sobige Institutional FrameworkTei uacuus Lee) Course Description and Units The course provides inputs on the part played by the Ministry of Micro, Small and Medium Enterprises (MSME), Government of India, in ensuring adequate assistance to MSMEs for thelr growth and development in the country. It further goes on to provide details of the various Central Government institutions which have been created under the auspices of the aforesaid ministry and their role in becoming the prime agency for advocacy, handholding and facilitation of the MSME sector. The course further familiarizes the reader with the schemes which are being implemented by central government for the uplifting of the sector and then proceed to describe the Institutions/organizations established at the state level to coordinate with the centre for implementation of the diferent schemes, The course ends by providing an insight into the part played by ‘some other institutions/agencies which have been set up to directly or indirectly help the MSME sector. Unit 1: Objectives Unit 2: Role of Ministry of MSME Unit 3: Central Government Institutions Unit 4: Central Government Schemes Unit 5: State Government Institutions Unit 6: Other agencies and Organizations Unit 7: Summary Unit 8: Test Your Sillsee aE Meth rene een Objectives Obj, ‘On completion of this course, you will be able to: ‘Acquire knowledge about the role played by the Ministry of Micro, Small and Medium Enterprises, (MSME), Government of India (GOI) in the development and growth of MSMES in India. Learn how the Ministry is organized and uses institutions, operating under its aegis and schemes, conceptualized by itto assist the MSMES. Identify the various institutions which work under the Ministry in the Central Government and know details of their organization and function. Understand about the different schemes to help MSMEs, run by the Central Government through the ‘Ministry and the institutions working under them. Learn about the institutions and bodies which have been established by the State Governments to coordinate and ald the proper Implementation of the schemes and also serve the MSMES in other ways. Lastly you wil be able to acquire knowledge about some other institutions which directly or indirectly help MSMES. hourFue atc Assistance to the Sector > The Government of India envisions a progressive MSME sector by promoting growth and development of the Sector, cluding Khadi, Village and Coir Industries, in cooperation concerned Ministries/Departments, State Governments and other Stakeholders, through providing support to existing enterprises, adopting cutting edge technologies and encouraging creation of new enterprises There Is therefore @ separate ministry for the MSME called the "Ministry of Micro, ‘Small and Medium Enterprises’ ‘The Ministry > Anumber of statutory and non-statutory organizations /bodies work under the aegis of the Ministry of MSME. These include the Khadi Village Industries Commission (KVIC) and the Coir Board besides National Small Industries Corporation (NSIC), National Institute for Micro, Small and Medium Enterprises (NIMSME) and Mahatma Gandhi Institute for Rural Industrallzation (MGIRI) > The Ministry of MME runs various schemes aimed at financial assistance, technology assistance and upgradation, infrastructure development, skill development and training, enhancing competitiveness and market assistance to MSMES, > The Ministry of MSME designs policies, programs and projects in consultation with Its organizations and various stakeholders and monitors their implementation with a view to assisting in the promotion and growth of MSMES, contd.Cee) Oe are cid > Entrepreneur Development Programs etc. are arranged through government agencies and NGOs. Financial institutions and industry associations have also come forward to support this sector under the supervision and control of the Ministry. > Moreover the Ministry also performs the function of policy advocacy on behalf of these enterprises with other Ministries/Departments of the Central Government and the State and Union Territories. > The Ministry has an agenda of inclusive development, and has taken various initiatives and measures to ensure that demographically as well as geographically weaker sections benefit from its work. > The Ministry of MSME consists of Small & Medium Enterprises (SME) Division, Agro & Rural Industry (ARI) Division, Integrated Finance (IF) Wing and Data Analytics and Technical Co-ordination (DATC) Wing, besides the Office of the Development Commissioner (DCMSME) as an attached office.