1.

EXECUTIVE SUMMARY

Industry is the production of goods or related services within an economy.[1] The major
source of finance of a group or company is the indicator of its relevant industry. It includes
various investment opportunities in small as well as large scale sectors.

An investment is an asset or item that is purchased with the hope that it will generate income
or appreciate in the future. In an economic sense, an investment is the purchase of goods that
are not consumed today but are used in the future to create wealth. The small-scale industry
owes its definition to the Industries Act 1951.The sector is defined in the value of investment.
A small-scale industry is a project or firm created on a small budget or for a small group of
people. A small-scale industry produces its goods using small machines, less power and hired
labor. It is located within a single place and produces goods meant for few people.

In addition, arranging collateral security or third party guarantee is the tough proposition for
them. Some options for funding small busines.it is unlikely that all the money will come from.
The major role is played by the government, institutions, and investors from various sectors.
Government subsidies helps small business like farmers, cottage industry , etc in growing
their business. Even the foreign investors act as the source of finance in small scale sectors
which indirectly help the Indian economy

Small and medium scale enterprises (SMEs) are understood in India as enterprises where the
investment in plant and machinery or equipments is between Rs. 25 lakh ( ͌ US $ 0.04 million)
to Rs. 10 crore ( ͌ US$1.6 million) in case of a manufacturing industry and between Rs. 10
lakh ( ͌ US $ 0.02 million) to Rs. 5 Crore ( ͌ US $ 0.8 million) in case of a service sector
enterprise.

As small scale business are the source of developing economy and the backbone of any
country. Though the small and medium enterprises are the backbone of Indian economy, most
of the SME owners face a lot of problem due to the non-availability of timely and adequate
credit at the reasonable rate of interest. It is mandatory for banks to provide 40% their lending
to priority sector comprising of SMEs.

Thus we can say that even the small scale sectors are the backbone of Indian economy and
many investors help them in sourcing the finance in which government plays the major role in
financing credit and other polices are even given by government and institutions.
 INDEX

Sr no. Topic

Executive summery

1 Introduction

1.1 Objectives

1.2 Research Methodology

2. Profile of company

2.1 Introduction

2.2 History

2.3 Structure Of The Organization

3. Conceptual framework

3.1 Introduction To Small Scale Sectors

And Their Types

3.2 Sources Of Finance

3.3 Main Source Of Finance—Government Subsidies

3.4 Source Of Finance- Equity And Debt

3.5 Foreign Investors In Ssi

3.6 Institutions Providing Financial Assistance

3.7 Finance And Credit As A Measure Problem In India For Small Business

Collection Of Data

4 Conclusion

Appendices

Bibliography
 1. INTRODUCTION

Finance is the key input for sustained growth of small-scale sector and its
accessibility continues to be a matter of concern. The small-scale industries need both long
run as well as short run credit. Source of finance plays a vital role in the survival, growth and
development of these industries. There are various sources of finance such as equity, debt,
debentures, retained earnings, term loans, working capital loans, letter of credit, venture
funding etc. These sources are useful under different situations. They are classified based on
time period, ownership and control, and their source of generation. Sources of finance are the
most explored area especially for the entrepreneurs about to start a new business. It is perhaps
the toughest part of all the efforts. Having know that there are many alternatives of finance or
capital available, a company can choose from. Choosing right source and right mix of finance
is key challenge for every finance manager. The process of selecting right source of finance
involves in-depth analysis of each and every source of finance. Based on a review of your
financing needs and the various costs and benefits of different sources available, you can
determine from which source to seek finance.

Financing your business is often the critical component to success. There are a
wide variety of ways this can be accomplished. Finding financing for your business is just one
aspect of your overall financial management of your business, but it is critical factor for the
success of many small businesses. This main objective of this study is to find out the main
source of financing used by small-scale industries for different purposes. For the said purpose
data have been collected from 400 small-scale units through questionnaire, interviews and
personal observation. After study it is found that in small-scale industries after maximum use
of trade credit, for additional funds, most of the industries approach commercial banks for
short-term borrowings. More than two-third industries in small sector have taken term loans
for investments in plants & machineries, land and buildings or permanent addition to current
assets. Out of them again more than two-third small industries have approached commercial
banks for term loans due to stringent terms and conditions of financial institutions for granting
term loans. . The owners’ funds in small-scale industries, owing to their nature of organization
and limited access of the owners to the market, are in short supply. Approximately only one-
fifth industries are using more than two-third owners’ funds out of the total capital used in the
business for long-term.
Equity vs. Debt Financing

Small businesses can get money through "equity financing" or "debt financing." Equity
financing means that you sell stock in your company to a buyer, who then has an ownership
interest in your company. Debt financing means a loan -- you owe the person who holds the
debt (usually a promissory note) the amount borrowed. Here are the most common sources of
equity and debt financing for small businesses.

Common Financing Sources

 You: Contributing your own money to your business is the easiest way to finance it.
You can tap into your savings, use a home-equity line of credit, or sell or borrow
against a personal asset -- including stocks, bonds, mutual funds, or real estate. You
can contribute money as equity or make loans to your company.
 Family and Friends: Mom, dad, relatives, and friends may have access to more cash
than you do. They may be willing to lend you money, or they may be willing to take
an equity stake in your company.
 Small Business Administration: The Small Business Administration (SBA) offers a
number of loan programs to small businesses. The 7(a) Loan Guaranty Program is one
of its primary programs. Through this program, the SBA provides loans to small
businesses that are not able to obtain financing on reasonable terms through normal
lending channels. You can apply for these loans through your local participating
lender (usually a bank).
 Banks: Banks make a lot of loans to small businesses. However, they are usually the
hardest place for the start-up business to find money, because banks like to see that a
company has a history of making money. The bank wants to be reasonably sure that
your company will be able to repay the loan. If you have a good business plan and
have personal assets that you can offer as collateral (or if you have a guarantor or
cosigner who is satisfactory to the lender), you may be able to qualify for a bank loan
even if your business is a start-up business.
 Credit Cards: If you have a credit card, you have a built in line of credit. Although
credit cards are one of the most costly ways to finance your company, they are
routinely used as a source of funds for start-up businesses.
 Leasing Companies: Leasing companies are a way to finance computers, office
equipment, phone systems, vehicles, and other equipment. Leasing can lower your
start-up costs because you won't have a large initial outlay of cash for the equipment.
 Customers: If you have existing customers, they may be willing to pay you in
advance for your products. This allows you to use their money to purchase products or
inventory prior to sale.
 Trade Credit: Vendors and suppliers are often willing to sell to you on credit. This is
a great source of financing for both start-up companies and growing businesses.
 Small Business Investment Centers: Small Business Investment Centers (SBICs) are
licensed and regulated by the SBA. SBICs are privately owned and managed
investment firms that provide venture capital and start-up financing to small
businesses.
 Venture Capital Firms: Venture capitalists provide funds to companies that they
believe have exceptional growth potential. Very few small businesses are able to
obtain financing through venture capital firms.
 Investment Banking Firms: Investment bankers "take companies public." That
means that the investment banker offers stock (an ownership interest) in your company
to the public. This option is generally only available to small businesses that have very
strong growth history and very strong growth potential.
 Private Placement: A private placement is an offer of stock (the stock gives the buyer
an ownership interest in your company), or debt (you owe the holder of the debt
instrument, much like a loan) to wealthy individuals or venture capitalistswithout
going public.
1.1 OBJECTIVES OF STUDY

1. To study the various sources of finance available in small scale sector.

2. To study the impact of government subsidies on small scale sector.
3. To study the statistical view of small scale industry on Indian economy.
4. To know how FDI help in financing small sectors.
5. To study how financing help small scale sector.
1.2 RESEARCH METHODOLOGY

Primary Data: Data which has not been previously published i.e. the data is derived from a
new or original research study & collected directly from first hand sources by means of
surveys observation or experimentation is known as Primary Data.

Secondary Data: Data which has already been collected by someone or an organization for
some other purpose or research study is known as Secondary Data.

Research
methodology

Primary Secondary
data data

Books Newspapers Internet

Method of Data Collection:

Secondary Data: Secondary Data was collected from various sources such as books,
internet, and newspapers.
 2. PROFILE OF THE COMPANY:

MAHILA BACHAT GAT

Shri Mahila Griha Udyog Lijjat Papad, popularly known

as Lijjat, is an Indian women's cooperative involved in
manufacturing of various fast-moving consumer goods. The
organization’s main objective is empowerment of women
by providing them employment opportunities. Started in the
year 1959 with a seed capital of Rs. 80, Lijjat has an annual
turnover of around Rs. 6.50 billion (over 100 million USD)
in 2010, with Rs. 290 million in exports. It provides
employment to around 43,000 (in 2015) people. Lijjat is
headquartered in Mumbai and has 81 branches and 27
divisions all over India.

Lijjat is primarily a cottage industry, urban by its origin, which has spread to the rural areas.It
is considered as one of the most remarkable entrepreneurial initiatives by women that is
identified with female empowerment in India.
2.2 HISTORY

Lijjat was the brain child of seven Gujarati women from Bombay (now Mumbai). The women
lived in Lohana Niwas, a group of five buildings in Girgaum. They wanted to start a venture
to create a sustainable livelihood using the only skill they had i.e. cooking. The seven women
were Jaswantiben Jamnadas Popat, Parvatiben Ramdas Thodani, Ujamben Narandas
Kundalia, Banuben. N. Tanna, Laguben Amritlar Gokani, Jayaben V. Vithalani, and one more
lady whose name is not known.

The women borrowed Rs 80 from Chhaganlal Karamsi Parekh, a member of the Servants of
India Society and a social worker. They took over a loss-making papad making venture by
one Laxmidasbhai, and bought the necessary ingredients and the basic infrastructure required
to manufacture papads. On 15 March 1959, they gathered on the terrace of their building and
started with the production of 4 packets of papads. They started selling the papads to a known
merchant in Bhuleshwar. From the beginning, the women had decided that they would not
approach anyone for donations or help, even if the organisation incurred losses.

An attempt to start a branch in Malad suburb of Mumbai, in 1961, was unsuccessful. In 1962,
the name Lijjat (Gujarati for "tasty") was chosen by the group for its products. The name,
suggested by Dhirajben Ruparel, was chosen in a contest held for the purpose, with prize
money of Rs. 5. The organisation was named Shri Mahila Griha Udyog Lijjat Papad.[8] In
many Indian languages, Mahila means women, Griha means home, Udyog means industry.
By 1962–63, its annual sales of papads touched Rs. 182,000 (Rs. 182,000).

In July 1966, Lijjat registered itself as a society under the Societies Registration Act 1860. In
the same month, on Chaganbapa's recommendation, U N Dhebar, the chairman of KVIC
personally inspected the Lijjat. KVIC or Khadi Development and Village Industries
Commission is a statutory body set up by the Government of India for development of rural
industries.

