering a self-help and entrepreneurial culture by bringing together skill and capital through various lending and skill enhancement schemes. Impart the resilience to withstand economic unheavals and maintain a reasonable growth rate since being indigenous is the key to sustainability and self- sufficiency.

ROLE OF SME IN ECONOMIC DEVELOPMENT

Small and Medium Enterprises (SMEs) play a very significant role in the economy in terms of balanced and sustainable growth, employment ganaration, development of entrepreneurial skills and contribution to export earnings. However, despite their importance to the economy, most SMEs are not able to stand up to the challenges of globalization, mainly because of difficulties in the area of financing. Small and Medium Enterprises are spread all over the world and contributing very significantly to India s Economic Development. Their contribution to industrial production, employment creation, exports, for providing seedbed for enterprise development is well known. However, SMEs have been facing serious constraints and problem for their growth and development, more so in the context of globalization of the Indian economy. Although many SMEs have withstood the onslaught of competition to a very large extent. Several of them are closing down or are on the verge of closure due to intense competition and particularly due to liberalized import regime. Most of the SMEs need to improve their managerial skills and build their capacities to sustain & growth and be a part of the globalize Indian economy, otherwise they are being left out.

That boost to SMEs is still missing

The importance and contribution of the SME sector to growth and prosperity are well established. Their role in terms of employment creation, upholding the entrepreneurial spirit and innovation has been crucial in fostering competitiveness in the economy. Towards meeting the national developmental objective of a growth rate of over 8% on a sustained basis, it is imperative for the industrial sector to grow at a faster pace supported by a vibrant SME sector. Towards this, the government s policy initiatives like the enactment of the new Micro Small and Medium Enterprises Development Act, 2006, pruning of the reserved SSI list, advising finicial institutions to increase their flow of credit to the SME sector, are all initiatives towards boosting entrepreneurship, investment and growth. According to a recent survey by New York-based Access Markets International Partner, more than 80% of SMEs in India are confident about reporting a revenue growth in 2008 over the last year. Micro, Small and Medium Scale Enterprises (MSME) facilitates the tapping of resources for providing purposes with minimum amount of capital investment, with in turn helps to strengthen the industrial structure of a nation. Worldwide, the micro and small enterprises (MSME) have been accepted as the engine of economic growth and for promoting equitable development. The MSMEs constitutes over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. In India, too, the MSMEs play a pivotal role in the overall industrial economy of the country. While the government has withdrawn itself from several cumbersome procedures of the past, it still has a lot of work to do to provide long term clarity about its policy approaches towards small scale industries. The government is not very clear as to what extent it would go to protect the interests of the small scale industries, in the face of competition from multi national companies in India and internationally.

Apart from many other positive features, the one aspect about smallscale industries that cannot be ignored is their potential for employment generation. In today s Indian context, capacity creation and employment generation are equally important factors and the large number of skilled and technical manpower being generated by the universities and technical institutions can be adequately absorbed in jobs only by setting up chain of small scale industries. However, small-scale projects certainly required proactive policies from the government and specific measures that would enable them to play the role that they are capable of. The problem face by the SMEs, particularly in accessing technology and maintaining competitiveness, have been formidable. SMEs find it difficult to match the wage rate, job security and career development opportunities, available in larger organization and therefore, are not in a position to hire skilled and competent manpower. What role can the government play in making these SMEs more competitive? In this context, it is important to re-look into the basis issues of SMEs past, present and Future prospects, especially in the policy framework. Today the small and medium industry occupies a position of strategic importance in the Indian economic structure due to its significant contribution in terms of output, export and employment. The small-scale industry accounts for 40% of gross industrial value addition and 50% of the total manufacturing exports. More than 3.2 million units are spread all over the country producing about 8,000 items, from very basis to highly sophisticated products. The SMEs are the biggest employment-providing sector after agriculture, providing employment to 29.4 million people. However, SMEs, which constitute more than 90% of the total number of industrial enterprises, are now facing a tough competition from their global counterparts due to liberalization, a change in manufacturing strategies, technological changes, and turbulent and uncertain market scenario. However, despite the certain manufacturing slowdown in the country, the SME sector has recorded improved growth, employment generation and revenue earnings.

Recognizing the important of SMEs in the industrial development of the country, the government has initiated a range of programmes in diverse areas, the financing, technology, innovation,market information, technical training, social security and developmental assistance. These initiatives are important in facilitating the growth of SMEs. But it will be the internal dynamics of industrial development takes, that will give a thrust to the development of SMEs. Our country has charted a new strategy based on cluster development that offers a holistic and integrated approach to SME sector s development. The government has taken up skill development as a high priority area. Skill development and industrial training can be strengthened by funding more polytechnics manpower in the SME sector. Improving working condition and productivity in SMEs is important for economic growth as well as for the owner and worker enterprises. A technologically vibrant, internationally competitive small and medium industry should be encouraged to emerge, to make a sustainable contribution to national income, employment and exports.

IMPACT ON ECONOMIC DEVELOPMENT

Promotion of Innovation and Technological Development: o All economies have transited from artisan industries to modern industries o Developing countries can leapfrog using experience of more developed countries

Production of Intermediate Goods: o Produce intermediate goods for large corporations o Symbiotic relationship between small and large firms.

SMEs upbeat on economy

India has emerged the most optimistic country about economy this year, according to HSBC SME Asia-pacific Business Confidence Survey released across the region on Thrusday. The Nielson group conducted the survey with 1800 small and medium enterprise on behalf of HSBC, across nine countries. Indian SMEs expect the economy to improve significantly with 70% of them voting for it, followed by 9 % saying the economy growth will maintain the same pace .However only 36% of them said they plan to invest while 64% said they have no such plans. This does not mean that there will be no need is working capital, said Puneet Chaddha, head of commercial banking, HSBC, in India. The recruitment expectation from the sector is also low with 54 percent saying they do not plan to hire more staff this year. This HSBC survey also said that Indian SMEs are highly optimistic about growth in cross-border trade with China and also rest of the world. Chaddha said that the bank has significant ambitions in the SME space and has designed unsecured loan products for this segment. What was once a public sector domain, the credit to SME segment has attracted attention of private as well as foreign banks as 95 of enterprises in India are SMEs. Among the other countries surveyed Indonesia displayed a trend similar to that of India and only Taiwan was not so upbeat of economic prospects, though it was highly positive on growth in cross border trade with china.

ALTERNATIVE AVENUES TO SME FINANCING

Small and medium enterprises (SME) sector is the future of India. In order to sustain the economic growth and development of the country, it is essential that the SME sectors play their role without which the growth story of India will be dampened. However, one of the biggest hurdles to the growth in the SME sector is lack of access to appropriate form of the capital or funding. Traditionally, projects were funded for entrepreneurs in the SME sector by essentially some bank borrowings apart from the promoters contributions, however the modern concepts and thinking has undergone a sea change. There are various alternative avenues to attracting the appropriate for of capital for good projects and credible entrepreneurs. These could be innovative projects that the new age banks nave started, or even funding though structures that NBFC may offer. Further, in most countries, venture capital and private equity funds have played a big role in the growth of the economy. They become partners in growth and back the project and the entrepreneurs, not only by providing funds, but also by playing a supportive role in formation of business. However, to even be in the radar for growth there are certain must dos for the entrepreneurs in the SME sector and that is compliances, transparency and corporate governance. These are the essential tools for accelerating growth. In order to provide our members in SME sector a first hand view from the best names and brains on the subject, MSME subcommittee of CII(ER) is organizing a seminar on Alternative Avenues to SME Financing for fueling growth. This programmes, with participation of senior representatives of the Government of West Bengal, Financial Institutions and SME Industry is expected to bring focus on the need of improving Corporate Governance for meeting the growth related funding needs of the Industry.

This will promote a better understanding of the needs of both the financial institutions as well as the industry and thereby benefit both. While the opportunity to listen to so many experts under one roof is itself rare, in order to make the seminar additionally beneficial for the participants we would be requesting the participants to submit their company s short profile to us which would be handed over to the speakers strategies. Whom the participant may feel would have a role to play in the growth of his/her business. The seminar is targeted towards Entrepreneurs and CEOs of SMEs who harbor ambitions to grow their business and mark for them.

