MEANING OF SMALL AND MEDIUM ENTERPRISES

SMALL AND MEDIUM ENTERPRISES (SMEs) are key players in the transformation of the knowledge economy. Their ability to apply, adapt and spread new technologies, as well as to create and develop them, is unique. Realizing the full potential of SMEs is an essential part of the Unions strategy for maintaining prosperity and high-quality employment. The World Commission is keen that all technology oriented. SMEs should consider participating in its Research Framework Programs. The scope and operational success helps to categorize enterprises. The initial capital investment made and the market for the product or service is very essential to understand the bifurcation. There are companies that are the outcome of huge capital investments, while there also some that are launched without much fan-fare and with very limited funds. However, the vision and the initiative remain the same for both. Small and Medium scale industries are those industries that are set-up and operated within limited budget and operations. The investors are usually small business men, who intend to cater to the needs of larger operations or a small market. The small and medium scale enterprises are target specific and usually meet the demands of the local markets. Many such undertakings are known to grow into industrial giants in good time, but many succumb to the pressure exerted by larger operations. The governments all over the world encourage the setting up of small and medium scale industries and even fund the initiatives.
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Sick small and medium scale units are known to be funded 100% by banks and other financial institutions. This is primarily because the start-up funds required are not much, but the scope of growth is unimaginable. In the right hands, with focused vision, a small or medium scale initiative can flourish, despite the limitations. Small and medium enterprises are small business mostly working in informal sector and on single ownership basis. This sector roughly comprise of various business sectors comprising various small businesses which provide either support to the main stream industries in the form of providing raw materials or sell their good and services at very small scale. The advancement of Japan in the world economy is mostly credited to the success and planned development of its small and medium enterprises sector. In Japan special benefits and strong support was provided to SMEs in order to enable them to be self sufficient and provide necessary backbone to the economy. One of the most important benefit of small and medium enterprises is the fact that they not only provide necessary reach into the untapped and potentially wide market base but their failure do not not wholly effect the progress of the economy. They also enjoy a very small cost therefore they can earn greater profits. Due to this in-built characteristic, they enjoy greater flexibility and ability to earn more profits. Traditionally, due to the lack of documentation, Banks were reluctant to provide the funding to those organizations but now focus is changing.
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HISTORY

Small and Medium Enterprises or SMEs are vital for the growth and well being of the country. This sector was recognised and given importance right from independence and is being encouraged ever since then. Though, it commenced on a small scale, it gradually gained significance, because it employed a considerable number of people. When it started gaining momentum, this sector was defined as an enterprise with investment in plant and machinery of up to Rs 1 lakh and situated in towns and villages with strength of less than 50,000 people. The policy statement put in place special legislation to recognize and protect self employed people in cottage and home industries. District industries centres (DICs) were set up and made the focal point of SSI development, bypassing large cities and state capitals. Also, the government started providing special services akin to product standardization, quality control and marketing surveys in order to assist the SSIs in enabling them to market their products in an underdeveloped market. The scenario for the small-scale sector changed with the Industrial Policy of July 1991, which, for the first time in Indias development history spoke of liberalisation. What this meant was that medium and large enterprises would no longer need licenses to run. Export-oriented enterprises could be wholly foreign owned and foreign equity participation was selectively allowed. Industries could import capital goods with much fewer restrictions.

1996 saw the government involved in the setting up of a higher level committee, known as the Abid Hussain Committee, to review policies for small industries and recommend measures to help formulate a strong and innovative policy package for the rapid development of SMEs. With liberalization, rapid changes were seen in the Indian economy. Indian companies were no longer insulated form the global economy. In fact, there was an urgent need to make them, especially SMEs, more competitive and resilient. In 1991, the growth rate of SSIs was almost three times that of the total industrial sector at 3.1 percent. From 1991 to 1995, the growth rate of SSIs exceeded that of the total industrial sector. Yet, in 1995-96, the growth rate of SSIs was slightly lower than the total industrial sector, however it increased again in 1996 and continued to be higher than the total industrial growth rate till 1999. till 2006, the SME segment saw a lot more development and support from the government.

DEFINITION OF SMEs

SMEs are defined in different ways in different parts of the world. Some define them in terms of assets, while others use employment, shareholder funds or sales as criteria. Some others use a combination of revenue and employment as a hybrid criterion. The definition of SME has been a contentious issue in India. In fact, the term, the term SSI (Small Scale Industry) is more commonly used to refer to SMEs. In recent years, the Government of India has sought to provide greater clarity in this sector by specifying a clear definition. In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes. (a) Manufacturing Enterprises: The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation Act, 1951. The Manufacturing Enterprise are defined in terms of investment in Plant & Machinery. (b) Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment.

REQUIREMENT OF SME

Year 2009 is a year to be remembered during the 21st century. The world has seen worst financial crisis in times gone by, making many developed and developing economies to recreate a new policy in terms of managing crisis. In addition to that, increasing mercury of mother Earth has led to change in climatic conditions across the globe, inducing, whole Diasporas to re think about what worst perhaps come, and how by adapting some arduous measures, if applied, can give a better environment to our future generations to live in. SMEs at there end, with innovative ideas helped to mitigate the situation. However, they lack in certain aspects, as follows: Technical Manpower Financial Aspect Technology Transfer Research and Development Lack of Education in terms of Policy, Labor Laws, Government Schemes.