In July 1979, the general secretary of a trade union tried to interfere in Lijjat's affairs, making
certain demands on behalf of a few member-sisters. L. C. Joshi, Labour Advocate of Bombay
and a well-known industrial relations expert, was called for consultations. In his observations
on "Who owns Lijjat?", he clarified that member-sisters were competent to take a decision for
their own and it was not open for an outside agency to interfere with the internal working of
Lijjat.
In 1985, the Lijjat branch at Jabalpur was taken over by one Shantilal Shah as his own unit,
which he ran with the help of a Sanchalika (branch head), who was wife of his employee.
Lijjat went through tremendous pressures and court stay orders to retrieve the situation.

In 1987, Lijjat purchased new premises at Kamal Apartments in Bandra, a suburb of Mumbai.
The registered office shifted to the Bandra with effect from July 1988. In 1988, Lijjat entered
the soap market with Sasa detergent and soap.[18] Sasa had annual sales of Rs 500 million,
accounting for 17 percent of Lijjat's total turnover in 1998. In March 1996, the 50th branch of
Lijjat was inaugurated in Mumbai.

In the 1980s, Lijjat also started taking part in several trade fairs and exhibitions, which
improved its sales and made the brand name "Lijjat" well-known among the people. The
advertising was undertaken through the vernacular newspapers, television and radio. The
institution sponsored programs and gave away gifts for the winners of specific shows in the
television. The money for advertisements was spent by the Polypropylene Division, which
recovered the same by adding it to the price of the bags that it supplied to all the branches and
divisions throughout India.

In the 1980s and 1990s, Lijjat started attracting attention of foreign visitors and officials.
Lijjat received the "Best Village Industries Institution" award from KVIC for the period
1998–99 to 2000–01.[24] In 2002, the "Businesswoman of the Year" award was given to "The
Women Behind Lijjat Papad" at The Economic Times Awards for Corporate Excellence. At
the awards ceremony, the President of Lijjat urged the State Governments of Maharashtra and
Punjab to reconsider their decision of withdrawing the tax exemption on Lijjat's Sasa
Detergent.

In 2002, Lijjat had a turnover of Rs 3 billion and exports worth Rs. 100 million. It employed
42,000 people in 62 divisions all over the country. The 62nd branch became operational at
Jammu and Kashmir in 2002, enrolling over 150 members.
2.3 ORGANIZATION STRUCTURE AND MANAGEMENT

Lijjat believes in the philosophy of sarvodaya and collective ownership. It accepts all its
working members as the owners and an equal partaker in both profit and loss. The members
are co-owners and fondly referred to as "sisters". All the decisions are based on consensus and
any member-sister has the right to veto a decision. Men can only be salaried employees
(accountants, drivers or security guards), and not the members of the organisation (i.e. they
are not the owners).

On successive failures of a branch to abide by the organization’s philosophy of consistent

quality and production of papads, the central committee reduces the daily wages of its
members by 1 rupee. The member-sisters are also rewarded for extra effort. For instance, in
2002, the member-sisters at the Rajkot branch received Rs 4,000 each as bonus, while the
member sisters at Mumbai and Thane branches received a 5-gram gold coin as an incentive.
Several issues of Lijjat Patrika enumerate the names of the names/numbers of the member-
sisters, who were rewarded with the cash or gold, for their extra efforts.
3. CONCEPTUAL FRAMEWORK

3.1 SMALL SCALE INDUSTRIES AND THE TYPES OF FINANCE

Major Sources of Industrial Finance Available in India

Some of the sources of Industrial finance available in India are as follows:

We now, describe the various sources from which industries meet their needs. This will help
us in understanding the present set-up of industrial finance.

(A) Internal Self-Finance:

One source, quantitatively of big importance, is the saving of the unit itself. It may be the
household, the business or the government.

Normally, the household not only invests out of its own saving but it also has surplus which it
lends to other units via, financial institutions. Like banks, capital market etc.

The savings of the business, comprised of depreciation and the retained earnings, are normally
short of its investment. Hence it also borrows from financial institutions. Government too
finances a part of their investment from internally generated funds.

These arise from the excess of tax and other income over consumption spending plus
transfers. For the shortfall, if and when it occurs, it also borrows from the financial system.
Altogether, roughly half of all the investment is self-financed.

An advantage of investment through internally generated funds is that it combines the acts of
saving and investment. As such certain costs are internalized and reduced. These costs pertain
to collection of information in respect of borrowers, transactions with them, monitoring the
use of funds, and enforcement of the conditions of borrowing.

These costs would have to be met if these funds were to be lent to someone else. Self-
financing also reduces the risks of lending’s as it does not involve preparation of documents
in respect of contract, collateral or security etc.
The shortcoming of this source is that it may fall short of investment opportunities or its use
may be inefficient. That is funds may not be wholly or partly invested in the most productive
lines.

(B) Equity, Debentures and Bonds:

A large part of finance for fixed investments [building, machines, etc.] comes from different
types of equity or shares such as ordinary, cumulative and non-cumulative preference shares.
These shares bear risks of different degrees and are tailored to suit the temperament of
different investors.

The latest trend is to issue shares in small denominations of ten rupees so as to enable the
largest number of people to participate in providing long-term finance. The credit-worthiness
of promoters of industries and profitability of industries, determinate the extent to which
savers invest their money in shares. In this way, industries are not burdened with interest, and
therefore do not get involved in complications on this account during recession or depression.

Often industrial companies also get long-term finance through the issues of debentures and
bonds. These are debt (loans), instruments. The buyers of those debentures and bonds are the
creditors of companies. They get a fixed rate of interest on the money invested in these
securities.

For this reason debentures are safer investments. Till recently, these debt-instruments were
not very popular. At present many industries are tapping this source. Public sector
undertakings too have started depending upon them. Since recently they have raised funds
through the sale of bonds bearing fixed interest.

(C) Public Deposits:

Another source is public deposits. It is also a debt-instrument, mostly for short-term finance.
Under this system, people keep their money as deposit with these companies or managing
authorities for a period of six months, a year, two years, three years or so. Depositors receive
a fixed interest.

They can ask for the refund of money at any time. This money is used by companies to meet
their needs of working capital. However, this source of finance is unreliable because
depositors can seek refund at any time.
And if the refund happens to coincide with the time when a company needs funds most, then
it complicates matters. With the growth of banking habits and increase in dealings with other
financial institutions, the importance of public deposits, as a source of finance, will decline.

(D) Loans from Banks:

Commercial banks can do also provide funds for meeting short-term needs or for working
capital. Loans are given against the guarantee of government securities and stocks with
companies. Loans are advanced in the form of overdraft and credit limit. Commercial banks
are generally reluctant to put their money in the purchase of shares.

The reason is that the deposits that they receive from the public are generally for a short-term
and therefore, banks can ill-afford to take any risk in investing public money in shares. They
can, however, do something by way of buying debentures of companies.

They can earn fixed interest on such investment and at the time of need they can sell these
debentures in the market and recover their money. Still, little has been achieved in this field
because of the fear that banks may find it difficult to cash debenture precisely at a time when
they need.

(E) The Managing Agency System:

The system of industrial finance, peculiar to India, and which prevailed till the recent times, is
of little importance now days. Under this system an individual or a group of individuals
finance the initial stage of the establishment of industries, and manage many activities of the
company thus established very often, one managing agent controls more than one concern and
uses fund of one concern to meet the needs of others under him.

In the past when there was a great shortage of industrial finance and almost complete lack of
financial institutions, and capital market in the real sense had not even come into existence,
managing agents did render a valuable service in the promotion of industries within the
country. Of course, it is true that their funds were mostly used for the establishment of
consumer goods industries.

In due course, however, the system developed certain drawbacks and came to be plagued by
serious shortcomings. The management of so many units, good and bad, and producing a
variety of products led to certain evils.
The payments which managing agents extracted for themselves, interest on their money,
commission for their services etc., were too much and were out of proportion with the paying
capacity of the companies and/or the work performed by those agents. It is for these reasons
that the government put a ban on this system in 1970.

(F) Indigenous Bankers:

Inspite of the establishment of new financial institutions, indigenous bankers also advance
financial help to a few large-scale industries, particularly during the time of stress, both for
fixed capital and working capital. But mainly they have provided finance to small scale
industries.

In the absence of adequate institutional finance, these industries have been forced to depend
upon indigenous bankers. These banks charge a very heavy rate of interest, thus making
finance a costly affair. However, the importance of these banks, even as a source of finance
for small industries, is on the decline.

(G) Development Finance Institutions:

Established with the help of the Government to fill-in the gap in industrial finance and to
promote the objective of planning, these institutions cater to the needs of large and small
industries.

The new institutions supplying industrial finance are Industrial Development Bank of India,
Industrial Finance Corporation of India, Unit Trust of India, and General Insurance
Corporation of India, Industrial Reconstruction Bank of India, State Financial Corporations,
and State Industrial Development Corporations.

These institutions provide huge quantity of finances for setting up of new industries, for
meeting their several needs and in several forms. These also ensure and monitor the use of
finance in pre-planned directions. As such these fit well with the modem scenario of industrial
development.

(H) Foreign Capital:

As a supplement to domestic finance, external capital too has been made use of in meeting the
needs of industrial finance, mostly for long-term needs. This has taken several forms. There is
the foreign aid (i.e., loans on concessional term) from foreign governments and foreign
institutions (like the World Bank) extended to the Government.
A part of this assistance has also gone to the private sector. A part of foreign funds has come
through foreign companies which have Indian subsidiaries in our country or through
Multinational Corporations which have branches in India.

Some foreign companies have given funds as part of direct investment or as part of
collaborations with Indian companies. There are also non-resident Indians who have invested
in collaboration with Indians. Indian companies have also raised loans from foreign markets.

The sources of industrial finance are thus of various types. And so are the instruments of
finance. A number of them are modem Such as shares, debentures, and loans from the
financial institutions. The old ones like, deposits from public, the finances of managing agents
as also of indigenous bankers are on the decline. This is as it should be for these are neither
enough, nor suitable for meeting the needs of the modern industrial growth.
3.2 SOURCES OF FINANCE

Short-term Capital in Small-scale Industries

Short-term financing plays a vital role in the financing of assets, regardless of the size
of the firm. However, this source is of particular significance to the small business. Having
limited access to the capital markets, the smaller company has to place greater reliance upon
short-term sources, particularly trade credit and short-term bank credit. In contrast, the large
corporations, while utilizing trade credit extensively, employ short- term bank loans as a
means for providing greater flexibility if the need arises. Thus, for the large business entity,
the importance of short-term bank credit comes in the form of increased discretion rather than
as a result of the volume. The smaller organization has no such option. If after maximizing its
use of trade credit additional funds are required, the smaller company, for the most part, must
approach the banker for additional money.
Finally, the small concern’s inability to enter the long-term public markets places
additional burden upon short-term financing. Thus, the small firm is restricted in its
availability to long-term sources of financing. Accordingly, the significance of short-term
funds takes on an extra dimension for the small organization.