CII FOR EASIER FDI NORMS FOR MSMES

The Confederation of Indian Industry (CII) is advocating simplification of the Foreign Exchange Act for easier participation of foreign direct investment (FDI) in the micro, small and medium enterprises (MSME) sector. One of the recommendations that the CII has made to the Government is to continue giving SSI status to companies even if the FDI limit is above 25 percent, Ramesh Datla, Chairman, CII National MSME Council and Managing Director, Elico Ltd, said while addressing a seminar in Hyderbad recently. The industry body has also recommended automatic approval for 100 percent FDI from non-resident Indians. Datla also said that Government has given an in-principle approval and both the Bombay Stock Exchange and National Stock Exchange have given their consent for creation of an SME exchange. Currently, discussions are on in the Finance Ministry for coming out with a scheme for creating such an exchange. The idea of the SME exchange is to create an effective market for raising equity funds by the SME sector and create a platform for infusing fresh capital to expand their business, Datla added. The portal will be launched by the year-end and it will also help in sharing of the best practices and facilitate business-to-business and business-to-consumer activities for MSMEs, he said. Anil Girotra, Executive Director, Andhra Bank, said that money is a critical component for the surviaval of MSMEs or any unit and banks need to do more for the development sector. More research and development activities should be undertaken for qualitative improvement of products, an apex level also need to be formed so that MSMEs can be helped to face the competition from large units and imports, Datla added. Meanwhile, in an effort to upgrade the SME sector,CII is also launching an SME portal as a one-stop shop for information on the sector.

Small and Medium Enterprises (SMEs) play major role in global economic growth in terms of their contribution to industrial employment, output and exports. SMEs occupy a place of strategic importance in the Indian Economy as well. However, since the early 1990s, Indian SMEs have been exposed to intense competition due to accelerated process of globalization. However, globalization has also brought, in its wake, newer opportunities for SMEs.

Importance of SMEs to Indian economy

SMEs are officially defined and exclusively identified for promotion in the manufacturing sector of most national economies. The most important justification for the exclusive promotion of SMEs is their potential for employment intensity. In general, a SME generates more jobs per unit of capital investment than a large enterprise. A SME has many other benefits: it can be started with relatively less capital; it can be used as an anstrument for alleviating regional disparities in development etc. Further, a SME is flexible in production, has the potential to be a training ground for managerial skills, promotes individual initiatives, and encourages rich personal relations. Therefore, it is often promoted as a source of technological innovations in industrialized economies. However, there is no uniform definition of a SME in the global economy. Different countries have defined SMEs in different ways. In Japan, a SME in the manufacturing sector is defined in terms of upper limit of paid-up capital of 300 million Yen or 300 employees (Small and Medium Enterprise Agency, 2004). In South Korea, SMEs are defined as firms, which are independently owned and employ less than 300 persons in the manufacturing, mining, transportation and construction sectors (Beak, 2002). In the European Union, SMEs are defined in terms of employment and turnover/balance sheet total. To be classified as a SME, an enterprise must satisfy the criteria for the number of employees and one of the two financial criteria, that is, either the turnover total or the balance sheet total. In addition, it must be independent. There is no official definition of a SME in India. The Government of India has officially defined a small-scale enterprise under the Industries Development and Regulation (IDR) Act, 1951, in terms of upper limit of original investment in plant and machinery at Rs.10 million. But the recently introduced Small and Medium Enterprises Bill, 2005 (SIDO, 2005) has proposed a definition of a medium enterprise in terms of investment in plant and machinery in the range of Rs.50 million to Rs.100 million are proposed to revise the upper limit for a small-scale enterprise to Rs.50 million. If this definition is accepted, then SMEs would cover all

enterprises having investment in plant and machinery up to Rs.100 million. But there is composition of SMEs in India. The Annual Survey of Industries (ASI) is the most comprehensive and reliable source of data on Indian industry covering registered factories. But, this source excludes unregistered or unorganized manufacturing enterprises, which is critical to any compilation of statistics on SMEs. According to ASI, SMEs account for major share of registered factories, employment, production and gross value added in Indian industry. In 1989/90, SMEs accounted for more than 93 percent of registered factories, 66 percent of employment, almost 52 percent of the value of production and about 44 percent of the gross value added. But by 1996/97, the share of SMEs declined marginally in terms of the number of factories and employment, and considerably in terms of value of output and value added. The question, therefore, is whether Indian can afford to allow the gradual dilution of SMEs when their growth and performance plays a vital role in the growth and performance of the Indian economy?

FOR SMES, SKY IS THE LIMIT

Small and Medium enterprises (SMEs), particularly in developing countries, are the backbone of the nation s economy. They constitute the bulk of the industrial base and also contribute significantly to their exports as well as to their Gross Domestic Product (GDP) or Gross National Product (GNP).

INDIA S SMEC SENARIO:

India has nearly three million SMEs, which account for almost 50 percent of industrial output and 42 percent of India s total exports. A special role for SMEs was earmarked in the Indian economy with the advent of planned economy from 1951 and the subsequent industrial policy followed by government. By and large, SMEs developed in a manner, which made it possible for them to achieve the objectives of: 1. 2. 3. 4. 5. 6. 7. 8. 9. High contribution to domestic production. Significant export earnings. Low investment requirements. Operational flexibility. Low intensive imports Capacity to develop appropriate indigenous technology. Import substitution. Technology- oriented. Competitiveness in domestic and export markets. However, as a result of globalization and liberalization, coupled with WTO regime, SMEs have been passing through a traditional period. With enhanced competition from China and a few low cost centers of production from abroad many units have of late been facing a tough time.

However, those SMEs who had a strong technological base, international business outlook, competitive spirit and willingness to restructure themselves withstood the current challenges and came out successful to make their own contribution to the Indian economy. It is the most important employment generation sector and is an effective tool for promotion of balanced regional development. These account for 50 percent of private sector employment and 30-40 percent of value-addition in manufacturing. It produce a diverse range of product (about 8000 odd items), Including consumer items, capital and intermediary goods. However, the SMEs in India, which constitute more than 80 percent of the total numbers of industrial enterprises and form the backbone of industrial development, are as yet, in technological backwaters vis--vis advances in science and technology. These suffers from problems of suboptimal scales of operation and technological obsolescence.

Globalisation and SMEs

Globalization is usually seen as the conversion of the world into a single economic space, one macro-economy, or perhaps mega-economy, and as a result, into a single seamless society and culture (Sutcliffe, 1998). Globalization-the process of continuing integration of the countries in the world-is strongly underway in all parts of the globe. While the movement of goods, services, ideas, capital and technology across national borders is not a new phenomenon, its process since the past decade mark as a qualitative break with the past. Globalization has exposed national economies too much more intense competition than ever before(Mark,2000).This process is characterized by national government across the world moving towards the more open and market oriented regime, with greater reliance on private business and less direction of resources allocation. Protective barrier are being lowered, restriction to foreign direct investment (FDI) removed and the private sector allowed into the areas previously reserved for public enterprises (Lall, 1995). During 19912003, the numbers of countries that have introduced changes in their investment regimes has more or less steadily increased from 35 in 1991 to 82 in 2003 and the number of regulatory changes introduced favoring FDI increases from 80 in 1991 to 220 in2003 (UNCTAD, 2001; 2004).As a result, there was a remarkable increases in FDI inflows: it increases from US $ 209 Billion in 1990 to US $ 560 billion in 2003 (UNCTAD, 2001:2004). Of course, in the last three years, there has been a consistent decline in global FDI inflows, which was more caused by economic decline in developed countries, particulary the US, Latin American and Caribbean countries (UNCTAD, 2004). The setting up of the World Trade Organization in 1995 and the subsequent dilution of tariff and non-tariff barriers have given a fillip to the growth of international There is no official definition of a SME in India. The Government of India has officially defined a small-scale enterprise under the Industries Development and Regulation (IDR) Act, 1951, in terms of upper limit of original investment in plant and machinery at Rs.10 million.

The Information and Communication Technology (ICT) revolution has made the spread of information and communication easy, fast and virtually costless. These have contributed immensely to the accelerating process of globalization. Globalization has facilitated two major developments, both of which have significant implications for SMEs in developing countries: (1) Globally spread complex integration strategy of Transnational Corporation (TNC) production network, and (2) Global expansion and procurement of TNC Super Market Chains. Both are necessitated by the need for sustaining competitiveness. Today, competitiveness matters much more than in the past. Competitiveness has two dimensions-cost and quality. A firm should have both. Transitional Corporations (TNCs) are looking for firms, which could supply intermediate as well as consumer products of superior quality but at a reasonable price because they are under constant pressure to cut down costs to sustain their competitiveness globally. Since 1990s, more and more TNCs adopt complex integration strategies as a means of enhancing competitiveness. A complex integration strategy is based on a firm s ability to shift any part of its value-chain to wherever it is most profitable. Complex integration reflects a willingness to locate various functional activities-not just production but also R&D, finance, accounting, procurement, etc.-to wherever they can be done best to fulfill the firm s overall strategy (UNCTAD, 1993). It is the increasing adoption of this complex integration strategy by TNCs, among others, which has given a boost to the growth of international subcontracting relationship between SMEs of developing countries and TNCs of developed countries (UNCTAD, 2000). As a result, globalization affects almost every economy, favorably or adversely. Even, the Japanese economy is perhaps no exception. The Japanese manufacturing industry comprised about 649,000 manufacturing SMEs with an employment of 7.9 million in 1970, which increased to about 731,000 with an employment of 8.03 million in 1980. By 1990, the number of SMEs declined to about 725,000 but employment increased to 8.7 million. However, since then both the number of SMEs and their employment figures are on the decline. The number of SMEs came down to about 501,000 with an employment of 6.4 million in 2003 (MITI, 1972; 1982; 1992; METI, 2005).