SMEs IN INDIA

With the advent of planned economy from 1951 and the subsequent industrial policy followed by Government of India, both planners and Government earmarked a special role for small-scale industries and medium scale industries in the Indian economy. Due protection was accorded to both sectors, and particularly for small scale industries from 1951 to 1991, till the nation adopted a policy of liberalization and globalization. Certain products were reserved for small-scale units for a longtime, though this list of products is decreasing due to change in industrial policies and climate. SMEs always represented the model of socio-economic policies of Government of India which emphasized judicious use of foreign exchange for import of capital goods and inputs; labour intensive mode of production; employment generation; non concentration of diffusion of economic power in the hands of few (as in the case of big houses); discouraging monopolistic practices of production and marketing; and finally effective contribution to foreign exchange earning of the nation with low import-intensive operations. It was also coupled with the policy of de-concentration of industrial activities in few geographical centers. It can be observed that by and large, SMEs in India met the expectations of the Government in this respect. SMEs developed in a manner, which made it possible for them to achieve the following objectives: High contribution to domestic production Significant export earnings
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 Low investment requirements Operational flexibility Location wise mobility Low intensive imports

IMPORTANCE OF SME

With various definitions by various countries, sometimes it becomes a difficult task for an individual to understand importance of a SME. One may not know the important role that SME plays in developing any particular sector, economy of any country, alleviating poverty, increasing employment, and, above all providing various items of daily use at an affordable cost. With in the last few years many developed and developing countries have realized the importance of the sector. Fast decision making due to less staff and more control of an entrepreneur, availability of raw material at our door step, as many SMEs have been started in the area where availability of raw material is not a hindrance, innovative products which cater to the needs of a particular region and its vicinity, are certain key factors making SMEs significant. Furthermore, economic factors which constitutes to the development of the sectors are as follows: Addition of output of goods and services to economy Low capital cost for establishment Reduction in income disparities Admirable propagation ground for entrepreneurial talent.

IMPORTANCE OF SMES IN ECONOMIC DEVELOPMENT

In any nation, SMEs play very important role in its economic activities. They represent over 90 percent of enterprises and account for 50 percent to 60 percent of employment in the world. In least-developed countries (LDCs), their role is considered even more important, since they offer the only realistic prospects to increase employment and value added. Many LDCs provide employment opportunities for the majority of population who live under the poverty line, so SMEs contribute not only economic but also social benefits by reducing crime rate and alleviating poverty. Industrial development was earlier believed to have occurred because of large enterprises. However, starting in the late 1970s and early 1980s, SMEs have become perceived as the key agent for industrialization. SMEs, which usually operate in the formal sector of the economy, are a very heterogeneous group of businesses usually operating in the agribusiness, service, trading and manufacturing sectors. They may include a wide variety of companies from traditional, small, and family-owned enterprises to dynamic, innovative and growth-oriented enterprises. If they are given proper opportunity, they have a great potential to become large businesses. Most large business corporations in todays world economy, such as Microsoft, Vodafone, HP, internet search engine Google, and online bookstore Amazon.com, started as small businesses from the exciting ideas of young entrepreneurs. When the large but inefficient state-owned enterprises failed, small and more efficient private entities started to emerge as shown in the cases of East
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Europe countries. A rapidly growing number of SMEs offered solution to the unemployment problem in these transitional economies. The growth of SMEs is synonymous with the growth of private sector, since SMEs represent larger number of businesses in the private sector. The development of entrepreneurship spirit is highly associated with the development of SMEs, as these are formed and run by entrepreneurs. Due to their private-ownership nature, entrepreneurial spirit, and the ability to adapt to the ever-changing environment, they contribute to sustainable growth and employment generation in a significant manner.

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THE ROLE OF SMALL AND MEDIUM SIZE ENTERPRISE SECTOR

Much the discussion of the transition process in the former socialist economies has focused on the process of the divestiture of previously StateOwned Enterprises. This approach has been justified by the belief that, by creating strong efficiency motives on the part of the new owners, privatization will by itself resolve virtually all of the production and incentive problems of the old system. The benefits of privatization perse are now being reassessed more critically, while at the same time the recognition has spread that healthy small enterprises do not automatically emerge to fill the interstices of the new system. Both of these patterns have long been evident but the long-evident need for policy-level reappraisal has only become unavoidable with the final collapse of the spontaneous liberalization model in Russia after August 1998. The SME sector carries great hopes and great burdens in the evolution of all of the transitional economies. Sustained and healthy growth of this sector is obviously necessary, since it is difficult to imagine rising overall living standards and social peace without such a development. With the large-scale units of both the State-Owned Enterprise (SOE) and previously State-Owned Enterprise (PSOE) sector often at best stagnant, successful performance during the transition increasingly appears to be dependent on the expansion of this Small and Medium Enterprise sector. Even if the hopes that this sector will by itself have a systems- dynamizing and transformational effect prove to

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be false, its role in generating employment and an atmosphere of social stability is crucial.