Sources of Short Term-Credit

Sources of short-term capital may be segmented into two categories: (1) credit
available from suppliers in the form of trade credit, and (2) debt provided by financial
institutions.

Trade Credit
Trade credit is characteristically different from other forms of short-term credit in that
this source is not associated with a financial institution. However, this fact should not
minimize the significance of trade credit as a primary source of financing. Specifically, on
average, approximately one-third of a firm’s current liabilities come from trade credit. These
payables are all the more important when viewed from the perspective of the small-scale
industries.
Financial Institutions as Supplier of Short – Term Credit
The volume of short-term credit supplied by financial institutions fluctuates more
widely than does the volume supplied by trade credit. Although banks are the largest group
of financial institutions supplying short-term credit, other financial institutions also play a
major role in this type of lending.

Long-term Financing in Small-Scale Industries

The source of finance has to be decided with reference to the period for which the
funds are required. Fixed capital or long-term funds must be raised in such a manner that the
enterprise will have uninterrupted use of such funds for a sufficiently long period. Long-term
finance is required for investment in fixed assets like land and buildings, plant and
machinery, furniture and fixtures, etc. It is generally required and raised for ten years.
Various sources of finance may be grouped under two heads, namely
(i) Owners’ Funds and
(ii) Borrowed Funds. Owners’ funds
include capital contributed by the Shareholders and profits re-invested in the business.
Borrowed funds are raised by way of loans and credit from the public, banks, financial
institutions, etc.
The owners’ funds in small-scale industries, owing to their nature of organization
and limited access of the owners to the market are in short supply. The table 1.2 (discussed
earlier) shows that 85.3 per cent small units have taken term loans for expansion,
modernization or even for establishment from banks, financial institutions or non-financial
institutions. Now, we will discuss with the help of two tables (1.3 and 1.4) given ahead the
percentage of Owners’ Funds and long-term loans used by small-scale industries for
fulfilling long-term needs.
 3.3 Main source of finance –Government subsidies

To promote the development of the industrial sector, especially MSME sector, the government
has introduced various schemes that provide financial subsidy to the eligible enterprises. Some
of these subsidy schemes are specifically for certain industrial sectors, while some of them like
CLCSS are available for a wide range of industries.

Some of the major subsidy schemes of the government and public institutions are provided
below. These can be categorized as follows:

Subsidy Schemes for Specific Industries

Textile Industry - Technology Upgradation Fund Scheme (TUFS)

Ministry of Textiles introduced the Technology upgradation fund scheme (TUFS) for textiles
and jute industry in April 1999 to facilitate induction of state-of-the- art technology by the
textile units.
The benefits under the scheme include:

 5% interest reimbursement of the normal interest charged by the lending agency on RTL,
or
 5% exchange fluctuation (interest & repayment) from the base rate on FCL, or
 15% credit linked capital subsidy for SSI sector, or
 20% credit linked capital subsidy for powerloom sector (An option for ‘front ended’
subsidy provided w.e.f. 1st October, 2005), or
 5% interest reimbursement plus 10% capital subsidy for specified processing machinery.
IDBI, SIDBI and IFCI were the nodal agencies for Non-SSI textile sector, SSI textile
sector and Jute sector respectively. However, w.e.f. 1st October, 2005, 13 additional
nodal banks have been appointed under TUFS for determining eligibility & releasing the
subsidy for the cases financed by them.
Food Processing Industry - Scheme for Technology Upgradation/ Establishment/
Modernization for Food Processing Industries

This Scheme covers the following activities: Setting up/expansion/modernization of food

processing industries covering all segments viz fruits & vegetable, milk product, meat, poultry,
fishery, oil seeds and such other Agri-Horticultural sectors leading to value addition and shelf
life enhancement including food flavors and colors, oleoresins, spices, coconut, mushroom,
hops. The assistance is in the form of grant subject to 25% of the plant & machinery and
technical civil work subject to a maximum of Rs. 50 lakh in General Areas and 33.33% up to Rs.
75 lakh in Difficult Areas.

Leather Industry – Integrated Development of Leather Sector (IDLS)

The scheme is aimed at enabling existing tanneries, footwear, footwear components and leather
products units to upgrade leading to productivity gains, right-sizing of capacity, cost cutting,
design and development simultaneously encouraging entrepreneurs to diversify and set up new
units

The financial assistance under the Scheme will be investment grant to the extent of 30% of cost
of plant and machinery for SSI and 20% of cost of plant and machinery for other units (i.e. non
small scale units) subject to ceiling of Rs.50 lakh for technology up gradation /modernization
and/or expansion and setting up a new unit. The rate of assistance would be @ 20% for all units
(both SSI and Non-SSI) above Rs.50 lakhs subject to ceiling of Rs.2 crore.

The nodal agency for release of assistance, monitoring and interface and coordination with
FIs,Banks and the Government is SIDBI.

Coir industry

The Coir Board runs various subsidy schemes for the coir sector, as provided below:

 Rejuvenation, Modernization and Technology Upgradation of the Coir Industry

A Central Sector Scheme on Rejuvenation, Modernization & Technology Up gradation of the
Coir Industry was launched during 2007-08, on a pilot basis, to facilitate the sustainable
development of the Spinning and Tiny/Household Weaving Units of the coir industry by
providing proper work sheds and enabling replacement of traditional age old ratts with
motorized ratts in the Spinning sector and replacement of traditional looms with the mechanized
looms in the Tiny/Household sector in the first phase, during XI Plan. The main objectives of the
scheme include modernization of Coir industry by adoption of modern technology in production
and processing of Coir in the spinning and weaving sectors; Upgradation of the production and
processing technology for improving the productivity and quality; and increasing the efficiency
and productivity for enhancing the earnings of the workers and income of spinners/ tiny-
household sectors, among others.

 The norms of assistance are as below:

Spinning unit: The financial assistance or government grant/subsidy would be 40% of the
project cost subject to a maximum of Rs. 80,000 (Rupees eighty thousand only) per unit.

Tiny/ household unit: The financial assistance or government grant/subsidy would be 40% of
the project cost subject to a maximum of Rs. 2,00,000 (Rupees two lakh only) per unit.

 Extension of Financial Assistance to Coir units in the Brown Fibre sector

The Coir Board runs a scheme for financial assistance to the coir units in the brown fibre sector.
The rate of financial assistance under the scheme is 25% of the cost of equipments and
infrastructural facilities subject to certain ceiling limits based on the type of unit.

 Scheme for Extension of Financial Assistance for Generator Set / Diesel Engine

The purpose of the scheme is to give one time subsidy to fibre/ curled coir production units in
the brown fibre sector to carry out production at periods of power cut/ low voltage and to ensure
supply of brown fibre and curled coir to meet the requirements of rubberized coir products, coir
rope, yarn and mats and matting sectors.
The quantum of subsidy for one unit will be 25% of the cost of generator set subject to a
maximum of Rs.50,000/-. This will be a one time financial assistance and will be granted on the
basis of expenditure incurred by the unit.

Other Subsidy Schemes of the Central Government

Credit Linked Capital Subsidy Scheme for Technology Upgradation (CLCSS)

The Scheme was launched in October, 2000 and revised w.e.f. 29.09.2005. The revised scheme
aims at facilitating Technology Upgradation of Micro and Small Enterprises by providing 15%
capital subsidy (12% prior to 2005) on institutional finance availed by them for induction of well
established and improved technology in approved sub-sectors/products. The admissible capital
subsidy under the revised scheme is calculated with reference to purchase price of Plant and
Machinery. Maximum limit of eligible loan for calculation of subsidy under the revised scheme
is also been raised Rs. 40 lakhs to Rs. 100 lakh w.e.f. 29-09.2005.

The Small Industries Development Bank of India (SIDBI) and the National Bank for Agriculture
and Rural Development (NABARD) will continue to act as the Nodal Agencies for the
implementation of this scheme.
Quality Upgradation/Environment management for small scale sector through incentive
for ISO 9000 /ISO 14001 /HACCP Certifications

In order to enhance the competitive strength of the small scale sector, the Government
introduced an incentive scheme for their technological upgradation/quality improvement and
environment management. The scheme provides incentive to those small scale/ ancillary
undertaking who have acquired ISO 9000/ISO 14001/HACCP certifications. The scheme for
ISO 9000 reimbursement in operation since March, 1994 has now been enlarged so as to include
reimbursement of expenses for acquiring ISO 14001 certification also.

The Scheme envisages reimbursement of charges of acquiring ISO-9000/ISO-14001/HACCP

certifications to the extent of 75% of the expenditure subject to a maximum of Rs. 75,000/- in
each case. The Scheme is valid upto 31st March 2012.

Market Development Assistance Scheme for Micro, Small & Medium Enterprises

The scheme offers funding for participation by manufacturing Small & Micro Enterprises in
International Trade Fairs/ Exhibitions under MSME India stall; sector specific market studies by
Industry Associations/ Export Promotion Councils/ Federation of Indian Export Organisation;
initiating/ contesting anti-dumping cases by MSME Associations and reimbursement of 75% of
one time registration fee (w.e.f. Ist January 2002); and 75% of annual fees (recurring) (w.e.f. Ist
June 2007) paid to GSI (Formerly EAN India) by Small & Micro units for the first three years
for bar code.
The permissible subsidy is as below:

 The Govt. of India will reimburse 75% of air fare by economy class and 50%
space rental charges for Micro & Small manufacturing enterprises of General
category entrepreneurs.
 For Women/SC/ST Entrepreneurs & Entrepreneurs from North Eastern Region
Govt. of India will reimburse 100% of space rent and economy class air fare.
 The total subsidy on air fare & space rental charges will be restricted to Rs.1.25
lakhs per unit.
Financial Assistance on Bar Code

The basic objective of financial assistance is to enhance the marketing competitiveness of Micro
& Small Enterprises (MSEs) by way of:

 Providing 75% of one-time registration fee and annual recurring fee (for first three years)
paid by MSEs to GS1 India.
 Popularizing the adoption of bar codes on large scale amongst MSEs, and
 Motivating and encouraging MSEs for use of bar codes through conducting seminars on Bar
Code, etc.

Subsidy Schemes of NSIC

Raw Material Assistance

Raw Material Assistance Scheme aims at helping Small Scale Industries/Enterprises by way of
financing the purchase of Raw Material (both indigenous & imported). This gives an opportunity
to SSI to focus better on manufacturing quality products. The benefits of the scheme include:

 Financial Assistance for procurement of Raw Material upto 90 days.

 SSI helped to avail Economics of Purchases like bulk purchase; cash discount etc
 NSIC takes care of all the procedures, documentation & issue of Letter of credit in
case of imports.