> The organizations under the Ministry seek to facilitate/provide one or more of the following for the MSMEs: = Adequate credit from financial institutions/banks; '= Funds for technology upgradation and modernization; = Adequate infrastructural facilities; "= Modern testing facilities and quality certification laboratories; . Modern management practices and skill upgradation through advanced training faci Marketing assistance; '= Level playing field at par with the large Industries sector. > The details of the major organizations (other than some of the training Institutes - already dealt with in the earlier study board) of the ministry and schemes administered by itis provided in the next unit.ue uiecbid Exercise 1 QL. Which one of the following is a function of the Ministry of MSME? 1, Runs various schernes aimed at financial assistance, technology assistance 2. Designs policies, programs and projects in consultation with its organizations and various stakeholders 43, Arranges for Entrepreneur Development Programs through government agencies and NGOs 4. ll the above w” [sent] > ‘These are some of the functions carried out by the Ministry for MSME,Pe ead reece aS ce) Exercise 1 Q2. The Ministry has _di ‘The Ministry of MSME consists amongst others of Small & Medium Enterprises (SME) Division, Agro & Rural Industry (ARI) Division.EEE ne Matec Page 5 of 39 Exercise 1 Q3. Which one of the following service is not provided by institutions working under the Ministry of MSME? 11. Funds for technology upgradation and modernization 2. Marketing assistance 3. Equity support 4, Modern testing facilities and quality certification laboratories [een] [eons] Equity to the extent required has to be brought in by the entrepreneurOe Uuie uu cois Page 6 of 39 Institutional Support ‘There are a number of institutions/bodies that have been established by the Central Government mostly under the auspices of the Ministry of Micro, Small and Medium Enterprises. These are - > National Board for MSME ‘Section 6 of the MSMED Act-2006 provides for establishment of National Board for Micro, Small & Medium Enterprises (NBMSME) and gives details of its functions. It was natified/established for the first time on 15** May 2007 and consists of 47 members. ‘The Minister in charge of the Ministry of MSME Is the ex-officla Chairman of the Board. ‘The functions of the Board include examining the factors affecting the promotion and development ‘of Micro, Small & Medium Enterprises and reviewing the policies & programs of the Central Government with regards to facilitating the promotion & development & enhancing the competitiveness of enterprises. ‘The Board also advices and makes recommendations to the Government, on matters pertaining to MSMEs referred to It by the Gavernment or which has been brought to Its natice and which, In its opinion is necessary or expedient for Facilitating the promotion and development and enhancing the competitiveness of the micro, small and medium enterprises.LEE Wats cokd AES) Advisory Committee for MSME > Section 7(2) of the MSMED Act, 2006 provides for constitution of Advisory Committee for MSME, by notification under the Chairmanship of Secretary, Ministry of Micra, Small Medium Enterprises. > The functions of the advisory committee is, 1. To examine matters referred to it by the NBMSME concerning promotion and development of MSME sector and enhancing its competitiveness. 2. To provide advice to the Central Government on Issues related to the promotion, development and enhancement of competitiveness of micro, small and medium enterprises which includes Issues concerning Credit Facilities, Procurement of Preference Policy, Constitution and Administration of Funds, etc. |. To recommend or advice Central Government or State Governments or the Board, as the case may be, in connection with the classification of enterprises after taking into consideration the level of employment, Investments, need of higher investment in plant and machinery or equipment for technology upgradation, employment generation and enhanced competitiveness and international standards for classification of small and medium enterprises.PEEL eS Development Commissioner -MSME > Was established as Small Industries Development Organization (S1DO) in 1954 on the basis of the recommendations of the Ford Foundation, Over the years, it has seen its role evolve into an agency for advocacy, hand holding and facilitation for the MSME sector. It has 72 offices and 18 autonomous bodies under its management. ‘The Office of the Development Commissioner is an attached office of the Ministry. ‘The autonomous bodies attached to it includes MSME-Development Institutes, Regional Testing Centers, Footwear Tralning Institutes, Production Centers, Field Testing Stations and other specialized Institutes. Itrenders services such as: . Advising the Government in Policy formulation for the promotion and development of MSMES. . Providing techno-economic and managerial consultancy, common facilities and extension services to MSME units, .. Providing facilities for technology upgradation, modernization, quality improvement and. infrastructure. |. Developing Human Resources through training and skill upgradation. 