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CHARACTERISTICS OF SMEs There is no globally recognised definition of an SME. In this report SMEs are defined as businesses with fewer than 20 employees. While SMEs are diverse, typically an SME may: Have begun spontaneously from just one idea or new product and may continue to be an incubator for innovative ideas and products. Have an owner/manager with little formal business experience or few generic business skills. Have begun because the founder/owner has a particular technical expertise. Comprise the founder/owner and up to four employees (often with an unpaid family member providing administrative support). Have the owner as the only person in a managerial position, and no board or formal governance arrangements. Operate on trust, rather than on systems and contracts. Have a tight family-like culture where the values of the owner are strongly shared by the staff and workplace practices are flexible and suited to individual employees' needs. Focus on a small range of products or services sold mainly on the local domestic market. Have all personal assets, including the owner's home, committed as security for the business. Acknowledge the owner's time as one of its scarcest and most valuable assets.

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 Operate flexibly, on a "reasonable person" basis, rather than on an informed and strict observance of regulations. Have a vision and outlook that is bounded by the horizons, skills and experience of the founder/owner, the pressures of day-to-day management and tight resource constraints (i.e. a tactical rather than a strategic approach). Endeavour to operate independently of other businesses and institutions and to favour self-help over seeking advice. Not be aware of the regulations to which it is expected to adhere. In provincial areas, be a key part of the social fabric of the community. Close within three years of its inception, not infrequently in circumstances that could easily have been prevented.

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ROLE

OF

SMALL

AND

MEDIUM-SIZE

ENTERPRISES

IN

DEVELOPING MARKET ECONOMIES

From a theoretical perspective, SMEs have several advantages over both SOEs and large PSOEs. In SMEs the incentives for both managers and workers tend to be clearer and stronger than in larger organizations. Governance problems are less significant since in many cases the managers and owners are the same people. The small size of many of the SME firms allows owners easily to monitor the performance of managers while the cost of monitoring labour is also lower. Under the special conditions of the transition economy there are several additional advantages. There is likely to be less behavioral carry-over of bad work habits in SMEs that are either new or had worked outside the main channels of the planned system. Small firms appear to have greater flexibility and potential for innovation, which are especially important in the unsettled conditions of the transition period. To the extent that the SME firms produce the same products or services as SOE and PSOE, their small size makes them less prone to monopolist behavior. Higher productivity is also likely in those product areas where there are no or few scale economies. It should be noted that many or even most of the existing or emerging SMEs are not really new. These are entities, now classified as SMEs, which had a pre-transition existence as part of large, usually horizontally integrated, service, craft and distribution SOEs or co-operatives. The new sector of relatively small organizations is thus a mixture of many privatized sub-units of SOE, entirely de novo entities and in surviving pre-transition SMEs.
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One of the significant characteristics of a flourishing and growing economy is a booming and blooming small and medium enterprises (SMEs) sector. Small and medium enterprises play an important role in the development of a country. SMEs contribute to economic development in various ways by creating employment for rural and urban growing labor force, providing desirable sustainability and innovation in the economy as a whole .In addition to that, a large number of people rely on the small and medium enterprises directly or indirectly. Most of the current larger enterprises have their origin in small and medium enterprises. SMEs are different from large scale enterprises in three main aspects; uncertainty, innovation and evolution. The SME sector itself can be classified into micro enterprises, small enterprises and medium enterprises. SMEs are the starting point of development in the economies towards industrialization. However, SMEs have their significant effect on the income distribution, tax revenue, and employment, efficient utilization of resources and stability of family income. According to the United Nations Industrial Development Organization UNIDO, for developing countries, integration into the global economy through economic liberalization, deregulation, and democratization is seen as the paramount way to triumph over poverty and inequality. Important to this process, is the development of an animated private sector, in which small and medium enterprises can play a central role. SMEs have a propensity to employ more labor-intensive production processes than large enterprises. Consequently, they contribute significantly to the

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provision of productive employment opportunities, the generation of income and, eventually, the reduction of poverty. According to the statistics, in industrialized countries, SMEs are major contributors to private sector employment. Empirical studies have shown that SMEs contribute to over 55% of GDP and over 65% of total employment in high income countries. SMEs and informal enterprises, account for over 60% of GDP and over 70% of total employment in low income countries, while they contribute about 70% of GDP and 95% of total employment in middle income countries. SMEs play significant contribution in the transition of agriculture-led economies to industrial ones furnishing plain opportunities for processing activities which can generate sustainable source of revenue and enhance the development process. SMEs shore up the expansion of systemic productive capability. They help to absorb productive resources at all levels of the economy and add to the formation of flexible economic systems in which small and large firms are interlinked. Such linkages are very crucial for the attraction of foreign investment. Investing transnational corporations look for sound domestic suppliers for their supply chains. SMEs are the major growing force behind the fastest growing economy of China, in terms of contribution to the national GDP (accounting for 40%), scale of assets, diversification of products, and the creation of employment. Similarly, the role of SMEs is well acknowledged in other countries such as Japan, Korea, and all other industrialized economies in terms of creating employment, reducing poverty and increasing the welfare of the society.