Marketing Assistance

Under the Scheme, marketing support is provided to Micro, Small & Medium Enterprises
through National Small Industries Corporation (NSIC) to enhance competitiveness and
marketability of their products, through following activities:

 Organizing International Technology Exhibitions in Foreign Countries by NSIC

and participation in International Exhibitions/Trade Fairs
  Organizing Domestic Exhibitions and Participation in Exhibitions/ Trade Fairs in
India
 Support for Co-sponsoring of Exhibitions organized by other organisations/
industry associations/agencies
 Buyer-Seller Meets
 Intensive Campaigns and Marketing Promotion Events
 Other Support Activities

Performance and Credit Rating

A scheme for performance and credit rating for SSIs has been formulated in consultation with
Indian Banks’ Association (IBA) and Rating Agencies. NSIC has been appointed the nodal
agency for implementation of this scheme through empanelled agencies.

Reimbursement of Performance and Rating Fee under this scheme is as below:

Turn Over of SSI Reimbursement of Fee through NSIC

Upto Rs 50 Lacs 75% of the fee or Rs 25000/- (Whichever is less)

Above Rs 50 to 200 lacs 75% of the fee or Rs 30000/- (Whichever is less)

More than Rs 200 lacs 75% of the fee or Rs 40000/- (Whichever is less)

To evolve the businesses as part of culture, Indian Government already has taken many steps,
including giving many incentives and subsidies to encourage youth to opt for business as another
career option which would be a better/stable career option compared to doing jobs for others.
Several schemes, assistance and many benefits are being provided to entrepreneurs through
different ministries, this is a pioneering effort to consolidate all the MSME related schemes
under one umbrella, thus conceptualized.

1. The Credit Guarantee Fund Scheme for Micro and Small Enterprises

The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was launched by
the Government of India to provide collateral-free credit to Indian MSMEs. Both the existing
and the new enterprises are eligible for the scheme. The Ministry of Micro, Small and Medium
Enterprises and Small Industries Development Bank of India (SIDBI) established a trust named
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the
scheme.

The scheme provides credit facilities in the form of term loans and working capital facility of up
to Rs. 100 lakh per borrowing unit. The amount is contributed by the Government and SIDBI in
the ratio of 4:1, respectively. The scheme also offers rehabilitation assistance to sick units
covered under the guarantee scheme.

2. Technology Upgradation Fund Scheme (TUFS) For Textile Industry

Ministry of Textiles introduced the Technology up gradation fund scheme (TUFS) for textiles
and jute industry in April 1999 to facilitate induction of state-of-the- art technology by the
textile units. It includes the benefits like 5% interest reimbursement of the normal interest
charged by the lending agency on RTL, or 5% exchange fluctuation (interest & repayment) from
the base rate on FCL, or 15% credit linked capital subsidy for SSI sector, or 20% credit linked
capital subsidy for power loom sector, or 5% interest reimbursement plus 10% capital subsidy
for specified processing machinery.

3. Scheme for Technology Upgradation/ Establishment/ Modernization for Food

Processing Industries

This Scheme covers the following activities: Setting up/expansion/modernization of food

processing industries covering all segments viz fruits & vegetable, milk product, meat, poultry,
fishery, oil seeds and such other Agri-horticultural sectors leading to value addition and shelf
life enhancement including food flavors and colors, oleoresins, spices, coconut, mushroom,
hops. The assistance is in the form of grant subject to 25% of the plant & machinery and
technical civil work subject to a maximum of Rs. 50 lakh in General Areas and 33.33% up to Rs.
75 lakh in Difficult Areas.

4. Integrated Development of Leather Sector – Scheme for Leather Industry

The scheme is aimed at enabling existing tanneries, footwear, footwear components and leather
products units to upgrade leading to productivity gains, right-sizing of capacity, cost cutting,
design and development simultaneously encouraging entrepreneurs to diversify and set up new
units. Newly eligible units would be approved for assistance under the scheme only on
submission of the copy of all the required registration, NOCs from all concerned Government
Departments for setting up of the unit and when the factory building is ready for installation of
plant and machinery.

5. Credit Linked Capital Subsidy Scheme for Technology Upgradation (CLCSS)

Upgradation of the process as well as the corresponding plant and machinery is important to
help SMEs reduce the cost of production and remain price competitive in the global market. To
help SMEs flourish in international trade markets, the Ministry of Small Scale Industries (SSI)
runs a scheme for technology up gradation of Small Scale Industries. Known as the Credit
Linked Capital Subsidy Scheme (CLCSS), it aims at facilitating technology up gradation by
providing the upfront capital subsidy of 15% (limited to maximum Rs.15 lakhs) to SSI units for
credit availed by them for the modernisation of their plant and machinery. All sole
proprietorship, partnership firms, cooperative, private and public limited companies are eligible
for this scheme.

6. Market Development Assistance Scheme for Micro, Small & Medium Enterprises

The scheme offers funding for participation by manufacturing Small & Micro Enterprises in
International Trade Fairs/ Exhibitions under MSME India stall; sector-specific market studies by
Industry Associations/ Export Promotion Councils/ Federation of Indian Export Organisation;
initiating/ contesting anti-dumping cases by MSME Associations and reimbursement of 75% of
one-time registration fee; and 75% of annual fees (recurring) paid to GSI (Formerly EAN India)
by Small & Micro units for the first three years for bar code.
7. Technology & Quality Upgradation Support for MSMEs

In an effort to increase the adoption of quality standards by the MSME sector of India,
Government provides a subsidy for acquiring ISO certifications like ISO 9000, ISO 14001 and
HACCP. The initiative under the NMCP aims to increase productivity, upgrading technology
and conserving energy in the manufacturing process as well as expanding domestic and global
market share of Indian MSME products.

8. Mini Tools Room and Training Centre Scheme

To assist state governments set up Mini Tool Room and Training Centres, the Government of
India provides financial assistance in the form of one-time grant-in-aid. The financial aid equals
to 90% of the cost of machinery/equipment (maximum to Rs. 9 crore) in case new Mini Tool
Room has to be created and 75% of the cost (maximum to Rs. 7.50 crore) in case an existing
room has to be upgraded. The main objective of this scheme is to develop more tool room
facilities in order to provide technological support to the MSMEs and training facility in tool
manufacturing and tool design to create a workforce of skilled workers, supervisors,
engineers/designers, etc.

9. Government Subsidy for Small Business from NSIC

NSIC provides two basic subsidies. Such as raw material assistance and marketing
assistance. Raw Material Assistance Scheme aims at helping Small Scale Industries/Enterprises
by way of financing the purchase of Raw Material (both indigenous & imported). This gives an
opportunity to SSI to focus better on manufacturing quality products. Under the Scheme,
marketing support is provided to Micro, Small & Medium Enterprises through National Small
Industries Corporation (NSIC) to enhance competitiveness and marketability of their products.

10. Government Subsidy for Small Business for Cold Chain

The objective of the scheme of Cold Chain, Value Addition and Preservation Infrastructure is to
provide integrated cold chain and preservation infrastructure facilities without any break from
the farm gate to the consumer. It covers pre-cooling facilities at production sites, reefer vans,
mobile cooling units as well as value addition centers which include infrastructural facilities like
Processing/Multi-line Processing/ Collection Centres, etc. for horticulture, organic produce,
marine, dairy, meat and poultry etc. Individual, Groups of Entrepreneurs, Cooperative Societies,
Self Help Groups(SHGs), Farmers Producer Organizations (FPOs),NGOs, Central/State PSUs
etc. with a business interest in Cold Chain solutions are eligible to setup integrated cold chain
and preservation infrastructure and avail grant under the Scheme.

11. Under Technology Mission on Coconut (TMOC) For Coconut Producing Units

Do you want to start a coconut based business? Do you know there is a Government subsidy
scheme for innovative and value-added coconut producing units in India? Under Technology
Mission on Coconut (TMOC), Coconut Development Board is providing assistance for setting
up of coconut based industry other than the husk. Technology for the products like virgin
coconut oil and dietary fibre, packing of tender coconut water, spray dried milk powder, vinegar,
and other convenience foods are available with the board on payment of technology transfer fee.

3.4 SOURCE OF FINANCE FROM EQUITY AND DEBT

Financing is needed to start a business and ramp it up to profitability. There are several sources
to consider when looking for start-up financing. But first you need to consider how much money
you need and when you will need it.

The financial needs of a business will vary according to the type and size of the business. For
example, processing businesses are usually capital intensive, requiring large amounts of capital.
Retail businesses usually require less capital.

Debt and equity are the two major sources of financing. Government grants to finance certain
aspects of a business may be an option. Also, incentives may be available to locate in certain
communities and/or encourage activities in particular industries.

Equity Financing
Equity financing means exchanging a portion of the ownership of the business for a financial
investment in the business. The ownership stake resulting from an equity investment allows the
investor to share in the company’s profits. Equity involves a permanent investment in a company
and is not repaid by the company at a later date.
The investment should be properly defined in a formally created business entity. An equity stake
in a company can be in the form of membership units, as in the case of a limited liability
company or in the form of common or preferred stock as in a corporation.
Companies may establish different classes of stock to control voting rights among shareholders.
Similarly, companies may use different types of preferred stock. For example, common
stockholders can vote while preferred stockholders generally cannot. But common stockholders
are last in line for the company’s assets in case of default or bankruptcy. Preferred stockholders
receive a predetermined dividend before common stockholders receive a dividend.

 Personal Savings
The first place to look for money is your own savings or equity. Personal resources can
include profit-sharing or early retirement funds, real estate equity loans, or cash value
insurance policies.

 Life insurance policies - A standard feature of many life insurance policies is the owner’s
ability to borrow against the cash value of the policy. This does not include term insurance
because it has no cash value. The money can be used for business needs. It takes about two
years for a policy to accumulate sufficient cash value for borrowing. You may borrow
most of the cash value of the policy. The loan will reduce the face value of the policy and,
in the case of death; the loan has to be repaid before the beneficiaries of the policy receive
any payment.

 Home equity loans - A home equity loan is a loan backed by the value of the equity in
your home. If your home is paid for, it can be used to generate funds from the entire value
of your home. If your home has an existing mortgage, it can provide funds on the
difference between the value of the house and the unpaid mortgage amount. For example,
if your house is worth $150,000 with an outstanding mortgage of $60,000, you have
$90,000 in equity you can use as collateral for a home equity loan or line of credit. Some
home equity loans are set up as a revolving credit line from which you can draw the
amount needed at any time. The interest on a home equity loan is tax deductible.

 Friends and Relatives

Founders of a start-up business may look to private financing sources such as parents or
friends. It may be in the form of equity financing in which the friend or relative receives an
 ownership interest in the business. However, these investments should be made with the
same formality that would be used with outside investors.

 Venture Capital
Venture capital refers to financing that comes from companies or individuals in the
business of investing in young, privately held businesses. They provide capital to young
businesses in exchange for an ownership share of the business. Venture capital firms
usually don’t want to participate in the initial financing of a business unless the company
has management with a proven track record. Generally, they prefer to invest in companies
that have received significant equity investments from the founders and are already
profitable. They also prefer businesses that have a competitive advantage or a strong value
proposition in the form of a patent, a proven demand for the product, or a very special (and
protectable) idea. Venture capital investors often take a hands-on approach to their
investments, requiring representation on the board of directors and sometimes the hiring of
managers. Venture capital investors can provide valuable guidance and business advice.
However, they are looking for substantial returns on their investments and their objectives
may be at cross purposes with those of the founders. They are often focused on short-term
gain.