Why have SMEs in Japan, which are known for their industrial efficiency, declined? Industrial subcontracting is an important distinguishing feature of the Japanese manufacturing industry. In the Japanese economy, subcontracting has been regarded as a crucial source of efficiency and competitiveness for industries such as textile, general machinery, electric machines and automobiles (Nishiguchi, 1994; kimura, 2001). A significant proportion of Japanese SMEs are linked to large enterprises through subcontracting relationships for the manufacturing of not only consumer products such as food products, wood products, textiles and clothing, but also intermediate products like plastic and rubber products, metal products and more importantly, general and electrical machinery, precision machinery and transport equipment (Kimura, 2001). This relationship has-been a means of technology transfer and support, among others, from large enterprises to SMEs, thereby resulting in increased competitiveness of the latter. However, since the 1980s, the TNCs of Japan have been availing of a better option: procurement of parts and components from the Southeast Asian nations and China, whose SMEs manufacture a wide range of quality, but less expensive parts and components. According to experts, this trend has increased gradually since then. As a result, the proportion of subcontractors among SMEs, which increased steadily from about 53 percent in 1966 to 66 percent in 1981, declined to about 56 percent in 1987 and further to 48 percent in 1998 (Okamuro, 2002). Perhaps, the high cost of labour is a major deterrent for Japanese SMEs to manufacture products, which are competitive both in terms of quality and price. The loss of Japanese SMEs has been the gain of SMEs in South East Asia and China, thanks to globalization. Another major development in this globalization era is related to the retailing industry. The retailing industry has seen aggressive global procurement of goods and international expansion by many leading players in recent times: Wal-Mart of the US has been expanding into Latin American, Europe, China and South Korea and currently knocking on the doors of India for entry; Carrefour of France has been rapidly expanding across Asia and Latin American; Royal hold of the Netherlands has-been strengthening its presence in Europe, the US and Argentina. The entry of TNC Super Markets into India is only a matter of time. These global Super Market Chains (which are located primarily in industrializes and rapidly industrializing countries) acquire consumer goods

globally, particularly from developing countries. According to a news report, WalMart procures good from India to some extent and China to a considerable extent (International Herald Tribune, 2005). However, it is not clear as what is the share of SME products in these procurements. Today, in many super market chains of Japan such as Akafudado and Daiei, SME products of China have a significant presence, apart from that of South Korea, Taiwan and Thailand. The 99 Yen shops & 100 Yen shops in Japan and One-Pound shops in the UK are virtually flooded with Chinese goods, a significant proportion of which obviously comes from SMEs. The global procurement and expansion of super market retail chains have been driven by the need to locate the best merchandize wherever available across the world and to generate new growth opportunities. This has again opened up the vast global market opportunities for local SMEs. Thus globalization has led to the opening up of opportunities for local SMEs from manufacturing TNCs as well as TNCS upper Market Chain for both intermediate and consumer products. Do Indian SMEs have any signify cant presence in the currently flourishing field of international subcontracting? If not, will Indian SMEs be able to exploit these opportunities?

Prospectus of Indian SMEs in the Era of Globalization

There is no evidence available yet to indicate that Indian SMEs have a noticeable presence in the growing arena of global value-chains of TNCs (with the exception of textile products & garments, software and auto-components). What factors inhibit the entry of Indian SMEs on a considerable scale into the global value-chain circles? In fact, Indian SMEs comprises on just factory enterprises but a considerable number of predominantly rural based, un-organized manufacturing enterprises. Thus Indian SMEs comprise three sub-factor: (1) Predominantly rural based, traditional household industries; (2) small and medium industries, functioning with relatively obsolete technologies; and (3) modern small and medium enterprises, which are owned and operated by technoentrepreneurs, operating in new industries such as software and biotechnology, among others. A substantial proportion of the traditional household enterprises will be catering to the demand of the rural population as well as that of low-income groups in the urban India. As and when the level of income goes up, particularly in rural India, this sub-sector is bound to diminish gradually due to lack of demand on the one hand and transformation through modernizations, on the other. Therefore, this subsector is unlikely to benefits from the globalization process. Rather, it may get affected adversely. Modern SMEs which are run by innovate technoentrepreneurs and which are operating in new industries, will be able to perceive and pursue the opportunities offered by globalization appropriately and, therefore, prosper rapidly. They would require little assistance from the Policy Makers. But these modern SMEs account for a minority in the vast and diversified SME sector of India. Therefore, they alone cannot make a difference to the SME sector, at least in the near future. A major proportion of the manufacturing enterprises in the Indian SME sector operate with obsolete technology. This lack of technology sophisticated will act as a constraint in exploiting the opportunities presented by globalization. Further, a considerable number of these

entrepreneurs would be either less qualified or lack both the resources and sources of information to access global opportunities. If appropriate steps are not taken, they will find it difficult to hold on to the market, which they currently have within the country. This is because both consumers and large firms producers (who currently obtain intermediate products directly or indirectly from these SMEs) might, sooner than later, become more quality conscious and look for better alternatives available globally. Therefore, the future survival of these SMEs will be increasingly under strain. Today, in many super market chains of Japan such as Akafudado and Daiei, SME products of Chains have a significant presence, apart from that of South Korea, Taiwan and Thailand.

What should be done?

There is no automatic and easy route for Indian SMEs to enter the global chains. Concerted efforts needed on the part of the stakeholderSMEs as well as the Government- to strengthen and promote the competitiveness of the sector. The recently introduced small and medium Enterprises are right step in the current context. The technological development of SMEs should be the top-most priority of the proposed national small and medium Enterprises Board. The technology development strategies of the Government of India adopted in the 1990s do not seem to have made a significant impact on the technological upgrading of SMEs to understand the imperativeness of achieving technology up-gradation for their own survival and growth. Considering the global opportunities, Policy Makers should priorities industrial sub-sector of SMEs and product specific-clusters for targeting technological upgrading. If necessary the existing programs must be revised to make it more targetoriented, based on feedback collected from organization such as SIDBI, State level Directorate of industries, Apex chambers such as ASSOCHAM, FICCI and CII and regional small-scale Association. In addition, Regional SME Association should be involved in the future planning of technological upgradation of SMEs. THE ability of SMEs to compete in the global market place depends on their access to certain critical resources, the most important of which are finance, technology and managerial skill. TNCs have been a important mean for SMEs to gain access to new technologies and management know-how (UNCTAD, 2000). Therefore, Indian policy-makers, on a priorities basis, should adopt policies deepen the development effects of Foreign Direct Investment by attracting TNCs willing to forge such linkages and then to undertake measures to promote such linkage between TNCs and SMEs. The SMEs should be encouraged and guided to involved in intra-national exports , that is, sales to foreign firms, which operate within the home country of the suppliers. A suitable strategy need to be developed at the state level, to encourage the already established TNCs to forge the links with local SMEs who have certain minimum technological

capabilities . This is important because the type and strength of linkages established depends to large extent on the technological and other resources capabilities of local firms (UNCTAD, 2000). The Small Industry Development Organization (SIDO) in the Ministry of the SSI should conduct a study to assess the ways and means of facilitating SMEs to enter the growing global value chain circles of TNCs and publicize its finding among SMEs. It would be worthwhile to identify and develop a database, through district Industries Centers (DICs), of the existing SMEs who have successfully entered into such a global relationship. The expertise of leaders such successful enterprises should be thereafter utilized in formulating an appropriate strategy for the promotion of Indian SMEs in the global market. In the long run, international subcontracting relationship should act as a means of sustaining the competiveness of such SMEs. Schmitz (2005) concludes from recent studies that is chains characterized by captive (subcontracting) relationships, developing country producers experienced rapid product and process upgrading. Of course, promotion of such relationships will have its own consequences. For, it would be difficult to prevent local SMEs from suffering from any fallout in the wake of global recession. Technology and innovation are the watchwords for strenghtening the competitiveness of a nation (Sikka, 1999). In recent years , technological innovation has been increasingly recognized as the for economic growth (Yeh and Chang, 2003). Among firms of different sizes, small firms are more suited for undertaking technology innovations due to their specific advantage of flexibility, concentration and internal communication. In India, a considerable proportion of small firms in Karnataka are predominantly engaged in incremental innovations to satisfy their customer needs and innovative firms are to be successful (Bala Subrahmanya, 2005a; 2005b). It is essential to facilitate and promote technological innovations of SMEs through national policies and programmes for their long term competitiveness. SMEs should have access to strategic business information on potential foreign business partners, regulations and business environment issues in foreign market, sources of technology, and international technology and market development trends

on continuous basis, at the sub-regional hubs to provide information on technology and global market trends, apart from government policy. All these steps would give a new dimension to the future growth and performance of SMEs in India.