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Experts and economists are unanimous about the role and importance of small and medium enterprises in the development of Pakistan economy. The statistical data and empirical studies about SMEs highlight the bulk share of SMEs in the economy. According to the Small and Medium Enterprises Development Authority (SMEDA), "SMEs constitute nearly 90% of all the enterprises in Pakistan; employ 80% of the non-agricultural labor force; and their share in the annual GDP is 40%, approximately. There are a number of factors responsible for the importance of SMEs in Pakistan. First, SMEs bolster an entrepreneurial spirit and put forward suppleness in the economy. Second, SMEs emanate the fastest growing export sub-sectors, such as cotton weaving and surgical instruments. Third, they can support the poverty alleviation endeavors through employment generation process. Above all, SMEs are more efficient in resource allocation as compare to that of large scale industry from a social point of view. They provide and facilitate the more number of people as compare to that of large scale industry. It is level headed to say that Pakistan economy is an economy of SMEs. The significant role of SME is plainly indicated by research and statistics. However, efforts had remained restricted focusing on the large enterprises, and neglecting small and medium enterprises which are the bone back of the economy. For instance, institutions established to facilitate business activities, like Board of Investment (BOI), Export Promotion Bureau (EPB), Central Board of Revenue (CBR), etc, have been focused their efforts on large scale industry.

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SMEs are a distinctive mainstay of the economy that requires owing attentiveness. The evidence shows that small firms are discriminated against relatively large firms. Large scale firms can cope and solve their hurdles due to possessing sound experience and financial position. SME due to their small size and the resulting peculiarities, are far less capable of adjusting and carrying on successful business. While spared direct statutory or administrative discrimination, SME remain subject to unequal treatment, which distorts the competitive environment for business. There are also some hidden and apparent obstacles in the path of growth of small and medium enterprises in Pakistan. The most important are, political instability, law and order situation, financial constraints, energy crisis, taxation problems, labor issues, lack of coordination and regular information exchange mechanism among institutions, etc. What it requires is to pursue the precise policy and regulatory reforms to turn SMEs into an effectual instrument for the enhancement of economic growth and employment. Furthermore, the milieu for SME is incessantly changing, especially in the scenario of globalization and openness of the economies. Therefore, the course of action for SMEs should be set for long-run period keeping in mind the predictable behavior of all stockholders. Advantages of small business A small business can be started at a very low cost and on a part-time basis. Small business is also well suited to internet marketing because it can easily serve specialized niches, something that would have been more difficult prior to the internet revolution which began in the late 1990s. Adapting to change is
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crucial in business and particularly small business; not being tied to any bureaucratic inertia, it is typically easier to respond to the marketplace quickly. Small business proprietors tend to be intimate with their customers and clients which results in greater accountability and maturity. Independence is another advantage of owning a small business. One survey of small business owners showed that 38% of those who left their jobs at other companies said their main reason for leaving was that they wanted to be their own bosses. Freedom to operate independently is a reward for small business owners. In addition, many people desire to make their own decisions, take their own risks, and reap the rewards of their efforts. Small business owners have the satisfaction of making their own decisions within the constraints imposed by economic and other environmental factors. However, entrepreneurs have to work very long hours and understand that ultimately their customers are their bosses. Several organizations also provide help for the small business sector, such as the Internal Revenue Service's Small Business and Self-Employed One-Stop Resource.

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DEVELOPMENT POLICIES FOR MSMEs IN INDIA

The Micro, Small and Medium Enterprises (MSME) sector has been an integral component of the industrial sector. The MSE sector has been accorded special status and importance in the Five-Year Plans since inception in view of the advantages it offers for better utilization of resources of capital and skill at the local level. The continuous support provided to the sector in the form of incentives, infrastructural facilities and other assistance in the industrial policy resolutions has facilitated the sector to acquire a place of prominence in the socio-economic development of the country. The number of enterprises in the MSE sector is estimated to be over 13 million, providing employment to estimated 42 million persons. As per the latest estimates, the micro and small enterprises (MSE) sector accounts for about 39 percent of the manufacturing output and 33 per cent of the national exports of the country (the estimated contribution is 45% and 40% respectively for the micro, small and medium enterprises (MSMEs) as defined under MSMED Act, 2006). Further, in recent years the MSME sector has consistently registered higher growth rate compared to the overall industrial sector. For achieving the objective of inclusive growth, creation of large employment opportunities is of significant importance. However, the declining employment trend in the organized sector has resulted in agriculture sector continuing to provide employment to almost two-third of the Indian population. With the land holding declining substantially, there is considerable surplus population engaged in the agriculture sector and needs to be provided gainful employment in the industrial and service sectors of the
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economy. The major advantage of the MSME sector lies in its significant employment potential at low capital cost and the labour intensity in the MSME sector is estimated to be considerable higher than the large enterprises. Hence, the MSME sector provides one of the most viable avenues for absorbing the large surplus population engaged in the agriculture sector. However, in todays liberalized and globalised environment, there are several preconditions to enhancing the global competitiveness of the MSMEs. These relate mainly to simplified systems and procedures, easy access to capital, positioning the MSMEs in the global value chain by enhancing their productivity (involving issues like technology up-gradation, quality improvement, skill development, etc.) and access to markets (both domestic and global). For the promotion and development of the MSMEs, the Government has put in place policy measures as well as implemented several schemes/programmes to address the requirements of the MSME sector in these areas. Enactment of the MSMED Act, 2006: The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 seeks to facilitate the development of these enterprises as also enhance their competitiveness. It provides the first-ever legal framework for recognition of the concept of enterprise which comprises both manufacturing and service entities. It defines medium enterprises for the first time and seeks to integrate the three tiers of these enterprises, namely, micro, small and medium.