5. Providing economic information services. . Te also administers a number of schemes which have been detailed hereinafter.POE GELSee eee ee ec Technology Centers (MSME-IC, Bhubaneswar Developing components for Moon Mission > Technology Centers-TCs (earlier known as Tool Room & Technical Institutions). |= To provide right stimulus to the growth of industry in the country - particularly to Micro, Small ‘and Medium Enterprises, the Ministry of MSME has established Technology Centers across India, many of them through bilateral collaboration with the Governments of Germany, Denmark and the United Nations. These were earlier known as Tool Rooms and Technology Development Centers. ‘There are 18 TCs as of now but 20 mare are being sat up, ‘Out of 18 Technology Centers (TCs), 10 provide technological support to industries through design & manufacture of tools, precision components, maulds, dles, etc. These TCs alsa serve Industry by providing skilled manpower in the areas of tool engineering & manufacturing sector. ‘The remaining Technology Centers, are product specific Centers to support MSMEs in the respective sectors by rendering technical services to develop and upgrade technologies, processes and products apart from training In the specific product groups such as Forging & Foundry, Electronics, Electrical Measuring Instruments, Fragrance & Flavour, Glass, Footwear and Sports Goods. fraxmewoneRee aie cod Page 100f 39 [ EXIT nal Sm: Industries Corporation (NSIC) > National Small Industries Corporation Ltd. (NSIC), is a Government of India Enterprise under Ministry of Micro, Small and Medium Enterprises (MSME). > NSIC has been working to fulfil its mission of promoting, aiding and fostering the growth of small Industries and industry related micro, small and medium enterprises in the country. > Over a period of five decades of transition, growth and development, NSIC has proved its strength within the country and abroad by promoting modernization, upgradation of technology, quality consciousness, strengthening linkages with large medium enterprises and enhancing exports. > NSIC operates through a countrywide network of offices and NSIC Technical Services Centers’ (NTSCs) and provides a package of services as per the needs of MSME sector. > NSIC carries forward Its mission to assist small enterprises with a set of specially tailored schemes, > The services provided by NSIC includes marketing support, single point registration for government purchases, B28 web portal for marketing, marketing Intelligence, exhibitions and technology fairs, buyer-seller meets and credit support in various ways.> One of the programs being implemented by NSIC is to create self-employment opportunities by Imparting training In entrepreneurship bulding to unemployed people who want to set up new small business enterprises in any of the manufacturing/services sectors or seek employment opportunities For this purpose, NSIC has started a new initiative by entering into franchisee arrangements with private partners interested for setting up of Training- cum-Incubation Centers (NSIC-TIC) at various locations across the country under Public- Private Partnership (PPP) mode. > NSIC has initiated Online Finance Facilitation Centre under which credit to MSMEs will be facilitated through web linkages between NSIC portal and Bank's portal. The MSME Unit can elther directly log in ‘at www.nsieffoontine.in or can also contact to its nearest NSIC Finance Facilitation Centre with the loan proposal> The functions of KVIC as prescribed under the KVIC Act, 1956 includes the following - 1) to plan and organize training of persons employed or desirous of seeking employment in khadi and village industries; 2) to build up directly or through specified agencies reserves of raw materials and Implements and supply them or arrange supply of raw materials and implements to persons engaged or likely to be engaged in production of handspun yarn or khadi or village industries at such rates as the Commission may decide. 