Conclusion
Globalization has been affecting every economic activity in almost every country across the world. Indian SMEs are no exception. The performance of SMEs has a determining significance for Indian economic growth due to their substantial share of enterprise, production, employment and gross value added in the industrial sector. However, in general, Indian SMEs lack technological strength to access and exploit the benefit emerging from the intensifying process of globalization. Therefore, technological transformation of SMEs should attract the focus of attention of policymakers. In addition, FDI and TNC entry should be used to promote inter-firm linkages for the benefits of SMEs. They need to be consciously guided to enter the ever expanding global value chains of TNCs, both in the manufacturing and retail sectors. Further, technological innovation and orientation of SMEs should be enabled to achieve self-sustainable competitiveness and reap the fruits of globalization for their own growth and growth of the Indian economy. The Small Industry Development Organisation (SIDO) in the Ministry of SSI should conduct a study to assess way the Ways and means of facilitating SMEs to enter the growing global value chain circles of facilitating SMEs to enter the growing global value chain circles of TNCs and publicize its findings among SMEs.

PROBLEMS FACED BY SMES

Small and Medium Enterprises (SMEs) are often confronted with problems that is uncommon to the larger companies and multi-national corporations. These problems include the following:

LACK OF IT SUPPORT

IT personnel are in high demand and are the often attracted to bigger companies and MNC s. It is very difficult for SMEs to attract good IT personnel. It is even more difficult to retain them. Moreover, good IT personnel are expensive and may not be affordable by most SMEs.

LACK OF IT LITERACY

Many of the employees in SMEs started from the ground up after working with the company for many years. Some of them are often holding supervisory and managerial positions. These employees may not be IT literate and often have high resistance with after many years.

LACK OF FORMAL PROCEDURE AND DISCIPLINE

Most SMEs do not have formal procedure or often these are not documented. Furthermore, these is tendency for these procedures to change frequently. This makes it difficult for new party and newcomer to understand the existing business practices and them with the IT process.

UNEVEN IT AWARENESS AND MANAGEMENT SKILL

As company grows, new managers are often introduced into the company. There will also be old managers who are promoted from the rank and the file. Some of these managers may not been trained in the leadership and management skill. These uneven skill among the managers often caused conflicts during the implementation.

LACK OF FINANCIAL RESOURCE

As a SME/SMI, financial resources are often limited. This often force company to select a solution, which appear to be cheap initially. However the hidden costs will start to emerge during implementation. This sometime causes the project to be abandoned or sometime sent the company into further financial crisis.

LACK OF HUMAN RESOURCES

Implementation of the some bigger scale IT project especially those that involve business process across different departments or require large amount of initial data entries require human resource during the implementation. Some SMEs are often in the stage of frequent fire fighting and shortage of manpower. This makes it very difficult for them to allocate time to carry out implementation. Furthermore, there is always a conflict between getting the daily routing work going and to do the Extra IT implementation.

LACK OF EXPERIENCE OF USING CONSULTANTS

A good consultant often save time and effort, and help to prevent pitfalls during the IT projects. However, most SMEs are lacked of experience in working with consultants. The lack of knowledge in the field of IT makes them difficult in identifying good consultant for the

projects. They often feel that the consultant cost is too high and they can handle it with their own staff. If the company has no staff that are experience and knowledgeable in the IT project, avoiding external help often costs more to the company eventually.

SMES OVERCOME INHERENT DIFFICULTIES

 CLEAR VISION AND PURPOSE

to be in the pre-determined future. With that, set the vision for the IT project. Define the purposes of the IT project, what it intends to solve or what it intends to improve.

BUILD UP STRONG MANAGEMENT TEAM

This is easier say then done. The definition of a strong management team differs from one CEO to another among the SMEs. This is very much dependent on the background, preference and management knowledge of the CEO will determine what the management team will be. It is important to specify the company vision, the business objective, define the business plan and then determine what type of management skill will be required in the management team to achieve the company vision. A strong management team with leadership skill and ability to appreciate technology will make the implementation of IT much easier.

CULTURE OF LEARNING AND SHARING

Keeping up with knowledge and seeing the world mattered less in the days of lifetime employment and when technology changed relatively slower. However, due to the rapid changes of technologies, even companies are trying hard to remain successful for more than two or three decades. The job nature of each employee also changes more rapidly. In 1990, Digital Equipment Crop was

the second largest in the computer industry; a decade later it no longer exists as an independent company. In the early 1980s nothing could stop IBM; in the 1990s it shed more than 1,00,000 jobs. The once-great British motorcycle industry is non-existence nowadays. To survive and to be successful, organization must continue to improve and learn. A culture of willingness to learn and share knowledge will make the organization transformation much easier. This will reduce the resistance to change. Investments in training of management team and staff are necessary. This will open the windows to the other alternatives of operating the business in more efficient and profitable way. Resistance to changes is one of the biggest obstacles in any IT implementation or organization improvement. Having a culture of learning and sharing of knowledge will help to minimize the effect. The leadership of the top management can only mold the culture of the company. The top management has lead by example and show willingness to change.

 COMMUNICATE, COMMUNICATE, COMMUNICATE

By the way, common sense is not so common. If you want your staff to know what you intended to do, you have to communicate to them. Never assume that they can read your mind. This fact is, technology has not advanced to the stage of mind reading. It is quite common for some top management to ignore communicating their plan or intention to their staff. This may due to the usual busy work schedule of the top management or the intention to keep their plan confidential. Their happen more frequently for top management of SMEs. If the staff do not know the long-term plan and objectives of doing certain tasks, it is very difficult for them to exercise initiative. This in turn, put additional

work on the top management to provide closer supervision and guidance. Staff will be less motivated in carrying out the task due to the lack of the ownership of the task. If the top management cannot have the basic trust on their staff, it is very unlikely that their staff will trust them. This distrust will create obstacles to any organization improvement.

GET EXTERNAL HELP

Good external advisors or consultants can induce different way of looking at the business and expertise in some specific areas. It is normally not affordable for SMEs to employ high quality management and technical staff. Besides the salary, experienced management and technical staff is less willing to work in SME due to the limited career advance prospect. Yet, expertise and experience staffs are essential for the growth of the company. How can we overcome this? One of the more common ways is to engage external advisors and consultants on term contract basis to guide and improve specific business issue. This will also offer the existing staff a chance to learn during the process. Once the company grow to a larger size, higher quality staffs will then be easier to attract. Another advantage of engaging external consultants is to take advantage of the government financial assistance on management consulting project for SMEs.

EXTERNAL FINANCIAL ASSISTANCE

There are many financial assistance schemes available. Some are from the government agencies and some are from hardware and software vendors. SMEs can take advantage of these scheme to minimize their cash flow issues due to the IT project implementation.

Financial Source
In the present days there exist several sources of financial. Keeping in view the type of requirement the financial sources are chosen. Find below various types of financial sources: 1) Long-term Sources of finance The long-term sources of finances can be raised from the following sources: y Share capital or equity share. y Preference shares. y Retained earnings. y Debentures/Bonds of different types. y Loans from financial institution. y Loan from State Financial Corporation. y Loans from commercial banks. y Venture capital funding. y Asset securitization. y International. 2) Medium-term Sources of finance The medium-term sources of finance can be raised from the following sources. y Preference shares. y Debentures/Bonds. y Public deposits/fixed deposits for duration of three years. y Commercial banks. y Financial institutions. y State financial corporations. y Lease financing/Hire Purchase financing. y External commercial borrowings. y Euro-issues. y Foreign Currency bonds.

3) Short term Sources of finance y y y y y Trade credit. Commercial banks. Fixed deposits for a period of 1 year or less. Advances received from customers. Various short-term provisions.