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The Act also provides for a statutory consultative mechanism at the national level with balanced representation of all sections of stakeholders, particularly the three classes of enterprises; and with a wide range of advisory functions. Establishment of specific Funds for the promotion, development and enhancing competitiveness of these enterprises, notification of

schemes/programmes for this purpose, progressive credit policies and practices, preference in Government procurements to products and services of the micro and small enterprises, more effective mechanisms for mitigating the problems of delayed payments to micro and small enterprises and assurance of a scheme for easing the closure of business by these enterprises are some of the other features of the Act. The Ministry of MSME has also taken a view, in the light of the liberalized provisions of the MSMED Act 2006, to do away with the restrictive 24% ceiling prescribed for equity holding by industrial undertakings, whether domestic or foreign, in the erstwhile Small Scale Industries (now MSEs). This coupled with the expected legislation on Limited Liability Partnerships (introduced in the Parliament by the Ministry of Corporate Affairs) should pave the way for greater corporatization of the Small and Medium Enterprises thereby enhancing their access to equity and funds from the market. Access to Finance: Finance is one of the critical inputs for the promotion and development of the micro and small enterprises. Finance to the MSEs is part of the Priority Sector Lending Policy of the banks. For the public and private sector banks, 40% of the net bank credit (NBC) is earmarked for the Priority Sector. For the foreign banks, however, 32% of the NBC is earmarked for the Priority Sector, of
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which 10% is earmarked for the MSE sector. Any shortfall in such lending by the foreign banks has to be deposited in the Small Enterprise Development Fund (SEDF) to be set up by the Small Industries Development Bank of India (SIDBI). The SIDBI is the principal financial institution for promotion, financing and development of the MSE sector. Apart from extending financial assistance to the sector, it coordinates the functions of institutions engaged in similar activities. SIDBIs major operations are in the areas of refinance assistance direct lending and Development and support services. Commercial banks are important channels of credit dispensation to the sector and play a pivotal role in financing the working capital requirements, besides providing term loans (in the form of composite loans). At the State level, State Financial Corporations (SFCs) and twin-function State Industrial Development Corporations (SIDCs) are the main sources of long-term finance for the MSE sector. Recognizing the importance of easy and adequate availability of credit in sustainable growth of the MSE sector, the Government has announced a Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs), with the objective of doubling the flow of credit to this sector within a period of five years. The measures in the Policy Package, inter alia, include banks to achieve a minimum 20% year-on-year growth in credit to the MSME sector and cover on an average at least 5 new MSMEs at each of their semiurban/urban branches per year. In addition, the Ministry of MSME is also implementing the following major schemes:
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Credit Guarantee Scheme: To ensure better flow of credit to MSEs by minimizing the risk perception of banks/financial institutions in lending without collateral security, the Credit Guarantee Fund Scheme for Micro and Small Enterprises is being implemented. The scheme covers collateral-free credit facility extended by eligible lending institutions to new and existing micro and small enterprises for loans up to Rs.1 crore. Performance & Credit Rating Scheme: The Performance & Credit Rating Scheme for manufacturing MSEs is being implemented with the objective of assisting the MSEs in obtaining performance-cum-credit rating which would help them in improving performance and also accessing bank credit on better terms if the rating is high. However, despite all the efforts, the number of MSEs having accounts with the banks has been only around 4 million. Taking this into account the fact that a majority of the MSEs at the lower-end of the sector are outside the ambit of institutional finance, concerted efforts are being made by the SIDBI to promote micro finance across the country to enable the unemployed persons to set up their own ventures. There are more than 100 Micro Finance Institutions (MFIs) developed by SIDBI that are engaged in implementation of its micro finance programme. SIDBI has disbursed about Rs.1700 crore (cumulative) under its programme, benefiting around 50 lakh beneficiaries. The outstanding loan under the SFMC programme is Rs.950 crore as at the end of March, 2008.
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Faced with increased competition on account of globalization, MSMEs are beginning to move from an obsession with bank credit to a variety of other specialized financial services and options. In recent years, the country has witnessed increased flow of capital in the form of primary/secondary securities market, venture capital and private equity, external commercial borrowings, factoring services, etc. Some of the measures required for promoting these emerging sources of finance are: To facilitate the MSME sector to garner resources, it is imperative that a separate trading exchange be set up exclusively for the MSMEs; Provide special incentives for encouraging larger flow of Venture Capital & Private Equity funds into the sector; More liberal All-in-Cost Ceilings for SMEs to raise low-cost funds through the External Commercial Borrowing route; and Urgent need to bring the legislation on Factoring Services. Competitive Technology and Quality Improvement: In todays fast paced global business scenario, technology and quality of products has become more vital than ever before. With a view to foster the growth of MSME sector in the country, Government has set up ten state-ofthe-art Tool Rooms and Training Centers. These Tool Rooms provide invaluable service to the Indian industry by way of precision tooling and providing well trained craftsmen in the area of tool and die making. These Tool Room are highly proficient in mould and die making technology and promote precision and quality in the development and manufacture of sophisticated moulds, dies and tools. The Ministry of MSME implements the following schemes and programs for the up-gradation of technology/quality of the MSMEs.