3) to encourage and assist In the creation of common service facllities for the processing of raw materials or semi-finished goods and otherwise facilitate production and marketing of khadl or products of village industries; 4) to promote the sale and marketing of khadi or products of village industries or handicrafts and for this purpose forge links with established marketing agencies wherever necessary and feasible. contd,EXIT Fee ae aed eee Khadi and Village Industries Commission > Khadi & Village Industries Commission (KVIC) established under the Khadi and Village Industries ‘Commission Act, 1956 (64 of 1956), is a statutory organization under the aegis of the Ministry of MSME. > The main objectives of KVIC includes the social objective of providing employment in rural areas, the economic objective of producing saleable articles; and the wider objective of creating self- reliance amongst people and building up a strong rural community spirit. > The Commission functions with its Head Office at Mumbai and six Zonal Offices located at New Delhi; Bhopal; Bangalore; Kolkata; Mumbal and Guwahatl and 46 Field Offices spread all aver the country. > The functions of KVIC as prescribed under the KVIC Act, 1956 includes the following - 1) to plan and organize training of persons employed or desiraus of seeking employment In khadi and village industries; 2) to build up directly or through specified agencies reserves of raw materials and implements and supply them or arrange supply of raw materials and implements to persons engaged or likely to be engaged in production of handspun yarn or khadi or village industries at such rates as the ‘Commission may decide.53) to encourage and assist in the creation of common service facilities for the processing of raw materials or semi-finished goods and otherwise facilitate production and marketing of khadi or products of village industri 4) to promote the sale and marketing of khadi or products of village industries or handicrafts and for this purpose forge links with established marketing agencies wherever necessary and feasible. contd.Oe ence Page 12 0f 39 [ BAT nd Village Industries Commission (contd...) 5) to encourage and promote research in the technology used in khadi and village industries, including the use of non-conventional energy and electric power with a view to increasing productivity, eliminating drudgery and otherwise enhancing their competitive capacity and to arrange for dissemination of salient results obtalned from such research; 6) to undertake directly o through other agencies, studies of the problems of khadi or village industries; 7) to provide financial assistance directly or through specified agencies to Institutions or persons engaged in the development and operation of khadi or village industries and guide them through supply of designs, prototypes and other technical infarmation, for the purpose af producing goods land services for which there Is effective demand in the opinion of the Commission; 8) to undertake directly or through specified agencies, experiments oF pilot projects which in the opinion of the Commission, are necessary for the development of khadi and village industries; 9) to establish and maintain separate organizations for the purpose of carrying aut any or all of the above matters.OE museca Cores e tie mmc) Mahatma Gandhi Institute for Rural Industrialization (MGIRT) > Jamnalal Bajaj Central Research Institute (JBCRI) which was an institute existing in Wardha was revamped with the help of IIT, Delhi and a national level institute under the Ministry of MSME called Mahatina Gandhi Institute for Rural Industrialization was created in October 2008, ‘The main objective with which the institute came into being in its new avatar includes acceleration of rural industrialization for sustainable village economy so that KVI sector co-exists with the main stream, attract professionals and experts to Gram Swaraj, empower traditional artisans, Innovation through pilot study/field trials, R&D for alternative technology using local resources. ‘The activities of MGIRI are being carried out by its six Divisions each headed by a Senior Scientists/ ‘Technologist. These divisions are Chemical Industries Division, Khadi and Textiles Division, Bio- processing and Herbal Division, Rural Energy and Infrastructure Division, Rural Crafts and Engineering Division and Management & Systems Division.See ae ead eee Exercise 2 Qi. Which are the two Central Government bodies concerned with the development of the MSME sector in the country which have been created under the MSMED Act 2006? e 1. Development Commissioner -MSME & Advisory Committee for MSME 2. Development Commissioner -MSME & National Small Industries Corporation 2. Natlonal Board for MSME & National Small Industries Corporation 4. National Board for MSME & Advisory Committee for MSME w/ =o = ‘Section 6 of the MSMED Act-2006 provides for establishment of the National Board and Section 7(2) of the MSMED Act, 2006 provides for constitution of Advisory Committee for MSME, LOe Gee mae c bid ect oo Exercise 2 Q2. Which of the following bodies is an attached office of the Ministry? 