RBI GUIDELINES ON FINANCING SME S

The Reserve Bank of India (RBI) has directed public sector banks to set up specialized branches for small & medium enterprises (SMEs) to cater to the fast growing SME sector. This is in addition to the directive to redesignate the specialized Small Scale Industries branches as SME branches. The RBI has issued the directives recognizing the need for SMEs to secure easy access easy to credit and specialized service and transaction costs. Banks have been advised to adopt cluster-based approach to SME financing and displaying instruction guidelines formulated by banks as well as by RBI on their website. Banks have also been advised to identify and select cluster of SME units, which share a homogeneity and critical mass. A cluster-based approach also offers possibilities of reducing transaction costs and mitigation of risks for SMEs, said Devaki Muthukrishnan, Regional Director, and RBI. Addressing a seminar on Emerging Trends in Banking ProductsFocus on SMEs and Exporters , organized by the Federation of Karnataka Chambers of Commerce and Industry here, she said: Banks have to fix their own targets for funding SMEs in order to achieve a minimum 20 per cent year-on-year credit growth to SMEs. The objectives is to double the flow of credit from 67,600 crores in 2004-05 to Rs 135,200 crores to the SME sector by 2009-10 within a period of five years . Further, the RBI has asked the banks to adopt a simplified, nondiscretionary and non-discriminatory mechanism for one-time settlement of chronic non-performing assets below Rs 10 crores in the SME sector. A debt restructuring mechanism for units in the SME sector has also been put in place by banks with outstanding up to Rs 10 crores, she added.

In order to increase the flow of credit and institutionalize appropriate risk and management systems for SME lending, Credit Information Bureau of India Ltd (CIBIL) has been operationalised by the RBI. This is to ensure that there can be proper and transparent dissemination of the SME financials for easy and objective assessment of their credit quality by banks. This would help in reducing the transaction cost and improving the credit flow to the SME sector, Muthukrishnan said. On measures taken by RBI for the benefit of exporters, she said the interest rate on exports was available at a concessional prime-lending rate (PLR) of 2.5 per cent. In the wake of rupees appreciation against the US Dollar, the RBI has reduced the PLR to 4.5 per cent for both pre-shipment and postshipment credit advances, she stated. With a view to simplifying procedural requirement for the SME sector, the RBI recently granted flexibility for hedging underlying as well as anticipated and economic exposure without going through the rigours of complex documentation formalities. To ensure the SMEs understand the risks of these products, only banks with whom they have relationships are allowed to offer such facilities, Muthukrishnan said.

RBI Initiatives
y y y y y y y Specialized SME Branches One time NPA Settlement of NPAs and debt restructuring for SMEs Cluster based Financing Approach Why Cluster based approach for financing is beneficial to SMEs? Corporate linked Cluster financing models Micro credit agencies for SME clusters Export finance/credit

Gold Card scheme Venture capital finance New policy package for MSMEs Guarantee cover to Member Lending Institutions (MLIs) like banks for credit to SMEs y Risks Management guidelines y CIBIL for SME financial information dissemination y y y y

y Specialized SME Branches

The RBI directs specialized SME branches in identified cluster/centers with preponderance of medium enterprises so as to enable the SME entrepreneurs have easy access to the bank credit and at the same time equip bank personnel to develop requisite expertise. The RBI also desire the existing specialized SSI branches may be also be redesignate as SME branches.

y One time NPA Settlement of NPAs and debt restructuring for SMEs
RBI has directed banks to adopt a simplified, non-discretionary and nondiscriminatory mechanism for one-time settlement of chronic NPAs below Rs.10 crores in the SME sector. A debt restructuring mechanism for units in the SME sector has also been put in place by banks as per RBI s directions for SMEs with outstanding up to Rs.10 crores. This would help banks assess the SMEs for credit sanctions, which were hitherto not being considered by them. According to the new RBI guidelines, banks could decide the acceptable viability benchmark, consistent with the unit becoming viable in seven years and the repayment period for restructured debt not exceeding 10 years. However, SME accounts classified by banks as loss assest would not be eligible for restricting. Moreover, any additional finance is to be treated as a standard asset in all accounts up to a period of one year after

the date when first payment of interest or of principal, whichever is earlier, was due. RBI has also asked banks to formulate a debt-restructuring scheme for SMEs.

y Cluster Financing Approach

All schedule commercial banks, (including RRBs) and local area banks (LABs) are constantly advised by the RBI for adoption of cluster-based approach for SME financing, and displaying instructions/guidelines formulated by banks as well as by RBI on their website. Banks have been advised to identify and select clusters of SME units, which share homogeneity and a critical mass. Thus by looking at SMEs as a cluster and understanding their strong linkages with the help of in-house industry experts, banks have more holistic view of their credit risk, and the need for extending credit by individually assessing their credit risk is thus obviated. Individual assessment of credit risk creates a myopic view of credit assessment by banks because of insufficient database dissemination of the SME financials which can be overcome through improved business dynamics of a cluster based business model. Cluster based approach also offers possibilities of reduction of transaction costs and mitigation of risks for SMEs.

y Why cluster based approach for financing is beneficial to SMEs?

i. ii. iii. Dealing with well-defined and recognized groups. Availability of appropriate information for risk assessment, and Institutionalized monitoring arrangements available to the lending institutions due to cluster framework. In order to institutionalize the cluster based financing, SIDBI is establishing Small Enterprises Financial Centers in select clusters. Under this exercise, risk profile of each cluster would be studied by a

professional credit rating agency and such risk profile reports would be made available to commercial banks. Each lead bank of a district will consider adoption of at least one cluster.

y Corporate linked Cluster financing models

On account of strong evidence that SSIs linked as suppliers, service, providers, etc. to successful large industries are usually successful ventures, RBI has also recommended banks/FIs to promote corporate-linked SME cluster models. Such successful SSI-large industry linkages provide examples of best practices, which can be aggressively extended. Financing SMEs linked to large corporate; covering suppliers; ancillary units, dealers etc. enhances the competitiveness of the corporate as well as the SME participants. Banks linked to large corporate houses are expected to play a catalytic role in promoting this model.

y Micro credit agencies for SME clusters

The RBI is also visualizing on promoting and financing Special Purpose Vehicles (SPVs) in the form of micro credit agencies dedicated to servicing SME clusters. It feels that banks can extend wholesale financial assistance to NGOs/MFI and work out innovative models for securitization of the MFI receivable portfolio on the pattern of models in vogue in USA and other countries. The Government can make working of such SPVs increasingly viable through extended support of various fiscal/taxation measures.

y Export finance/credit
The RBI Working Group on export finance has opined that while interaction between banks and exporters by way of seminars/ meetings/ workshops is prevalent in major centers, it is conspicuously absent at smaller centers. Therefore, there is a need to arrange for such meetings with banks and small and medium exporters to sort out the differences and also educate the exporters about various formalities of banks to obviate the difficulties faced by

them. For this, export promotion organization are to interact at state level with the SLBC (State Level Bankers Committee) sub-committee and arrange for meetings/seminars etc. The working group has also recommended that banks should put in place a control and reporting mechanism to ensure that the applications for export credit especially from Small and Medium Exporters are disposed of within the prescribed time frame. It has said that banks should post nodal officers at Regional/Zones Officers and major branches having substantial export credit for attending to the credit related problems of SME exporters.

y Gold Card scheme

A Gold Card scheme was worked out by RBI (part of EXMI Policy 2003-04) for creditworthy exporters (including SMEs) with good track record for easy availability by export credit on best terms, which envisaged certain additional benefits based on the record of performance of the exporters. Since the number of Gold cards issued by banks was low, banks have been advised by RBI to speed up the process of issue of the cards to all the eligible exporters especially the SME exporters and ensure that the process is complemented within a period of three months.

y Venture capital finance

Since SMEs face obvious difficulties in obtaining finance through the traditional route, the RBI has been increasingly recognizing the role of venture finance for the SME sector. It has recommended in one of its Working Group Reports that a dedicated National level SME Development Fund should be established. For this SIDBI is to promote a NBFC (non-pubic deposit taking) exclusively for undertaking venture and other development financing activities for SMEs. The Report has also recommendation that Banks could also contribute to the corpus credited by SIDBI (on risk sharing basis) or alternatively, set up their own venture financing instruments.

y New policy package for MSMEs

RBI envisages under its new policy package for MSMEs for the commercial banks (including regional rural banks) with over 67,000 branches, to make concerted efforts to provide credit cover on an average to at least 5 new tiny, small and medium enterprises at each of their semi urban/urban branches per year. The new policy also stipulates the public sector banks to fix their own targets for funding SMEs in order to achieve a minimum 20% year on year growth in credit to SMEs. The objectives is to double the flow of credit from Rs.67,600 crores in 2004-05 to Rs.135,200 crores to the SME sector by 2009-10, i.e. within a period of 5 years.