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ISO 9000/14001 Certification Fee Reimbursement Scheme to enhance the competitive strength of the MSEs, the Government introduced a scheme to incentivize technological up-gradation, quality improvement and better environment management by the MSEs. Micro and Small Enterprises Cluster Development Programme (MSECDP) is implemented for holistic development of clusters of MSEs. The programme envisages measures for capacity building, skill development, technology upgradation of the enterprises, improved credit delivery, marketing support, setting up of common facility centers, etc., based on diagnostic studies carried out in consultation with cluster units and their collectives. The Credit Linked Capital Subsidy Scheme (CLCSS) aims at facilitating technology up-gradation by providing 15 per cent upfront capital subsidy on institutional finance up to Rs. 1 crore. To help the MSMEs improve their competitiveness, the Government has also launched the National Manufacturing Competitiveness Programme (NMCP). The schemes under this Programme are aimed at addressing the technology/quality up-gradation needs of the sector, mainly in the PublicPrivate Partnership mode. Further, to facilitate investments for technological up-gradation and higher productivity in the micro and small enterprises, the phased deletion of products from the list of items reserved for the exclusive manufacture by MSEs is being continued. There are now only 21 items that are reserved for this sector.

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INCLUSIVE GROWTH THROUGH MSMEs

Shri Dinesh Rai writes: The Micro, Small and Medium Enterprises (MSME) sector contributes significantly to the manufacturing output, employment and exports. It is estimated that in terms of value, this sector accounts for about 45 per cent of the manufacturing output and 40 percent of the total exports of the country. As per the quick estimates of 4th All-India Census of MSMEs for reference year 2006-07, the number of enterprises is estimated to be about 26 million and these provide employment to an estimated 60 million persons. The labour to capital ratio and the overall growth in the MSME sector is much higher than in the large industries. The geographic distribution of the MSMEs is also more even. Thus, MSMEs are important for the national objectives of growth with equity and inclusion. Considering the importance of the MSME sector in the overall growth of the economy, the Prime Minister announced the setting up of a Task Force on MSMEs in August 2009. Accordingly, a Task Force was set up in September 2010 under the chairmanship of the Principal Secretary to Prime Minister to look into the issues and concerns of the MSME sector in a holistic manner. The Report submitted in January 2010 provides a roadmap for the development and promotion of the MSMEs in the country. It recommends an agenda for immediate action to provide relief and incentives to the MSMEs, accompanied by institutional changes and detailing of programmes to be achieved in a time bound manner. In addition, it suggests setting up of appropriate legal and regulatory structures to create a conducive environment for entrepreneurship and growth of MSMEs in the country. The Task Force
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has laid emphasis on timely implementation of the recommendations and has set up a system for its continuous monitoring in the Prime Ministers Office. A Council on MSMEs under the chairmanship of Honble Prime Minister has been constituted to lay down the broad policy guidelines and review development of the MSME sector. The Council would meet on a yearly basis. As is well known, technology plays a key role in the success of MSMEs. The Task Force in its Report has also stressed on the need for strengthening the technological capabilities of the MSMEs and recommended setting up of a Technology Fund for supporting MSMEs to undertake technology upgradation, acquisition, adaptation and innovation to enable them to move up the value chain. Towards this endeavor, the Ministry of MSME has recently launched ten innovative schemes under the National Manufacturing Competitiveness Programme (NMCP) to improve the processes, designs, technology and market access of MSMEs. These include programmes on lean manufacturing, designs, intellectual property rights, quality management standards and quality technology tools, ICT promotion, mini tool rooms, etc. These programmes, which are at their initial stages, are being implemented in a Public-Private-Partnership mode and are expected to provide a cutting edge to the beneficiary MSMEs in the global value chain. The Ministry has also recently enlarged the ambit of Credit Linked Capital Subsidy Scheme for technology up-gradation and included 201 new technologies, including 179 technologies relating to Pharmaceutical sector. Another aspect that is critical for long-term sustainability of this sector relates to marketing. To facilitate the MSMEs in their marketing endeavor, the various organizations under the Ministry of MSME organize exhibitions/fairs and buyer-seller meets across the country providing an opportunity to them
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for displaying their products and capabilities. The Ministry is in the process of finalizing a public procurement policy for the MSEs to ensure a fair share of Government procurement. Once formulated, this may be more effective in providing the much-needed marketing support that MSEs seek. In addition, National Small Industries Corporation (NSIC) has launched a B2B Web portal to provide marketing facilities to national and international MSMEs for business to business relationship. Further, NSIC has also established a Marketing Intelligence Cell in May 2010, which shall provide database and information support to the MSMEs on marketing of their products/services. The Ministry of MSME has also launched two schemes under the NMCP to improve the strengths of MSMEs in marketing by using latest techniques and technologies. The Ministry of Micro, Small and Medium Enterprises is the nodal Ministry of the Government for enterprise development in the country. It is implementing the Prime Ministers Employment