1. Development Commissioner -MSME ~~ 2. Advisory Committee for MSME 3. Technology Centers-TCs 4. Khadi and Village Industries Commission er Only the Office of the Development Commissioner is an attached office of the Ministry.OE GEe Uitte Page 14 of 39 Exercise 2 Q3. Which is the ition created to promote the sale and marketing of khadi or products of village industries or handicrafts? 41. Technology Centers-TCs 2. Khadi and Village Industries Commission WW 3. Mahatma Gandhi Institute for Rural Industrilization (MGIRI) 4. None of the above - One of the functions of KVIC as prescribed under the KVIC Act, 1956 includes promote the sale and marketing of khadi or products of village industries or handicrafts. LCOe arta Peer) Prime Minister’s Employment Generation Program (PMEGP) > > The scheme aims to generate employment opportunities in rural as well as urban areas of the country through setting up of new self-employment ventures/projects/micro enterprises. Ttalso seeks to provide continuous and sustainable employment to a large segment of traditional and prospective artisans and rural/urban unemployed youth in the country, $0 as to help arrest migration of rural youth to urban areas. {A third objective is to increase the wage earning capacity of artisans and contribute to increase in the growth rate of rural and urban employment. ‘The Scheme Is implemented by Khadi and Village Industries Commission (KVIC), as the nodal agency at the National level, At the State level, the Scherne is implemented through State KVIC Directorates, State Khadi and Village Industries Boards (KVIBs) and District Industries Centers (DICs) and banks. ‘The maximum cast of the project/unit admissible under manufacturing sector Is Rs.25 lakh and Rs 10 lakh under business/service sector, Any individual, above 18 years of age is eligible to seek assistance. I the project size is above Rs.10 lakh in the manufacturing sector and above Rs. 5 lakh in the business/service sector, the applicant must be at least Class VIII Pass.Oe Uuie uu cois CoC Soon Credit Linked Capital Subsidy Scheme (CLCSS) > > ‘The Scheme was launched in October, 2000 and revised on 29.09.2005 ‘The objective of the "Credit Linked Capital Subsidy Scheme (CLCSS)" for Technology Uparadation of Micro and Small Enterprises Is to facilitate technology upgradation In Micro and Small Enterprises (MSEs) by providing capital subsidy of 15 9 (limited to maximum of Rs.15.00 laklis) on institutional finance availed by them for induction of well-established and Improved technology. Maximum limit of eligible loan for calculation of subsidy under the Scheme is investment in approved plant & machinery up to Rs.1.00 crore for induction of the Improved technologies ‘The CLCSS is envisaged to address this Issue of a large percentage of MSEs running with outdated technology and plant and machinery. ‘The scheme is applicable to new and existing Micro & Small Enterprises (MSEs) engaged in manufacturing 51 Sectors/sub-sectors with approved Machinery/Technologies are presently covered under the scheme. Office of the Development Commissioner (MSME) is implementing the scheme through 12 Nodal Banks sdgencies. ‘The Implementation of the scheme has resulted in productivity Improvement and substantial improvement in product quality. The scheme has also led to energy reduction in terms of electricity ‘consumption and fuel consumption besides having a positive impact alr, water and noise pollution.LEE Lata ee se A Scheme for Promotion of Innovation, Rural Industry & Entrepreneurship (ASPIRE) > The scheme aims to Create a database of technologies available with various Government/private agencies and set up Network of Technology Centers for sharing of best practices and experiences, Develop the Human Resources with requisite skills necessary for mentoring and handholding; ‘Set up Livelihood Businass Incubators (LBI) under National Small Industries Corporation (NSIC), KVIC or Colr Board or any other Institutlon/agency of GOW/State Govt. Incubation and Commercialization of Business Ideas Program through technical/research institutes Ministries of GOI and Private incubators Business Accelerator program for scaling up MSMEs. Create a framework for Start-up Promotion through Small Industries Development Bank of India (SIDBI) by using Innovative means of finance to enable generation of Ideas/innovation & to convert these Into commercial enterprises.eT eM ad ee Cres) ‘Scheme of Fund for Regeneration