Venture capital firms are usually focused on creating an investment portfolio of businesses
with high-growth potential resulting in high rates of returns. These businesses are often
high-risk investments. They may look for annual returns of 25 to 30 percent on their
overall investment portfolio.

Because these are usually high-risk business investments, they want investments with
expected returns of 50 percent or more. Assuming that some business investments will
return 50 percent or more while others will fail, it is hoped that the overall portfolio will
return 25 to 30 percent.

More specifically, many venture capitalists subscribe to the 2-6-2 rule of thumb. This means
that typically two investments will yield high returns, six will yield moderate returns (or
just return their original investment), and two will fail.
 Angel Investors
Angel investors are individuals and businesses that are interested in helping small
businesses survive and grow. So their objective may be more than just focusing on
economic returns. Although angel investors often have somewhat of a mission focus, they
are still interested in profitability and security for their investment. So they may still make
many of the same demands as a venture capitalist.

Angel investors may be interested in the economic development of a specific geographic

area in which they are located. Angel investors may focus on earlier stage financing and
smaller financing amounts than venture capitalists.

 Government Grants
Federal and state governments often have financial assistance in the form of grants and/or
tax credits for start-up or expanding businesses.

 Equity Offerings
In this situation, the business sells stock directly to the public. Depending on the
circumstances, equity offerings can raise substantial amounts of funds. The structure of the
offering can take many forms and requires careful oversight by the company’s legal
representative.

 Initial Public Offerings

Initial Public Offerings (IPOs) are used when companies have profitable operations,
management stability, and strong demand for their products or services. This generally
doesn’t happen until companies have been in business for several years. To get to this
point, they usually will raise funds privately one or more times.

 Warrants
Warrants are a special type of instrument used for long-term financing. They are useful for
start-up companies to encourage investment by minimizing downside risk while providing
upside potential. For example, warrants can be issued to management in a start-up
company as part of the reimbursement package. A warrant is a security that grants the
owner of the warrant the right to buy stock in the issuing company at a pre-determined
(exercise) price at a future date (before a specified expiration date). Its value is the
 relationship of the market price of the stock to the purchase price (warrant price) of the
stock. If the market price of the stock rises above the warrant price, the holder can exercise
the warrant. This involves purchasing the stock at the warrant price. So, in this situation,
the warrant provides the opportunity to purchase the stock at a price below current market
price. If the current market price of the stock is below the warrant price, the warrant is
worthless because exercising the warrant would be the same as buying the stock at a price
higher than the current market price. So, the warrant is left to expire. Generally warrants
contain a specific date at which they expire if not exercised by that date.

Debt Financing
Debt financing involves borrowing funds from creditors with the stipulation of repaying the
borrowed funds plus interest at a specified future time. For the creditors (those lending the funds
to the business), the reward for providing the debt financing is the interest on the amount lent to
the borrower.

Debt financing may be secured or unsecured. Secured debt has collateral (a valuable asset which
the lender can attach to satisfy the loan in case of default by the borrower). Conversely,
unsecured debt does not have collateral and places the lender in a less secure position relative to
repayment in case of default.

Debt financing (loans) may be short term or long term in their repayment schedules. Generally,
short-term debt is used to finance current activities such as operations while long-term debt is
used to finance assets such as buildings and equipment.

 Friends and Relatives

Founders of start-up businesses may look to private sources such as family and friends
when starting a business. This may be in the form of debt capital at a low interest rate.
However, if you borrow from relatives or friends, it should be done with the same
formality as if it were borrowed from a commercial lender. This means creating and
executing a formal loan document that includes the amount borrowed, the interest rate,
specific repayment terms (based on the projected cash flow of the start-up business), and
collateral in case of default.
 Banks and Other Commercial Lenders
Banks and other commercial lenders are popular sources of business financing. Most
lenders require a solid business plan, positive track record, and plenty of collateral. These
are usually hard to come by for a start- up business. Once the business is underway and
profit and loss statements, cash flows budgets, and net worth statements are provided, the
company may be able to borrow additional funds.

 Commercial Finance Companies

Commercial finance companies may be considered when the business is unable to secure
financing from other commercial sources. These companies may be more willing to rely
on the quality of the collateral to repay the loan than the track record or profit projections
of your business. If the business does not have substantial personal assets or collateral, a
commercial finance company may not be the best place to secure financing. Also, the cost
of finance company money is usually higher than other commercial lenders.

 Government Programs
Federal, state, and local governments have programs designed to assist the financing of
new ventures and small businesses. The assistance is often in the form of a government
guarantee of the repayment of a loan from a conventional lender. The guarantee provides
the lender repayment assurance for a loan to a business that may have limited assets
available for collateral. The best known sources are the Small Business Administration and
the USDA Rural Development programs.

 Bonds
Bonds may be used to raise financing for a specific activity. They are a special type of debt
financing because the debt instrument is issued by the company. Bonds are different from
other debt financing instruments because the company specifies the interest rate and when
the company will pay back the principal (maturity date). Also, the company does not have
to make any payments on the principal (and may not make any interest payments) until the
specified maturity date. The price paid for the bond at the time it is issued is called its face
value.

When a company issues a bond it guarantees to pay back the principal (face value) plus
interest. From a financing perspective, issuing a bond offers the company the opportunity
 to access financing without having to pay it back until it has successfully applied the
funds. The risk for the investor is that the company will default or go bankrupt before the
maturity date. However, because bonds are a debt instrument, they are ahead of equity
holders for company assets.

Lease
A lease is a method of obtaining the use of assets for the business without using debt or equity
financing. It is a legal agreement between two parties that specifies the terms and conditions for
the rental use of a tangible resource such as a building and equipment. Lease payments are often
due annually. The agreement is usually between the company and a leasing or financing
organization and not directly between the company and the organization providing the assets.
When the lease ends, the asset is returned to the owner, the lease is renewed, or the asset is
purchased.

A lease may have an advantage because it does not tie up funds from purchasing an asset. It is
often compared to purchasing an asset with debt financing where the debt repayment is spread
over a period of years. However, lease payments often come at the beginning of the year where
debt payments come at the end of the year. So, the business may have more time to generate
funds for debt payments, although a down payment is usually required at the beginning of the
loan period.
Beyond the Bank Loan: 6 Alternative Financing Methods for Startups –

Many aspiring entrepreneurs have an idea for their business but lack the capital to actually start
it. Brand-new businesses are often turned down for bank loans, and even if your business is
established, funds can still be tough to secure. Loans funded by the Small Business
Administration are usually more accessible, but they are becoming increasingly competitive.

So what options are left for someone aspiring to be a small business owner? Here are six options
beyond bank loans for financing your startup.

Online lending
Online lenders have become a popular alternative to traditional business loans. These platforms
have the advantage of speed, as an application takes only about an hour to complete, and the
decision and accompanying funds can be issued within days. Because of the ease and quickness
of online lending, economist and former U.S. Treasury Secretary Larry Summers said at the
2015 lend It conference that he expects online lenders to eventually reach more than 70 percent
of small businesses.

Angel investors
Angel investors invest in early-stage or startup companies in exchange for a 20 to 25 percent
return on their investment. They have helped to start up many prominent companies, including
Google and Costco. Mark DiSalvo, CEO of private equity fund provider Semaphore said, "You
are likely to get an investor who has strategic experience, so they can provide tactical benefit to
the company they are investing in."

Venture capitalists
Venture capital is money that is given to help build new startups that are considered to have both
high-growth and high-risk potential. Fast-growth companies with an exit strategy already in
place can gain up to tens of millions of dollars that can be used to invest, network and grow their
company frequently.

Brian Haughey, assistant professor of finance and director of the investment center at Marist
College, said that because venture capitalists focus on specific industries, they can generally
offer advice to entrepreneurs on whether the product will be successful or what they need to do
to bring it to market. However, venture capitalists have a short leash when it comes to company
loyalty and often look to recover their investment within a three- to five-year time window, he
said.

Factoring/invoice advances
Through this process, a service provider will front you the money on invoices that have been
billed out, which you then pay back once the customer has settled the bill. This way, the
business can grow by providing the funds necessary to keep it going while waiting for customers
to pay for outstanding invoices.

Eyal Shinar, CEO of small business cash flow management company Fundbox, says these
advances allow companies to close the pay gap between billed work and payments to suppliers
and contractors.
"By closing the pay gap, companies can accept new projects more quickly," Shinar told Business
News Daily. "Our goal is to help business owners grow their businesses and hire new workers
by ensuring steady cash flow."

Crowdfunding
Crowdfunding on sites such as Kickstarter and Indiegogo can give a boost to financing a small
business. These sites allow businesses to pool small investments from a number of investors
instead of having to look for a single investment.

Make sure to read the fine print of different crowdfunding sites before making your choice, as
some sites have payment-processing fees, or require businesses to raise their full stated goal in
order to keep any of the money raised.

Grants
Businesses focused on science or research may be able to get grants from the government. The
SBA offers grants through the Small Business Innovation Research (SBIR) and Small Business
Technology Transfer (STTR) programs. Recipients of these grants are required to meet federal
research-and-development goals, and have a high potential for commercialization.
3.5 FOREIGN INVESTORS IN SSI

Foreign direct investment (FDI) in small-scale industry (SSI) It could be just what the
sector needs. In fact, the governments reported move to liberalize FDI here by shifting the
approval regime from the case-by-case approach currently used by the FIPB to the automatic
route, and by perhaps even raising the industry-specific caps on foreign equity ownership, could
boost India’s prospects in the race to secure global capital for its economy. Foreign money
brings with it new expertise, international discipline in the deployment of funds and sometimes
even strategic inputs, from which entire market segments tend to benefit. Ideally, of course, the
entire SSI list there are 35 industries still on it reserved for small players should be scrapped and
100% FDI invited in all manufacturing sectors, big and small, with only a handful of strategic
industries kept out of foreign control. But if the proposed FDI-in-SSI move has the effect of
impressing upon our reservationists the value of foreign inputs, then maybe this is clever ways to
pry open the sector for bigger and better things to come. on the SSI list include food products
like pickles, chutneys and bread, most ground and processed spices and a few edible oils like
non-solvent extracted mustard and groundnut oil. One might think that foreign investors interest
in these is rather low, but this will not be known until the doors are properly thrown open, no
FIPB questions asked. Steel furniture and domestic utensils, which have huge export potential
and are in desperate need of quality upgradation even within India, might attract a lot more
interest. All in all, however, business opportunities can be found in the unlikeliest of places, and
it would be good if global capital can reach wherever it wants to without needless restrictions.
For decades on end, India’s stance on foreign investment was one of suspicion, and protectionist
policies did Indian business no good by letting it get away with
The current case-by-case FDI system has far too many stipulations to make any
difference to the fortunes of the sector. The 35 industries mediocrity (or worse). It is time India
started pushing all its manufacturing units without exception towards global excellence. The
money is readily available. The talent exists. Old policies from the licenser-permit raj days
should not come in the way.
Recently, India has allowed Foreign Direct Investment up to 100% in many manufacturing
industries which were designated as Small Scale Industries.
India further ended in February 2008 the monopoly of small-scale units on 79 items, leaving just
35 on the reserved list that once had as many as 873 items.