Generation Programme (PMEGP), introduced in 2008-09 by merging the erstwhile Prime Ministers Rozgar Yojana and Rural Employment Generation Programme, which incentivizes the potential entrepreneurs to set up new micro enterprises in the manufacturing as well as the services sector. During the year 2009-10, the scheme helped in setting up of 40,000 new micro enterprises, resulting in generation of employment opportunities for 4.21 lakh persons. The Ministry has also been conducting various Entrepreneurship and Skill Development Programmes for prospective entrepreneurs through its wide network of field offices across the country to facilitate setting up of MSMEs. These include programmes on
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Entrepreneurship

Development,

Entrepreneurship and Skill Development, Management Development and Business Skill Development. The Ministry also extends assistance to three Entrepreneurship and Development Institutes (EDIs), namely, National Institute of Micro, Small and Medium Enterprises, Hyderabad, National Institute of Entrepreneurship and Business Development, NOIDA, and Indian Institute of Entrepreneurship, Guwahati to conduct skill development training programmes on regular basis. During 2009-10, around

3.50 lakh persons were trained through the various schemes of the Ministry. Further, the scheme of Assistance to Training Institutions has been expanded by adding a new component to include private participation for substantial increase in the number of trainees. Under the scheme, assistance will be provided to the training institutions/centers established by Partner Institutions (PIs) of National Level EDIs and franchisees of NSIC. The Ministry has also introduced a novel scheme for Support for Entrepreneurial and Managerial Development of Small and Medium Enterprises (SMEs) through Incubators from April 2008 for assisting incubation of innovative business ideas that could be commercialized in a short period of time, resulting in the formation of MSMEs. So far, 171 business ideas have been approved under the scheme. The Ministry also provides hand holding support through its

Rajiv Gandhi Udyami MitraYojana to start-ups. Under the scheme, the potential entrepreneurs is provided support for completion of various formalities and tasks necessary for setting up and operationalization of the enterprise. Linked to this scheme, the Ministry is launching an Udyami Helpline shortly which will provide easy and ready access to

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information regarding the various MSME-related policies/programmes of the Government as well as Banks. MSME's and their link to Sustainable Development: MSMEs are particularly important in supporting economic growth and livelihoods in developing countries, because they (inter alia): Tend to use more labor-intensive production processes than large enterprises, boosting employment and leading to more equitable income distribution; Provide livelihood opportunities through simple, value-adding

processing activities in agriculturally-based economies; They tend to nurture entrepreneurship; Support the building up of systemic productive capacities and the creation of resilient economic systems, through linkages between small and large enterprises. It is clear that MSMEs as they stand are a major economic force, upon which large numbers of people in developing countries depend for their livelihood. At the very least then, CSR practices should be shaped in a way that does not adversely affect the economic viability of MSMEs in developing countries. The cumulative social and environmental impact of MSME is highly significant, even though their individual impact is small. This is not simply due to the large number of enterprises and their overall economic significance, but also because MSMEs are often over-represented in industrial sectors with high environmental impacts, and because they may not be subject to the same regulatory and enforcement processes that can mitigate the
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negative impacts of large companies. There is therefore the potential for significant progress towards sustainable development if MSMEs social and environmental performance could be linked up. This logic leads to two conclusions in relation to CSR and MSME. First, that it makes sense to identify existing CSR-related incentives for MSME that adopt higher social and environmental standards, while ensuring that flanking measures are in place to assist in this transition and to protect livelihood and secondly that we should look for new ways to make CSR more relevant to MSME.

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SIGNIFICANCE OF MSMEs IN INDIAN ECONOMY The Indian industrial economy is characterized by a dynamic and versatile set of enterprise actors, who are small and medium in terms of scale of operations. This MSME category has been giving a typical competitive advantage to Indian industry in terms of controlling sufficient markets globally. It is because of their ability to make available low-volume customized products, flexible response and lower fixed overhead costs. The other typical behavior of these MSMEs is that in most of the cases depending upon their specialization, they have evolved as clusters. The importance of MSMEs as compared to Corporate Enterprises with regard to their contribution towards Indian economy can be best understood that they have a share of 39% of gross value of output, 86% in terms of employment in the manufacturing sector, and 33% of the total exports from the country and 92% in terms of number of enterprises. Clusters account for 77% of firms, 72% employment, 61% investment, 59% output, and about 76% exports of small scale industries in India. (Source: Website Ministry of MSME, GOI). Employment SSI Sector in India creates largest employment opportunities for the Indian populace, next only to Agriculture. It has been estimated that Rs. 1,00,000 of investment in fixed assets in the small-scale sector generates employment for four persons.