y Guarantee cover to Member Lending Institutions (MLIs) like banks for credit to SMEs
At present, Member Lending Institutions (MLIs), like banks, are provided guarantee cover of 75% of the amount of default by CGTSI in respect of term loan and/or working capital facilities up to Rs.25 lakhs extended by the MLIs to new and extending SSI units/IT/software units/small scale service business enterprises (SSSBEs), without collateral security and/or third party guarantee. One-time guarantee fee of 2.5% and annual service fee of 0.75% of the credit facility sanctioned are currently charged by CGTSI from the MLIs. In order to reduce the cost of guarantee to the weaker segments of the borrowers, particularly tiny units, the CGTSI under the new policy package is to reduce the one-time guarantee fee from 2.5% to 1.5% for all (i) loans up to Rs. 2 lakhs, (ii) eligible women entrepreneurs, and (iii) eligible borrowers located in the North Eastern regions (Sikkim) and Jammu & Kashmir. Further, public sector banks are to be encouraged to absorb the annual service fee in excess of 0.25% in respect of guarantee for all (i) loans up to Rs.2 lakhs (ii) eligible women entrepreneurs, and (iii) eligible borrowers located in the North Eastern regions (Sikkim) and Jammu & Kashmir.

y Risk Management guidelines

RBI to be implemented by banks by the FY end 2006-07 has circulated the Basel II implementation guidelines. Basel II guidelines recognize the element of diversification of risk in the SME sector and have assigned a lower risk weight for retail SME exposure under standardized approach. The non-retail SME exposure would also attract a lower weight where they have better external ratings under the standardized approach. Shifting to Basel II, therefore, would be advantageous for the bottom lines of the banks that have significant SME exposure due to lower capital requirements.

y CIBIL for SME financial information dissemination

In order to increase the flow of credit and institutionalize appropriate risk management systems for lending, including SME lending, Credit Information Bureau of India Ltd. (CIBIL) has been operationalised by RBI in association with Government of India so that there can be proper and transparent dissemination of the SME financials for easy and objective assessment of their credit quality by banks. This would help in reducing the transaction cost and improving the credit flow to the SME sector.

ROLE OF FINANCIAL INSTITUTIONS IN SMALL & MEDIUM ENTERPRISES

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 acts 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 disparities by including widespread industrial development. The Government in India, in order to provide adequate supply of credit to various sector of the economy, has evolved a well-developed structure of financial institutions in the country. These financial institutions can be broadly categorized into all India institutions and State level institutions, depending upon the geographical coverage of their operations. At the national level, they provide long and medium term loans at reasonable rates of interest. They subscribe to the debenture issued of companies; underwrite public issue of shares, guarantee loans and deferred payments, etc. Though, the State level institutions are mainly concerned with the development of medium and small-scale enterprises, but they provide the same type of financial assistance as the national level institutions.

National Level Institutions

A wide variety of financial institutions have been set up at the national level. They cater to the diverse financial requirements of the

entrepreneurs. They include all India development banks like IDBI, SIDBI, IFIC Ltd, IIBI; specialized financial institutions like IVCF, ICICI Venture Funds Ltd, TFCI; investment institutions like LIC, GIC, UTI; etc. All-India Development Banks (AIDBs):- Includes those development banks which provide institutional credit to not only large and medium enterprises but also help in promotion and development of small scale industrial units. Industrial Development Bank of India (IDBI):- IDBI was established in July 1964 as an apex financial institution for industrial development in the country. It caters to the diversified needs of medium and large-scale industries in the form of financial assistance, both direct and indirect. Direct assistance is provided by way of project loans, underwriting of and direct subscription to industrial securities, soft loans, technical refund loans, etc. While, indirect assistance is in the form of refinance facilities to industrial concerns. Industrial Finance Corporation of India Ltd (IFCI Ltd):- IFCI was the first development finance institution set up in 1948 under the IFCI Act in order to pioneer long term institutional credit to medium and large industries. It aims to provide financial assistance to industry by way of rupee and foreign currency loans, underwrites/subscribes the issue of stocks, shares, bonds and debentures of industrial concerns, etc. It has also diversified its activities in the field of merchant banking, syndication of loans, formulation of rehabilitation programmes, assignments relating to amalgamations and mergers, etc. Small Industries Development Bank of India (SIDBI):- SIDBI was set up by the Government of India in April 1990, as a wholly owned subsidiary of IDBI. It is the principal financial institution for promotion, financing and development of small-scale industries in the economy. It aims to empower the Micro, Small and Medium Enterprises (MSME) sector with a view to

contributing to the process of economic growth, employment generation and balanced regional development. Industrial Investment Bank of India Ltd (IIBI):- IIBI was set up in 1985 under the Industrial reconstruction Bank of India Act, 1984, as the principal credit and reconstruction agency for sick industrial units. It was converted into IIBI on March 17, 1997, as a full-fledged development financial institution. It assists industry mainly in medium and large sector through wide ranging products and services. Besides project finance, IIBI also provides short duration non-project asset-backed financing in the form of underwriting/direct subscription, deferred payment guarantees and working capital/other short-term loans to companies to meet their fund requirements. Specialized Financial Institutions (SFIs):- SFI are the institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing. IFCI Venture Capital Funds Ltd (IVCF):- Formerly known as Risk Capital & Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was promotion with the objective of broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative product/process/technology. Initially, it started providing financial assistance by way of soft loans to promoters under its Risk Capital Scheme . Since 1988, it also started providing finance under Technology Finance and Development Scheme to projects for commercialization of indigenous technology for new processes, products, market or services. Over this year, it has acquired great deal of experience in investing in technology-oriented projects. ICICI Venture Funds Ltd:- Formerly known as Technology Development & Information Company of India Limited (TDICI), was founded in 1988 as a joint venture with the Unit Trust of India. Subsequently, it became a fully

owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project finance for new technology ventures. The industrial units assisted by it are in the fields of computer, chemical/polymers, drugs, diagnostics and vaccines, biotechnology, environmental engineering, etc. Tourism Finance Corporation of India Ltd. (TFCI) :- TFCI is a specialized financial institution set up by the Government of India for promotion and growth of tourist industry in the country. Apart from conventional tourism projects, it provides financial assistance for non-conventional tourism projects like amusement parks, ropeways, car rental services, ferries for inland water transport, etc. Investment Institutions:- Investment Institution are the most popular form of financial intermediaries, which particularly catering to the needs of small savers and investors. They deploy their assets largely in marketable securities. Life Insurance Corporation of India (LIC):- LIC was established in 1956 as a wholly owned corporation of the government of India. It was formed by the Life Insurance Corporation Act, 1956, with the objective of spreading life insurance much more widely and in particular to the rural area. It also extends assistance for development of infrastructure facilities like housing, rural electrification, water supply, sewerage, etc. In addition, it extends resource support to other financial institutions through subscription to their shares and bonds, etc. The Life Insurance Corporation of India also transacts business aboard and has offices in Fiji, Mauritius and United Kingdom. Besides the branch operations, the corporation has established overseas subsidiaries jointly with reputed local partners I Bahrain, Nepal and Sri Lanka.

STATE LEVEL INSTITUTIONS

Several financial institutions have been set up at the State level, which supplement the financial assistance provided by the all India institutions. They act as a catalyst for promotion of investment and industrial development in the respective States. They broadly consists of State financial corporations and State industrial development corporations . State Financial Corporations (SFCs):- SFC are the State-level financial institutions, which play a crucial role in the development of small and medium enterprises in the concerned States. They provide financial assistance in the form of term loans, direct subscription to equity/debentures, guarantees, discounting of bills of exchange and seed/special capital, etc. SFCs have been set up with the objective of catalyzing higher investment, generating greater employment and widening the ownership base of industries. They have also started providing assistance to newer types of business activities like floriculture, tissue culture, poultry farming, commercial complexes and services related to engineering, marketing, etc. There are 18 State Financial Corporation (SFCs) in the country:1. Andhra Pradesh State Financial Corporation (APSFC) 2. Himachal Pradesh Financial Corporation (HPFC) 3. Madhya Pradesh Finance Corporation (MPFC) 4. North Eastern Development Finance Corporation (NEDFI) 5. Rajasthan Finance Corporation (RFC) 6. Tamil Nadu Industrial Investment Corporation Limited 7. Uttar Pradesh Financial Corporation (UPFC) 8. Delhi Financial Corporation (DFC) 9. Gujarat State Financial Corporation (GSFC) 10. The Economic Development Corporation of Goa (EDC)

11. Haryana Financial Corporation (HFC) 12. Jammu & Kashmir State Financial Corporation (JKSFC) 13. Karnataka State Financial Corporation (KSFC) 14. Kerala Financial Corporation (KFC) 15. Maharashtra State Financial Corporation (MSFC) 16. Orissa State Financial Corporation (OSFC) 17. Punjab Financial Corporation (PFC) 18. West Bengal Financial Corporation (WBFC)