While industrial policy reforms began with the new industrial policy statement of 1991, India
remained wary of intruding on the politically sensitive issue of reservation for small-scale
industry till the end of the 1990s.

Thus, while at the turn of the millennium the number of items reserved for SSI units had come
down from its peak of 873 in 1984, well over 800 items remained on the list.

Since 2002, the scenario has changed dramatically. In these last seven years, around 790 items -
including things like farm equipment, toothpaste, ice cream, footwear, detergents and even
garments - have been knocked off the list.

Thus, for the first time in over 40 years, there are today as few as 35 items reserved for SSI
units. When the policy of reservation was first introduced in 1967, there were just 47 items
reserved for small-scale manufacturers.

However, what was till then an administrative decision was given legal backing by an
amendment enacted in 1984 to the Industries (Development and Regulation) Act, 1951. That
year also saw the number of items reserved reaching a peak of 873.

Reservation means that units producing the reserved items cannot go beyond a stipulated cap on
investment in plant and machinery. Moreover, FDI was allowed on a limited basis in SSI's.

In the old days, therefore, it was standard practice for mass consumption items covered by the
reserved list to be farmed out by large marketing companies to dozens of small units, thereby
negating economies of scale.

What it also meant was that some companies resorted to manufacturing completely new class of
products. So, if ice cream was reserved for small scale units, a large player could always
produce, say, 'frozen desserts'.
Apart from the steady trickle of de-reservation over the last decade, one of the measures taken to
get over this problem without confronting the political problems involved was to allow foreign
investment even in reserved items with the caveat that such units would have to fulfill an export
obligation.
For players who were already manufacturing items that were suddenly reserved in 1967, the
government came up with what was carry-on-business license which capped their capacity, and
fixed the location of the plant and the goods produced.
The latest de-reservation means that pastries, hard boiled sugar candy and tooth powder can be
manufactured by large units too. Similarly, buckets, paper bags, paper cups, envelopes, letter
pads, paper napkins might not be manufactured only in small units but also in specialized
factories.
The same for sesame and rapeseed oil, which are not solvent extracted, a host of chemicals and
dyes paints be it distempers.
Electrical goods, which include geysers, hot air blowers and toasters, too are out of the reserved
list, as are ballpoint and fountain pens.

The remaining 35 items that would be produced by the SSI sector are food and allied items,
wood, wood products, paper, paper products, plastic products, organic chemicals, drugs, drug
intermediates, other chemicals, chemical products, glass, ceramics, mechanical engineering and
electrical machines, appliances and apparatus.

In a nutshell, only 35 items remain reserved for the small scale industries sector. For foreign
investors, it means that in those 35 reserved sectors foreign investment is allowed on a limited
basis, except where certain conditions are met.
CURRENT SCENARIO:

The current FDI norms impose a ceiling of 24 per cent FDI for companies in the SSI sector i.e.
small scale units having capital investment in plant and machinery not exceeding Rs. 50,000,000
(USD 1,250,000). Further, SSI units with foreign investment exceeding the notified sectoral cap
are liable to lose their status as SSI units.

With a view to liberalizing the SSI sector and augmenting economic activity in the country, it is
announced that FDI norms governing SSIs would be relaxed and a notification is likely to be
tabled before Parliament, enabling an increase in the limits of FDI in the SSI sector.

If such notification is passed, SSI units would be eligible to raise foreign equity in accordance
with caps governing the sectors in which they operate, thereby improving their access to
technology and capital and assisting in the growth and modernization of the sector.

3.6 INSTITUTIONS PROVIDING FINANCIAL ASSISTANCE

A. SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

SIDBI is wholly owned subsidiary of IDBI was setup in 1989 as the principal financial
institution to promote finance and develop small business. It was set up with a view to ensure
larger flow of assistance to small business units

BASIC OBJECTIVES:
1. Initiating steps for technological upgradation and modernization of existing units.
2. Expanding channels of marketing in small sector.
3. Promotion of employment oriented industries especially in semi urban areas to generate
employment. SIDBI provides assistance to small business through existing credit delivery
system.
MAJOR ACTIVITIES:

1. Granting direct assistance and refinancing loans.

2. Extension of seed capital/ soft loans.
3. Financial facilities relating to marketing and development of industrial areas and technical
support.
4. Direct discounting and rediscounting of short term trade bills.

The small and medium Enterprises SME fund of Rs. 10000 crore was implemented by SIDBI
since 2004.

SCHEMES BY SIDBI

1. General scheme for all forms of organization in small scale sector for setting up new
small business unit or for expansion modernization, diversification, etc.
2. Scheme for cottage village and tiny industries.
a) Composite loan scheme.
b) Scheme for artisans, village / cottage industries for equipment and/or working
capital and also for work shed.
3. Specific schemes for all forms of small business for acquisition of
i) In house quality control
ii) Computer and related accessories.
iii) For manufacturing and installation of renewable energy and energy saving
system.
iv) Equipment refinance schemes
v) Schemes for small road transport operators.
4. Schemes for marketing activities.
a) Schemes for marketing activities.
b) Schemes for purchasing mobile sales van.
5. Schemes for medical profession
This is for entrepreneurs setting up hospitals/ nursing home/home/ poly clinic/ small
hospitals
 a) Schemes for hospital / nursing homes.
b) Schemes for acquisition of electro medical medical and other equipments.
6. Schemes for tourism related activities.
a) Scheme for tourism
b) Scheme for hotel and restaurant projects for setting up or development of cultural
centers, convention centers, tourist service agencies, etc.
7. Schemes for women entrepreneurs
a) Mahila udyam nidhi
b) Schemes for women entrepreneurs

Those schemes are provided for setting up new projects in tiny or small sector and also for
rehabilitation of viable sick units. Special schemes for assistance to ex-servicemen including
widows of ex-servicemen sponsored by Director General Ministry of Defense.

B. National bank for agriculture and Rural Development (NABARD) :

National Bank for Agriculture and Rural Development (NABARD) is an apex development
bank in India, headquartered at Mumbai with branches all over India. The Bank has been
entrusted with "matters concerning policy, planning and operations in the field of credit for
agriculture and other economic activities in rural areas in India". NABARD is active in
developing financial inclusion policy and is a member of the Alliance for Financial Inclusion

NABARD was established on the recommendations of B.Shivaraman Committee, (by Act 61,
1981 of Parliament) on 12 July 1982 to implement the National Bank for Agriculture and Rural
Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural
Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and
Development Corporation (ARDC). It is one of the premier agencies providing developmental
credit in rural areas. NABARD is India's specialised bank for Agriculture and Rural
Development in India.
The initial corpus of NABARD was Rs.100 crore. Consequent to the revision in the composition
of share capital between Government of India and RBI, the paid up capital as on 31 March 2015,
stood at Rs.5000 crore with Government of India holding Rs.4,980 crore (99.60%) and Reserve
Bank of India Rs.20.00 crore (0.40%).RBI sold its stake in NABARD to the Government of
India, which now holds 99% stake.

International associates of NABARD include World Bank-affiliated organizations and global

developmental agencies working in the field of agriculture and rural development. These
organizations help NABARD by advising and giving monetary aid for the upliftment of the
people in the rural areas and optimizing the agricultural process.

ROLE:

NABARD has been instrumental in grounding rural, social innovations and social enterprises in
the rural hinterlands. It has in the process partnered with about 4000 partner organizations in
grounding many of the interventions be it, SHG-Bank Linkage program, tree-based tribal
communities’ livelihoods initiative, watershed approach in soil and water conservation,
increasing crop productivity initiatives through lead crop initiative or dissemination of
information flow to agrarian communities through Farmer clubs. Despite all this, it pays huge
taxes too, to the exchequer – figuring in the top 50 tax payers consistently. NABARD virtually
ploughs back all the profits for development spending, in their unending search for solutions and
answers. Thus the organisation had developed a huge amount of trust capital in its 3 decades of
work with rural communities.[7]

1.NABARD is the most important institution in the country which looks after the development
of the cottage industry, small industry and village industry, and other rural industries.

2.NABARD also reaches out to allied economies and supports and promotes integrated
development.

3.NABARD discharge its duty by undertaking the following roles :

1. Serves as an apex financing agency for the institutions providing investment and
production credit for promoting the various developmental activities in rural areas
 2. Takes measures towards institution building for improving absorptive capacity of the
credit delivery system, including monitoring, formulation of rehabilitation schemes,
restructuring of credit institutions, training of personnel, etc.
3. Co-ordinates the rural financing activities of all institutions engaged in developmental
work at the field level and maintains liaison with Government of India, state
governments, Reserve Bank of India (RBI) and other national level institutions
concerned with policy formulation
4. Undertakes monitoring and evaluation of projects refinanced by it.
5. NABARD refinances the financial institutions which finances the rural sector.
6. NABARD partakes in development of institutions which help the rural economy.
7. NABARD also keeps a check on its client institutes.
8. It regulates the institutions which provide financial help to the rural economy.
9. It provides training facilities to the institutions working in the field of rural upliftment.
10. It regulates the cooperative banks and the RRB’s, and manages talent acquisition through
IBPS CWE.

NABARD's refinance is available to state co-operative agriculture and rural development banks
(SCARDBs), state co-operative banks (SCBs), regional rural banks (RRBs), commercial banks
(CBs) and other financial institutions approved by RBI. While the ultimate beneficiaries of
investment credit can be individuals, partnership concerns, companies, State-owned corporations
or co-operative societies, production credit is generally given to individuals. NABARD has its
head office at Mumbai, India.

NABARD Regional Office[RO] has a Chief General Manager [CGMs] as its head, and the Head
office has several top executives viz the Executive Directors[ED], Managing Directors[MD],
and the Chairperson.It has 336 District Offices across the country, one special cell at Srinagar. It
also has 6 training establishments.

NABARD is also known for its 'SHG Bank Linkage Programme' which encourages India's
banks to lend to self-help groups (SHGs). Largely because SHGs are composed mainly of poor
women, this has evolved into an important Indian tool for microfinance. By March 2006, 22 lakh
SHGs representing 3.3 core members had to be linked to credit through this programme.[8]
NABARD also has a portfolio of Natural Resource Management Programmes involving diverse
fields like Watershed Development, Tribal Development and Farm Innovation through dedicated
funds set up for the purpose.