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Sr. No.

Industry

% of employment generated

1. 2. 3.

Food Products Non-metallic mineral products Metal products

13.1% 12.2% 10.2%

In Chemicals & chemical products, Machinery parts except Electrical parts, Wood products, Basic Metal Industries, Paper products & printing, Hosiery & garments, Repair services and Rubber & plastic products, the contribution of MSME ranged from 9% to 5%, the total contribution by these eight industry groups being 49%. In all other industries the contribution was less than 5%. Export SSI Sector plays a major role in India's present export performance. 45% 50% of the Indian Exports is contributed by SSI Sector. Direct exports from the SSI Sector account for nearly 35% of total exports. Besides direct exports, it is estimated that small-scale industrial units contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts and components for use for finished exportable goods. It would surprise many to know that non-traditional products account for more than 95% of the SSI exports. The exports from SSI sector have been clocking excellent growth rates in this decade. It has been mostly fuelled by the performance of garments, leather and gems and jewellery units from this sector.
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The product groups where the SSI sector dominates in exports are sports goods, readymade garments, woolen garments and knitwear, plastic products, processed food and leather products. Challenges Faced by the MSME Sector The challenges being faced by the small and medium scale sector may be briefly set out as follows Small and Medium Enterprises (MSME), particularly the tiny segment of the small enterprises have inadequate access to finance due to lack of financial information and non-formal business practices. MSMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments. MSMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to market fluctuations. MSMEs lack easy access to inter-state and international markets. There is lack of awareness of global best practices. The access of MSMEs to technology and product innovations is also limited. MSMEs face considerable delays in the settlement of dues/payment of bills by the large scale buyers. With the deregulation of the financial sector, the ability of the banks to service the credit requirements of the MSME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the banking sector to focus on credit and finance requirements of MSMEs.

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PROFILE OF FINANCIAL INSTITUTIONS

State Bank of India (SBI) State Bank of India has been playing a vital role in the development of small scale industries since 1956.The Bank has financed over 8 lakhs SSI units in the country. It has 55 specialized SSI branches, 99 branches in industrial estates and more than 400 branches with SIB divisions. The Bank finances for Small Business activities which are of special significance to a large number of people as many of these activities can be started with relatively lower investment and with no special skills on the part of the entrepreneurs. There are various Loans which are related only to SSIs. Some of them are General Purpose Term Loan Liberalized Credit Entrepreneur Scheme Equity Fund Scheme Stree Shakti Package

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Canara Bank The Bank has adopted a Policy for lending to MSME sector, in tune with Govt. of India guidelines as per MSMED Act, 2006, which has come into force w.e.f. 2nd October, 2006. It provides an array of products to the MSMEs depending upon the nature of need, and Schemes for Capital Investments.

Bank of India Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalized along with 13 other banks. Bank of India formulated its MSME Policy in October 2005, which was duly approved by the Banks Board of Directors on 28/10/2005, encompassing the various schemes and norms within the overall ambit of the Govt./RBI directives. The MSME sectors demands were comprehensively taken care of by the Bank through several initiatives such as: Single Window dispensation, Quick decision with least Turnaround Time through specially constituted MSME Cells, and above all, Better service. Cluster-based Schemes are also on the list of the Banks initiatives.

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SIDBI (Small Industries Development Bank of India) SIDBI had been providing refinance to State Level Finance Corporations / State Industrial Development Corporations / Banks etc., against their loans granted to small scale units. Since the formation of SIDBI in April, 1990 a need was felt/ representations were made that SIDBI being the principal financial institution for the small sector, should take up the financing of SSI projects directly on a selective basis. So it was decided to introduce direct assistance schemes to supplement the other available channels of credit flow to the small industries sector. Since then, SIDBI has evolved itself into a supplier of a range of products and services to the Small & Medium Enterprises [MSME] sector.

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ICICI Bank (Industrial Credit Investment Corporation of India) ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. Small & Medium Enterprises Group (MSMEG) caters to the MSME segment and offers banking solutions to sole proprietorship, partnership firms and companies. The extensive trade related expertise, widespread local network and global alliances enable it to provide value-added service. MSMEs trust us for information, advice, customized banking solutions and assistance.
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Central Bank of India Established in 1911, Central Bank of India was the first Indian commercial bank, which was wholly owned and managed by Indians. The establishment of the Bank was the ultimate realization of the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the first Chairman of a truly 'Swadeshi Bank'. In fact, such was the extent of pride felt by Sir Sorabji Pochkhanawala that he proclaimed Central Bank as the 'property of the nation and the country's asset'. He also added that 'Central Bank lives on people's faith and regards itself as the people's own bank'. Further in line with the guidelines from Reserve Bank of India as also the Government of India, Central Bank has been playing an increasingly active role in promoting the key thrust areas of agriculture, small scale industries as also medium and large industries. The Bank also introduced a number of Self Employment Schemes to promote employment among the educated youth.

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