State Industrial Development Corporations (SIDCs):- SIDC have been established under the Companies Act, 1956, as wholly-owned undertakings of State Governments. They have been set up with the aim of promoting industrial development in respective States and providing financial assistance to small entrepreneurs. They are also involved in setting up of medium and large industrial projects in the joint sector/assisted sector in collaboration with private entrepreneurs or wholly owned subsidiaries. They are undertaking a variety of promotional activities such as preparation of feasibility reports; conducting industrial potential surveys; entrepreneurship training and development programmes; as well as developing industrial areas/estate. The State Industrial Development Corporations in the country are:Assam Industrial Development Corporation Ltd (AIDC) Andaman & Nicobar Islands Integrated Corporation Ltd (ANIIDCO) Andhra Pradesh Industrial Development Corporation Ltd (APIDC) Bihar State Credit and Investment Corporation Ltd (BICICO) Chhattisgarh State Industrial Development Corporation Limited (CSIDC) Goa Industrial Development Corporation Gujarat Industrial Development Corporation (GIDC)

Haryana State Industrial Development & Infrastructure Development Corporation Ltd (HSIIDC) Himachal Pradesh State Industrial Development Corporation Ltd. (HPSIDC) Jammu & Kashmir State Industrial Development Corporation Ltd. Karnataka State Industrial Investment & Development Corporation Ltd (KSIIDC) Kerala State Industrial Development Corporation Ltd (KSIDC) Maharashtra Industrial Development Corporation (MIDC) Manipur Industrial Development Corporation Corporation Ltd (MANIDOC) Madhya Pradesh State Industrial Development Corporation Ltd (MPSIDC) Nagaland Industrial Development Corporation Ltd (NIDC) Orissa Industrial Infrastructure Development Corporation Omnibus Industrial Development Corporation (OIDC), Daman & Diu and Dadra & Nagar Haveli Pudhucherry Industrial Promotion Development and Investment Corporation Ltd. (PIPDIC) Uttar Pradesh State Industrial Development Corporation Punjab State Industrial Development Corporation Ltd (PSIDC) Rajasthan State Industrial Development & Investment Corporation Ltd (RIICO) Sikkim Industrial Development & Investment Corporation Ltd. (SIDICO) Tamil Nadu Industrial Development Corporation Ltd (TIDCO) State Infrastructure & Industrial Development Corporation of Uttaranchal Ltd. (SIDCUL) Tripura Industrial Development Corporation Ltd. (TIDC)

SOURCES OF FINANCE
IDBI Bank has been actively engaged in providing a major thrust to financing of SMEs. With a view to improving the credit delivery mechanism and shorten the Turn Around Time (TAT), IDBI Bank has set up Centralized Loan Processing Cells (CLPCs) at major centers across the country. To strengthen the credit delivery process, the CART (Credit Appraisal & Rating Tool) Module developed by Small Industries Development Bank of India (SIDBI), which combines both rating and appraisal mechanism for loan proposals, was adopted by IDBI Bank for faster processing of loan proposals. Recently, a number of products have been rolled out for the SME sector, which considerable expanded IBDI s offering to its customers. Also, the German Technical Co-operation and IDBI Bank entered into an understanding for strengthening the growth and competitiveness of SMEs by providing better access to demand-oriented business development and financial services. IDBI Ltd is now virtually a universal bank post the merger of IDBI with its parent (IDBI Ltd). The bank is fast spreading its wings across the country. The new generation public sector now has 157 Branches, 8 Extension Country and 363 ATMS spread over 95 cities. The bank rides on a state-of-the-art information technology (IT) platform to structure and deliver personalized banking services and customized financial solutions to its clients. SIDBI is committed to developing a strong, vibrant and responsive small scale sector. This committed is to be achieved through a variety of means. Principal amongst them is finance. Alongside finance, SIBDI provides appropriate support in the form of promotional and developmental services. SIDBI has been built up as a financially sound, vibrant, forward looking and technically oriented institution and, it intends to sustain this oriented in future. SIDBI has 50 Branches, 5 Zones and 1 Regional Office across the country. SIDBI s charter include Financing, Promotion, Development and Coordination for orderly growth of Small and Medium Enterprises. The charter has provided SIDBI considerable flexibility in adopting appropriate operational

strategies to meet these objectives. The activities of SIDBI, as they have evolved over the period of time, now meet almost all the requirements of SMEs which fall into a wide spectrum constituting modern and technologically superior units at one end and traditional units at the other. SIDBI has operationalised SME Fund of Rs.10,000 crores under which direct assistance is being provided at an interest rate of two percent below SIDBI s PLR. SIDBI has operationalised a national level venture capital fund called SME Growth Fund of Rs.500 crores which is utilized for investing in equities of growth sector like life sciences, light engineering, retailing, food processing, IT and infrastructure related services. SIDBI, in associated with CIBIL, select public sector banks and an existing rating agency, has set up a specialized rating Agency SMERA for the SME sector. SIDBI operates special schemes like Credit Linked Capital Subsidy Scheme, Credit Guarantee Scheme, etc. SIDBI has helped a number of MFIs in developing a wide range of products as also support other services providers. SIDBI showed an excellent performance in Micro Credit operations by achieving a growth of 168 percent in sanctions and 119 percent in disbursement over the previous year. SIDBI retained its position in the top 30 Development Banks of the world in the latest ranking of the Banker, London. As per the May 2001 issue of The Banker, London, SIDBI ranked 25th both in terms of Capital and Assets. As of March 31,2005, the outstanding portfolio of SIDBI STOOD at Rs.10,862 crores SIDBI operation during Q2 2005-06 resulted in a net profit of Rs 56 crores. During the half-year ended September 30, 2005, SIDBI earned a net profit of Rs.102 crores. SIDBI and Intel have come together with a first-of-its kind initative to help SMEs set-up or step-up IT in their business. While Intel will deliver a range of world class IT products and solutions, SIDBI will provide the financial assistance

for SMEs to buy them. Called SMEITLOANS, it provides an easy access for SMEs to get both the finance and the technology to adopt IT, especially since the loan is available for hardware, software, installations and services.

EXAMPLE:
SIDBI, Intel jointly support IT in SMEs
Mumbai: On the back of Rs 75 core corpus fund, Small Industries Development Bank of India (SIDBI) has entered into an agreement with Intel Corporation to jointly support small and medium enterprises (SMEs) in embracing information technology. Our board has approved a Rs 75 crores fund for the first year to jointly support use of IT in SMEs with Intel, for which we have signed a memorandum of understanding, SIDBI chairman and managing director N Bal Subramanian told the media. Under the agreement, SIDBI and Intel will jointly deploy and structure financial products to encourage use of IT in SMEs wherein SIDBI provides the financial support and Intel the technological support, he added. The focus of this funding will be cluster-based. And out of the 139 SME clusters in India we are targeting at least three to five clusters in the first year, Bal Subramanian said, without specifying the regions. The main focus of this fund will be to encourage customers use IT for their enterprises. We will provide them soft loan to use information technology, while Intel will provide, he said. On being asked about the interest rates, he said it could be anything between 8.5 percent to 9 percent however adding, Much would depend on how many customers we are able to attract . He said the funding under this scheme is likely to start by July this year. While most of the large companies, even in developing companies, have financial as well as technical capacity to identify technological sources and evaluated alternate technologies that would suit their requirements, unfortunately, this capacity is conspicuously missing in the most SMEs.

It is this features of SMEs that make them an ideal target for technological upgradation through tchnological corporation with foreign and local enterprises, with R&D institutions and centers of technology development. So, what these SMEs need today is primarily access to new technology. Poor financial situations and low level of R&D, poor adaptability to changing trade trends, non-availability of technical trained human resources, lack of management skills, lacks of access to technological information and consultancy services and isolation from technology hubs, etc. are some of the reasons why these SMEs are not being to surge ahead. Small and Medium enterprises are the backbone of India s economy. They have to now work hard to get out of this impending scenario. There has to be a major change in policy on how they are operating. SMEs have to put in more effort on research and development (R&D) and on ways to use technology at par with the international standards.

Commercial Bank Initiatives

SMEs act as propellants of the Indian economy in terms of their contribution to the country s gross domestic product, exports, employment generation and encouraging entrepreneurship. This pivotal sector faces tremendous challenges in the post liberalization era both from the domestic and international markets. In such a scenario, it is imperative to ensure the growth and long-term viability of SMEs through smooth flow of credit to this sector. Financial Institutions tend to be risk averse and conservative in respect of SMEs. SME entrepreneurs are at times deficient in financial skills and are unable to formulate and push through bankable proposals. They do not maintain regular books of accounts and therefore don t evoke full confidence of the creditors.

SMEs need to set up effective linkage with credit agencies and venture capitalist through enabled channels to procure adequate and timely finance. This will go a long way in fostering entrepreneurship in the country.

HDFC Bank
Recognizing the hard work that goes into establishing a successful SME and its demanding nature and the need to keep pace with the growing requests that come in, which may lead to purchasing new, or updating existing plant and equipment, or employing new staff to cope with the demands arising out of business expansion as SMEs enter new territories and markets, HDFC Bank has assembled products, services, resources and expert advice to help ensure that SME business excels. HDFC Bank solutions are designed to meet the varying needs of SMEs. The following services are provided by the HDFC Bank;

Funded Services
Funded Services from HDFC Bank meet the day-to-day working needs of a small and medium business enterprises. From working capital finance to credit substitutes; from export credit to construction equipment loan-HDFC caters to virtually every business requirement of an SME.