C. KVIC (KHADI AND VILLAGE INDUSRIES COMMISSION)

The Khadi and Village Industries Commission (KVIC) is a statutory body formed by the
Government of India, under the Act of Parliament, 'Khadi and Village Industries Commission
Act of 1956'. It is an apex organisation under the Ministry of Micro, Small and Medium
Enterprises, with regard to khadi and village industries within India, which seeks to - "plan,
promote, facilitate, organize and assist in the establishment and development of khadi and
village industries in the rural areas in coordination with other agencies engaged in rural
development wherever necessary.".[3] In April 1957, it took over the work of former All India
Khadi and Village Industries Board.[4] The First Director of KVIC was Late Sardar KA
Venkataramaiya, a veteran freedom fighter from Karnataka. Its head office is based in Mumbai,
with its six zonal offices in Delhi, Bhopal, Bangalore, Kolkata, Mumbai and Guwahati. Other
than its zonal offices, it has offices in 29 states for the implementation of its various
programmes.

Objectives of the Commission

The Commission has three main objectives which guide its functioning. These are -

 The Social Objective - Providing employment in rural areas

 The Economic Objective - Providing salable articles
 The Wider Objective - Creating self-reliance amongst people and building up a strong
rural community spirit.

The commission seeks to achieve these objectives by implementing and monitoring various
schemes and programs.

Implementation of Schemes and Programs

The process of Implementation of schemes and programs starts at the Ministry of Micro, Small
and Medium Enterprises which is the administrative head of the programs. The Ministry
receives funds from the Central Government of India, and routes these to the Khadi and Village
Industries Commission for the implementation of programs and schemes related to Khadi and
Village Industries.

The Khadi and Village Industries Commission then uses these funds to implement its programs
either directly - Through its 29 state offices, by directly funding Khadi and Village institutions
and co-operatives, or indirectly through 33Khadi and Village Industries Boards, which are
statutory bodies formed by the state governments within India, set up for the purpose of
promoting Khadi and Village Industries in their respective states. The Khadi and Village
Industries Boards, in turn, fund Khadi and Village Institutions/Co-operatives/Entrepreneurs.

At present the developmental programmes of the commission are executed through, 5600
registered institutions, 30,138 Cooperative societies and about 9485,000 people.

Schemes and Programs of the Commission

Prime Ministers Employment Generation Program (PMEGP)

The Prime Minister's Employment Generation Programme (PMEGP) is the result of the merger
of two schemes - Prime Minister's Rojgar Yojana (PMRY) and The Rural Employment
Generation Programme (REGP)

Under the scheme, the beneficiary is required to invest his/her own contribution of 10 per cent of
the project cost. In case of Schedule Castes/Schedule Tribes and beneficiaries from other weaker
sections, the beneficiary's contribution is 5 per cent of the project cost. The remaining 90 and
95% as of the project cost, as the case may be, is granted by banks specified under the scheme.
The Beneficiaries under the scheme are refunded a certain amount of the loan (25% for General,
35% for weaker sections in rural areas) which is credited after three years from the date that the
loan was extended.

Interest Subsidy Eligibility Certification Scheme (ISEC)

The Interest Subsidy Eligibility Certificate (ISEC) Scheme is the major source of funding for the
Khadi programme. It was introduced in May 1977 to mobilize funds from banking institutions to
fill the gap in the actual fund requirement and its availability from budgetary sources.
Under this scheme, loans are provided by the banks to the members to meet their working/fixed
capital requirements. These loans are provided at a concessional interest rate of 4% p.a. The
difference between the actual interest rate and the concessional rate is borne by the commission
under the 'grants' head of its budget. However, only members producing Khadi or Polyvastra (a
type of Khadi) are eligible for this scheme.

Rebate Scheme: The rebate on sales of Khadi and Khadi products is made available by the
Government so as to make the price of Khadi and Khadi products competitive with other
textiles. Normal rebate (10 per cent) all through the year and an additional special rebate (10 per
cent) for 108 days in a year, is given to the customers. The rebate is allowed only on the sales
made by the institutions/centers run by the Commission/State Boards and also at the sales
centers run by the registered institutions which are engaged in the production of Khadi and
polyvastra.

Recently, the finance ministry has asked the micro, small and medium enterprises ministry to
redraw its rebate scheme for Khadi and village industries. Its view is that the "ministry should
approach the plan commission and not seek year-to-year extension of the scheme. Furthermore,
it has asked the MSME ministry to redesign the scheme in a manner that it should benefit the
artisan and not the seller, which (has been) the case so far" With regard to this, A proposal
received from the Commission for introducing Market Development Assistance as a possible
alternative to Rebate on Sale is being considered by the Government.

D. GOVERNMENT POLICY PACKAGE 2000:

On August 30, 2000, S.P Gupta committee. Recommended comprehensive policy package. Main
objective was to meet global competition.

Important Features of this policy:

1. An increase in investment limit from Rs. 5 lacs to 10 lakh in industry related to service
and business enterprise.

2. Raised the limit for excise duty exemption from Rs. 50 lacs to 1 crore.
 3. Providing grants of Rs 75000 to each small unit for obtaining ISO 9000 certification till
the end of 10th plan.

4. Conducting the third census of small industry after a gap of 12 years.

3.7 FINANCE AND CREDIT AS A MEASURE PROBLEM IN INDIA FOR

SMALL BUSINESS

Finance is one of the most important problem confronting small scale industries Finance
is the life blood of an organisation and no organisation can function proper у in the absence of
adequate funds. The scarcity of capital and inadequate availability of credit facilities are the
major causes of this problem.

Firstly, adequate funds are not available and secondly, entrepreneurs due to weak
economic base, have lower credit worthiness. Neither they are having their own resources nov
are others prepared to lend them. Entrepreneurs are forced to borrow money from money lenders
at exorbitant rate of interest and this upsets all their calculations.

After nationalisation, banks have started financing this sector. These enterprises are still
struggling with the problem of inadequate availability of high cost funds. These enterprises are
promoting various social objectives and in order to facilitate then working adequate credit on
easier terms and conditions must be provided to them.

Micro, Small and Medium enterprises (MSME) constitute the dominant form of business
organisation worldwide. For instance, 99% of enterprises in European Union and about 80% in
USA were small enterprises. In India too, SSIs’ share is as high as 97%. Out of 42.12 million
non-farm enterprises, 0.58 million are factory units. (Source– 5th Economic Census – Provisional
Result – June 2006). It is estimated that out of 5.8 lakh factory units, about 5 lakh are factory
SSIs and “Medium Enterprises” as per the new definition of MSMEs adopted by the
Government of India in June 2006.
Institutional Credit Structure

A multi-level institutional structure exists for financing of small enterprises and non-
farm enterprises in India. This consists of commercial banks, cooperative banks, RRBs, State
Financial Corporations. Credit to small enterprises comes under priority sector lending
programme of banks. The Reserve Bank of India (RBI) constantly reviews the flow of credit to
this sector. To improve the flow of credit, the RBI has constituted several committees and
working groups since 1991. Notable among the committees are Nayak Committee, Kapur
Committee and Ganguly Committee. Appropriate measures are taken by the RBI and
Government from time to time based upon the decision of the Standing Committee on SSI set up
at the RBI. An exclusive refinancing bank, called Small Industries Development Bank of India
(SIDBI) was set up in 1990. The issue of providing micro credit to micro-enterprises through
development of SHG-Banks Linkage rests mainly with National Bank for Agricultural and Rural
Development (NABARD). However, major part of SHG-Bank Linkage credit is in the form of
micro credit to meet production and consumption needs and not for micro – enterprises.

Year No. of Units Un-registered Total Units Production Employment Export

registered (in lakh) (in lakh) (Rs. in crore) (in lakh) (Rs. in crore)

(in lakh) (Constant price

Base 1993)

2000-01 13.10 88.00 101.10 184428 239.09 69797

2001-02 13.75 91.46 105.21 195613 249.09 71244

2002-03 13.68 94.81 108.49 210636 260.13 86013

2003-04 15.54 98.41 113.95 228730 271.36 97644

2004-05 16.38 102.15 118.53 245747 282.82 NA

(Source: Annual Report 2005 – 06, Ministry of SSI)

Status of Credit Flow to MSMEs

Major complaints of the MSME sector relating to bank finance are that it is inadequate, delayed
and costly. The status of SSI sector and flow of credit to the sector from scheduled commercial
banks and public sector banks could be obtained from the Table 1.

During the five year period, number of SSIs has increased from 101.1 lakh in 2000 – 01 to 118.5
lakh in 2004 – 05 and employment from 239 lakh to 283 lakh during the same period. The sector
recorded an annual growth of 4.4% in units, 8.2% in output and 5.2% in employment during
2000– 01 to 2004 – 05. Currently it contributes 39% of industrial production and 30% of
national export.

In view of the important role played by SSIs, it is essential to look into the status of credit flow
to SSIs from the scheduled commercial banks which is the prime source of credit to the sector. It
may be clarified here that in banking parlance, ‘SSI sector’ covers both modern SSIs eligible for
registration at DICs and traditional industries like khadi and village industries, handloom,
handicraft, coir, sericulture, etc.

Flow of Credit from Commercial Banks to SSI Sector

Year Net Bank Credit Annual Credit to SSI Annual SSI as % of

(Rs. in crore) Growth (%) (Rs. in crore) Growth (%) Net Bank Credit

1994-95 192424 —- 29175 —- 15.17

1995-96 228198 18.75 34246 17.12 14.98

1996-97 245999 17.89 38196 11.40 15.52

1997-98 297265 21.20 45771 19.60 15.40

1998-99 339477 14.14 51679 12.66 15.22

1999-00 398205 17.40 57035 10.46 14.31

2000-01 467206 17.33 60141 5.43 12.86

2001-02 535063 14.56 67107 11.65 12.53

2002-03 668576 25.04 64707 (-) 3.60 9.67

 Credit Flow to SSI Sector from
Public Sector Banks (PSBs) ( Rs. Crore)

S. No. Year As at the end of March

Net Bank Credit (NBC) Credit to SSI % to NBC

1. 1998 218219 38109 17.5

2003-04 763855 14.20 71209 10.04 9.32

2004-05 971809 27.22 83179 16.71 8.55

2. 1999 265554 42591 16.0

3. 2000 316427 46045 14.6

4. 2001 341291 48400 14.2

5. 2002 396954 49743 12.5

6. 2003 477899 52988 11.1

7. 2004 558849 58278 10.4

8. 2005 718722 67634 9.4

9. 2006 966452 82275 8.5

(Source: RBI)

The pace of growth in SSI credit has not kept pace with the growth in net bank credit (NBC)
(see Table 2 and 3). While NBC grew by 17.33% in 2000 – 01, SSI credit grew by only 5.43%
that year and while NBC grew by 25.04% in 2002 – 03, SSI credit recorded a negative growth of
3.60%. Though SSI loans come under priority sector lending programme of the scheduled
commercial banks, the most disturbing trend to note is the decline in flow of credit to SSI in
percentageterms in relation to NBC. It has declined from 15.52% in 1996-97 to 8.55% in 2004-
05. In the absence of any quantitative restriction to SSI lending within the priority sector, the
commercial banks have enough scope for deploying funds to other priority sectors like housing,
retail trade, education, consumption and transport purposes, etc. and thus, try to meet the overall
target.