of Traditional Industries (SFURTI) > The objectives of the scheme are to organize traditional industries and artisans into clusters to make them competitive, provide support fr thelr long term sustainability and employment. > Italso aims To enhance marketability of products of such clusters and to equip traditional artisans of the ‘assoclated clusters with the Improved skils. ‘To make provision for common facilities and improved tools and equipment for artisans, to strenathen the cluster governance systems with the active participation of the stakeholders, To build up innovative products, improved technologies, advanced processes, market intelligence ‘and new models of public-private partnerships. > The scheme covers three types of Interventions: = Soft interventions - Activities to build general awareness, counselling, skill development and capacity building, exposure visits, market development initiatives, design and product development, etc. = Hard interventions - Creation of common facility centres, raw material banks, upgradation of production infrastructure, warehousing facility, tools and technological upgradation, ete. = Thematic interventions - Interventions on a cross-cutting basis for brand building, new media marketing, e-commerce initiatives, research and development, etc.Fee eae eee ‘Scheme for Micro & Small Enterprises Cluster Development Program (MSE-CDP) > The Ministry has adopted a cluster development approach as a strategy for enhancing the product competitiveness as well as capacity building of Micro and ‘Small Enterprises (MSES). “The objectives of the Scheme include supporting the sustainability and growth of MSEs by addressing common Issues such as improvement in technology, skills and quality, market access, access to capital, building capacity of MSES for common supportive action through formation of self-help Groups, consortia, upgradation of association etc, creating/ Turmeric Clusters, Sangli, Maharashtra Uuparading infrastructural facilities in the new/existing Industrial areas/clusters of MSEs and setting up Common Facility Centers (for testing, training center, raw material depot, effluent treatment, complementing production processes etc.). > The major activities under the scheme include ‘= Funding support for setting up of ‘Common Facility Centers (CFC)’. ‘= Funding support for setting up of ‘Common Display Centers (CDC) for Women Entrepreneurs’. ‘= Funding support for “Infrastructure Development Projects (new/ upgradation).Oe REEL ees) ‘Scheme for providing financial assistance to Khadi institutions under MPDA > The Government introduced from 01.04.2010, a flexible, growth stimulating and artisan oriented Market Development Assistance (MDA) Scheme. This scheme replaced the erstwhile system of rebate > Under MDA, financial assistance is provided to institutions @ 30% of the value of production of khadi and poly-vastra, to be shared among artisans, producing institutions and selling institutions in the ratio 40:40:20 respectively. > MDA provides institutions flexibility to use the assistance for improving the outlets, products and production processes, besides giving incentive to customers, etc. > KVIC Is the implementing agency of MPDAFinancial Support for ZED certification > The Ministry of MSME has launched on 18.10.2016 a new scheme named ‘Financial Support to MSMES in ZED Certification Scheme’ > The scheme envisages promotion of Zero Defect and Zero Effect (ZED) manufacturing amongst MSMEs and ZED Assessment for their certification with the objectives like, developing an Ecosystem for Zero Defect manufacturing, promoting adaption of Quality tools/systems and Eneray Efficient manufacturing etc > After ZED assessment, MSMEs can reduce wastages substantially, increase productivity, expand their market, become vendors to Central Public Sector Undertakings, develop new products and processes ete. > The Quality Council of India (QCT) Is the National Monitoring & Implementing Unit (NMIU) to implement ZED scheme among MSMES across the country,SO eae alid Page 21 of 39 National Scheduled Caste and Scheduled Tribe Hub > The Hub provides professional support to SC/ST entrepreneurs to fulfll the obligations under the Central Government Public Procurement Policy for Micro and Small Enterprises Order 2012, adopt applicable business practices and leverage the Standup India initiatives. > The Scheme is implemented through National Small Industries Corporation Ltd. (NSIC). > The National SC/ST Hub carries out the following functions: = Collection, Collation and Dissemination of information regarding SC/ST enterprises and entrepreneurs. Capacity building among existing and prospective SC/ST