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Working Capital Finance Commercial Vehicle Finance Construction Equipment Loan Short Term Finance Bill Discounting

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Credit Substitutes Export Credit Structured Cash Flow Financing Real Estate Initatives

Non-Funded Services
Under Non-Funded services HDFC bank offers solutions that act as a catalyst to flourish the business. The following Non-Funded services are provided by HDFC Bank:

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Business Accounts HDFC Bank Trade Letters of Credit Guarantees Collections of Documents Cash Management Services Forex Desk Money Market Desk Derivatives Desk Services to Employee Trusts Services to Cash Surplus Corporate Tax Collection Bankers to Right/Public Issue

Specialized Services
Under the specialized services of Bank SMEs can also avail customized control of their value chain through the Internet banking platform of HDFC.

Precious Metals Channel Financing

Value Added Services

There is a plethora of services that HDFC offers under value added services. The following are the highlighting of this services:

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Real Time Gross Settlement Corporate Salary Accounts Reimbursement Account Merchant Services Depository Services Custody Services Power Plus Business Card

Internet Banking
Internet Banking is a revolutionary service under the banking sector and HDFC Bank is at top in providing this service. It provides state-of-the-art payment gateway services to industries and companies in order to ease out transaction processing. This in turn enhances the credibility of business and makes banking extremely cost-efficiency.

State Bank of India

State Bank of India has been playing a vital role in the development of small-scale industries since 1956. The Bank has financed over 8 lakhs Small Scale Industry

(SSI) units in the country. It has 55 specialized SSI branches, 99 branches in industrial estate and more than 400 branches with SIB divisions Some of the important SME related services

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Project UPTECH Open Term Loan SSI Loans Business Enterprises Retail Trade Professionals & Self-Employed Persons SSI Shoppe Cyber Plus SME Credit Plus Small Business Card Credit SME Petro Credit Transport Operators Artisan Credit Card Swarojgar Credit Card

INSTITUTION PROVIDING FINANCE TO SME s

Non-Banking Financial Institutions
NBFCs (Non Banking Financial Companies) All India Financial Institutions (AIFIs)

NBFCs
Through banks have traditionally provided most financial services most financial services, they typically excel in providing payment and liquidity related services (which includes loans) and usually selecting a portfolio mix commensurate to a certain desire return. The RBI is examining the issue of smooth flow of bank finance to NBFCs in order to develop NBFCs into a financially strong sector with improved skill and technology for the SME sector. The NBFCs can play a critical role as an instrument of credit delivery in providing support finance to SME sector. The strategy will have full support from SIDBI and the NABARD, which have agreed to evolve viable credit dispensation arrangements to provide resource support to NBFCs (through viable refinance arrangements) for on-lending to the SME sector. These refinancing institutions would be evolving appropriate mechanisms, in consultation with NBFCs, to address their needs and provide support in terms of their capacity building to develop expertise for financing these sectors. Finance comes from some of the NBFCs in the shape of Venture Capital Funds that aim to provide long-term equity capital to SME players. The NBFCs are also aggressively looking into providing ancillary services through their subsidiary and associate companies. The fact that they are able to offer all needs related to infrastructure, capital

markets, insurance, forex, venture capital etc. under one umbrella, makes them excellent referral point for SME client who have limited market knowledge and contacts. Through banks have also got access to low-cost deposits, due to widespread operations in the form of retail deposits and thus can lend at competitive rates, NBFCs enjoy an advantage over banks in terms of experts domain knowledge, project structuring skills and providing experience. At times NBFCs find favour with the SME sector due to their localized knowledge base and flavor.

y AIFIs
All India Financial Institutions (AIFIs), on the other hand, have traditionally offered enhanced equity and risk-based products. AIFIs play a crucial role in broadening access to financial services, enhancing competition and diversification of the financial sector. Services provided by some of the leading AIFIs to SMEs in India are discussed hereunder:

1. EXIM Bank
It has been focusing on small and medium enterprise (SMEs) exporters as a significant target group of clients. An SME Group has been set up in the EXIM Bank to handle proposals from companies/firms with annual turnover of up to Rs.75 crores. The primary objectives of the Group is to develop a portfolio of external oriented SME clients and ensure smooth credit delivery to these clients. The EXIM Bank s support to the SME sector includes term loans for setting up of new projects, modernization, and expansion as also equipment finance and export credit.

2. SIDBI

SIDBI has been taking a series of measures in the direction of aligning the concept of SSIs with the SMEs. SIDBI has operationalised the SME Fund of Rs.10,000 crores announced earlier by the Government of India. Under the Fund, direct assistance is being provided to SMEs at an interest rate of 2 percent below the PLR of SIDBI. Further, in association with the select public sector banks, SIDBI has set up the SME Growth Fund with a view to meeting the needs of risk capital for SMEs.

SIDBI Scheme
SIDBI scheme can be broadly divided into three categories:

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Refinance Schemes Bills Finance Schemes Project Related Direct Finance Scheme SIDBI provides refinance to State Level Finance Corporations/ State Industrial Development Corporations/ Banks., against their loans granted to small-scale units. Since the formation of SIDBI in April 1990 a need was felt/ representations were made that SIDBI being the principal finance institution for the small sector, should take up the finance of SSI projects directly on a selective basis. So it was decided to introduce direct assistance schemes to supplement the other available channels of credit flow to the small industries sector. Since then, SIDBI has evolved itself into a supplier of a range of products and services to the SME sector.

3. IDFC
IDFC has also expanded its business from core infrastructure financing to urban, agriculture and social infrastructure in recent years, and many of the Business Development Providers in these sectors now fall under the purview of the new Micro, small and medium enterprises definition. It is

also expanding its non-interest sources of income such as financial and advisory services, to MSMEs.

SMEs--help yourself to succeed

It seems nothing has changed for the Small and Medium Enterprises (SMEs). Surveys, studies came and went, but SMEs are still languishing in the alleys of darkness. Indian SMEs have opportunities for higher growth and exports, through linking with global supply chains. However these opportunities require structured policies, sustained learning, innovation and competence building by the locally-owned SMEs. Despite successive government s initiatives, it is a fact all will agree with that a large portion of SMEs remain untouched by these initiatives and schemes. With fierce competition- both domestic and global- the only way ahead for SMEs is to innovate. As such, innovation is the necessary core competence to remain competitive in the new landscape. Meanwhile finance which is the lifeline of an SME is still a distant Utopian dream. SMEs have limited access to finances and a majority of them run on the promoter s investment which severely limits the growth of these enterprises. To provide better access to finance in form of loans at the grass-root level, it is important to give a boost to the financing innovations like micro credit and factoring solutions. While institutions like NABARD and SIDBI were specifically created to provide loans to SMEs, somewhere down the line the plight of the small enterprises is still pronounced and evident. On the other hand, the level of adoption of IT is still low due to lack of understanding of the benefits of IT as well as lack of investment. Even those SMEs which have invested in Information and Communications Technology (ICT) view it as an enabler. Above that, SMEs have the financial constraints in going global and ability to invest in ICT. Many of the SMEs are not able to appreciate the value in ICT investment due to limited exposure to ICT.

SMEs have to adhere to industry best practices and harness the power of the internet. The future of SMEs will depend on overcoming the challenges encountered in a liberalized world and by enhancing their competitiveness in an increasingly global economy.

Conclusion
SMEs are spread all over the country and contributing very significantly to India s economy development. It has been observed that SMEs were not able to stand up to the challenges of globalization, mainly because o difficulties in the area of financing. Bur with help of financial sector, SME solved all their problems. By which our country could achieve the goal of industrial development & complete with MNC s in the economy. It also has been observed that not only the financial institutions but also the bank has been actively engaged in providing a major thrust to financing of SME s. Such as IDBI, IFIC, SIDBI, IIBI etc. SIBDI and INTEL have come together with a first-of its-kind initiatives to help SMEs aet up or set up IT in their business. All the initiatives taken by RBI are inconsonance such as Export Finance/credit, Gold Scheme, Venture Capital Finance, New Policy Package for SME s Guarantee cover to member Lending, RISK Management Guidelines, CIBIL for SME financial information Dissemination for the credit flow to the SME sector.

BIBLIOGRAPHY
1. OCED Small & Medium Enterprise Outlook 2. Financing Micro, Small & Medium Enterprise

WIBLIOGRAPHY
Website:y y y y
www.moneycontrol.com www.plantersbank.com www.nmccvikas.gov.in www.images.googles.co.in