Further, while the absolute amount of advances from the public sector banks to SSIs had
increased from Rs. 38109 crore in 1998 to Rs.82275 crore in 2006 (Table – 3), the share of the
credit to the SSI sector in the NBC had declined from 17.5% as at the end of March,.1998 to
8.5% as at March, 2006. The continuing decline of credit to SSI sector is a matter of serious
concern as adequate credit flow is vital for achieving12% annual growth rate for the SSI sector
as envisaged in the 10th Plan.

Tiny Units

Sixty per cent of the total SSI credit is earmarked for tiny units, (now micro enterprises) as per
the guidelines of the RBI. The flow of credit to tiny sector since 2000 is as under:
 Credit Flow to Tiny Units from Public Sector Banks

( Rs. Crore)

Net Bank credit to tiny sector 24742 26019 27030 26937 30826 28062 33314

Credit to tiny sector as % of 54.0 53.7 54.3 50.8 52.9 41.5 40.5

net SSI credit

  Micro Finance

A notable development in recent years has been the phenomenal growth of micro-credit to the
poor and needy segment considered as altogether non-bankable segment by the banking sector.
This has been possible by the initiative of the RBI and the lead role played by NABARD and
SIDBI. Though there are 3 accepted models in micro financing in India namely (1) SHG-Bank
Linkage model (II) Grameen model (based on Grameen Bank of Bangladesh and (III) Individual
Banking Model operated through Micro Financing Institutions (MFIs), the first model is most
popular in India.90% of the micro credit is being disbursed through the SHG-Bank Linkage
Model. In fact, with emphasis on capacity building of MFIs and intermediaries, micro credit has
transformed to micro financing.

The phenomenal growth of micro financing is evident from the fact that the number of SHGs
which was 4757 in 1995-96, had increased to 1.83 million by the end of December, 2005 and the
volume of credit had increased from Rs. 6 Crore to Rs. 8319 crore during the same period.
However, in spite of this phenomenal growth, micro financing has not attained the shape of a
movement. There exists a vast gap in demand and supply of credit. As per one study, micro
credit requirement was assessed at Rs. 50000 crore for the year 1999-2000. By adding other
requirements such as housing loan, education loan and micro-enterprise loan, the upper ceiling of
loan requirement was assessed at Rs. 2 lakh crore of micro credit. At present rate of cost
escalation and taking the base at Rs.50000 crore, it is estimated that the present minimum
requirement of micro credit may be Rs. 70000 crore. As against this, the supply is not more than
Rs. 10000 crore.

 Innovative Financing

The small enterprises have, so far, depended mostly on banks and traditional modes of financing
namely term loan and working capital from banks. Micro finance through MFIs and SHGs, no
doubt an innovative means of financing, is only in its initial stage and at best only an indirect
form of bank finance. Unlike large enterprises which raise finance from capital market and
external sources like foreign financial investors besides commercial banks, small enterprises and
other non-farm enterprises are solely dependent on banks. With the growing financial need,
emergence of new product lines, emergence of risky and untried ventures, it is high time that
some innovative means of financing for the non-farm unorganized enterprises are explored.
The possibility of linking SMEs, with capital market needs to be explored. Capital market has
huge amount of money and institutions like SIDBI will have to design instruments to link SMEs
with capital market. The emergence of clusters and with emphasis on making them as the
strategy of SME development would make it possible to rope in capital market to SME
financing. This will bring new capital to this sector. Another, innovative instrument to be tried
for newly emerging ventures like bio-tech, food processing, IT, pharmaceutical and other
knowledge based sectors in India is creation of venture capital funds to meet the equity
requirements of these units in the initial phase of their working and the knowledge sector
including BPO, KPO, Life sciences, on-line business, technology-enabled design and
manufacturing as well as in emerging areas of nano-technology and environmental technology.
Some venture funds, have already been set up by SIDBI, SBICAP, etc. Third area of innovative
financing, which needs popularization in India, is the development of factoring services. This is
necessary since a major problem faced by MSMEs, is delayed payment from the units to whom
they have supplied goods. Banks can work as factors on behalf of MSMEs, to collect the dues on
their behalf by discounting the bills at nominal service charge. Likewise, other means of
financing SMEs, such as lease finance, hire-purchase finance and propagation of incubation
centers could be undertaken to inject additional fund to the MSMEs in order to bridge the
financial gap.

 The Sum up

The development of an efficient MSME lending environment requires that economic agents
involved i.e. the lenders and borrowers should receive incentives to make correct economic
choices. For this, they must have the relevant information needed to make such decisions.
Available evidence suggests that in the case of lending to even larger small enterprises, these
requirements are not always met. In a market led economy, in the presence of information
asymmetries, prospective lenders may not be able to correctly appraise true value of the project
proposals. The protection of creditors’ right is of particular importance in the case of bank
finance. At the same time, government intervention is required for micro enterprises and smaller
among small enterprises. Since in the normal commercial operation of the commercial banks,
there is practically not much scope for this category of enterprises. This calls for a proper mix of
policy support for lower segment and demand – supply based credit policy for upper segment of
MSME sector. In the context of jobless growth in formal sector, such a mix is necessary. Banks
should also diversity the loan portfolio from existing production loan to include technology loan,
marketing loan and cluster development loan. Some innovative instruments should be tried to
bridge the financing gap. The task of financing MSMEs is challenging but not unachievable. The
sector needs proper attention since it has the potential to generate large scale employment and
also emerge as the engine of growth.
4. CONCLUSION

In small-scale industries after maximum use of trade credit, for additional funds, most of
the industries approach commercial banks for short-term borrowings. Commercial banks play the
most significant role in providing working capital finance to small industries because most of
other financial institutions do not provided finance for working capital. More than two-third
industries in small sector have taken term loans for investments in plants & machineries, land
and buildings or permanent addition to current assets.
Out of them again more than two-third small industries have approached commercial
banks for term loans due to stringent terms and conditions of financial institutions for granting
term loans. Only approx. and one-tenth of them have taken loans from these financial
institutions. Remaining industries have taken term loans from non-financial institutions. The
owners’ funds in small-scale industries, owing to their nature of organization and limited access
of the owners to the market, are in short supply.
Approximately only one-fifth industries are using more than two-third owners’ funds out
of the total capital used in the business for long-term. And in 67.8% industries more than half of
the total capital is contributed by outsiders. In small sector only 14.8% industries solely depend
on owners’ funds for long-term investment and these are financially sound, less capital intensive
and as well as old units, which have repaid the loan amount.
The small industrial units are treated as one of the priority sectors for the provision of credit
facilities by commercial banks and other financial agencies. The broad framework of the policy
in relation to SSIs pursued by commercial banks is presented below.
a. The small scale industry is in the priority sector and the banks, therefore, provide funds to this
sector on priority basis,
b. Within small scale sector, preference is given to units that produce essential goods and/or
items in the form of inputs for the core sector,
c. Units enjoying credit limits of Rs. 2 lakh and below can be given funds at interest rates below
the minimum lending rate prescribed by the Reserve Bank of India.
d. The Reserve Bank of India has suggested that added attention should be given to provide term
loans for small industrial units with investment of up to Rs. 25,000 each. There has been a
marked improvement in the advances made by the scheduled commercial banks to small scale
industrial units after the nationalization of 14 major commercial banks in July 1969.15The Asian
Development Bank (ADB) is also showing keen interest in the development of SSIs.
At the instance of the United Nations Industrial Development Organisation (UNIDO), the ADB
has been financing industrial estate projects and promoting development of ancillary industrial
units. The ADB in which India is also a member provides foreign exchange resources to the
national credit agencies so that small scale industries are able to obtain imported raw materials,
machinery and equipments. The State Finance Corporations provide medium and long-term
loans to SSIs. Under the State Aid to Industries Act, the State Directorates of Industries give
loans to small industries on the security of personal bonds and sureties for obtaining premises,
machinery and/or working capital. The loans are re-payable on easy installments at rates of
interest varying
from 3 to 5 per cent.
 APPENDICES:

QUESTIONNAIRE FOR SURVEY ON “INVESTMENT OPPORTUNITIES

IN SMALL SCALE SECTOR”

SECTION – I (Personal Details)

A) Name-
B) Occupation-
C) Gender-
D) Place of residence-

Age-

 20-30
 30-40
 40-50
 50 & above

Annual Income

 2 lakhs to 3 lakhs
 3 lakhs to 4 lakhs
 4 lakhs to 5 lakhs
 5 lakhs & above

1. WHICH ARE THE AVENUES YOU PREFER TO INVEST?

 Small scale sector

 Large scale sector.

 Debt

 Equity
2. HAVE YOU EVER INVESTED IN SMALL SCALE SECTOR?

 Yes

 No

3. WOULD YOU LIKE TO INVEST IN SMALL SCALE SECTOR IN FUTURE?

 Yes

 No

4. IS FINANCING IN SSI IS A GOOD INVESTMENT?

 Yes

 No

5. WHAT IS THE BEST SOURCE OF FINANCE IN SSI ?

 Bank

 Debt

 Equity

 Government

6. HOW MUCH RETURNS DO YOU EXPECT AFTER 5 YEARS?

 High

 Average

 Less
7. WHAT FACTORS ARE CONSIDERED WHEN YOU MAKE INVESTMENT IN SSI?

 Goodwill of the firm

 Performance of last year

8. WHICH IS MORE PROFITABLE LARGE SCALE OR SMALL SCALE?

 Large scale sector

 Small scale sector

9. IS FINANCING IN SSI IN LIQUID?

 Yes

 No

10. DO YOU GET ANY HELP FROM INTERNET FOR FINANCING IN SSI?

 Yes

 No

11. ACCORDING TO YOU IS THERE ANY ECONOMIC DEVELOPMENT THROUGH

SSI?

 High

 Average

 Low
12. DOES BROKER AFFECT YOUR INVESTMENT DECISION?

 Yes

 No

13. ARE YOU SATISFIED WITH REFORMS TAKEN BY THE GOVERNMENT FROM
DEVELOPMENT OF SSI?

 Yes

 No

14. DO YOU THINK THERE WILL BE FURTHER DEVELOPMENT IN SSI?

 Yes

 No

15. IS SMALL SCALE SECTOR GROWING IN INDIA COMPARITIVE TO LARGE

SCALE SECTOR?

 Yes

 No
BIBLIOGRAPHY

Newspapers:

The Times of India

The Economic Times

Websites:

www.sourceoffinancing.in

www.wikipedia.com

www.governmentsubsidies.com

www.statisticalview.com

articles.economictimes.indiatimes.com

www.aarthashastra.com

www.mahilabachatgat.co.in

www.investopedia.com