entrepreneurs through skill training and EDPs. = Vendor Development involving CPSEs, NSIC, MSME-DIs and industry associations including DICCI. = Promoting participation of SC/ST entrepreneurs in exhibitions and organizing special exhibitions for this purpose. = Mentoring and hand holding support to SC/ST entrepreneurs. = Working with States as well as other organizations for SC/ST entrepreneurs so that these enterprises can benefit from all of them. Facilitating SC/ST entrepreneurs participating in public procurement, e-platform of DGS & D and, monitoring the progress. Facilitating credit linkages for SC/ST entrepreneurs.Fee eae reece) The Scheme for setting up new and moder 1g existing Mini Technology Centers > The Scheme envisages providing financial assistance to State Governments for setting up new and modernizing existing Mini Technology Centers. > The quantum of financial assistance is 90% of the cost of machinery/equipment/buildings, not exceeding Rs. 10.00 crore. Government of India funding would not be admissible towards cost of land, > The scheme is focused on development of MSME in North East Region and Sikkim. Development of new and existing Industrial Estates > Financial assistance is provided for development of new and existing Industrial Estates to the extent of 80% of the cost of infrastructure facilities not exceeding Rs. 8.00 crore, > The infrastructure facilities will include power distribution system, water, telecommunication, drainage & pollution control facilities, roads, banks, storage and marketing outlets etc. > The scheme is focused on development of MSME in North East Region and Sikkim.Performance and Credit Rating Scheme > To enable small enterprises to ascertain the strengths and weaknesses of their operations and take corrective measures to enhance thelr organizational strength. NSIC Is operating a Performance and Credit Rating Scheme. > The scheme is administered with the help of empaneled rating agencies like ICRA, ONICRA, CRISIL, India Ratings & Research Pvt. Ltd. CARE, BRICKWORK and MSMERA. > Sinall enterprise has the liberty to choose any of the rating agencies empaneled with NSIC, > Rating agencies will charge the credit rating fees according to their policies.See ae eed ener 1SO 9000/1S0 14001 Ce ication Reimbursement Scheme > The incentive scheme, introduced by GOT, Is to enhance the competitive strength of the MSME sector for their technological upgradation/quality improvement and environment management. > Under the scheme, reimbursement of expenses for acquiring Quality Management System (QMS) ISO 9000 certification/Environment Management (EMS) ISO 14001 certification/HACCP certification to the extent of 75% or RS. 75,000/- whichever is lower Is available. > The permanently registered MSMES are eligible to avail the facility. > However the reimbursement will be made only against certcates obtained from certification bodies directly accredited by National Accreditation Board of Certification Bodies (NABCB) and bear thelr logo.National Award Scheme > The Ministry of Micro, Small and Medium Enterprises with a view to recognizing the efforts and contribution of MSMEs gives National Award annually to selected entrepreneurs and enterprises under the scheme of National Award. > The Awards are given for every calendar year, periodically, to deserving entrepreneurs of Micro, ‘Small and Medium Enterprises having permanent registration/have flled Entrepreneurs Memorandum, ‘with the authorities notified by respective State Governments/UT Administration. > The MSMEs should have been in continuous production/service for last four years, > There are various categories for which prizes are given Scheme of Credit Guarantee Trust Fund For MSEs (CGTMSE) > This is @ major scheme of the GOI and will be dealt with separately and exhaustively In the later unitsEe MecLd eae Exercise 3 Qi. Which is one of the schemes of the Central Government which aims at organizing traditional industries and artisans into clusters? 1. A Scheme for Promotion of Innovation, Rural Industry & Entrepreneurship (ASPIRE) 2. Credit Linked Capital Subsidy Scheme (CLCSS) 3. Scheme of Fund for Regeneration of Traditional industries (SFURTI) W 4. All the above ‘The objectives of SFURTI is to organize traditional industries and artisans into clusters to make them competitive, provide support for their long term sustainability and employment.Pe EMG Licked eee) Exercise 3 Q2. Which is the Central Government Scheme to Set up Livelihood Business Incubators (LB1) under National Small Industries Corporation (NSIC), KVIC or Coir Board or any other Institution/agency of GOI/State Government? 1. Credit Linked Capital Subsidy Scheme (CLCSS) 2. A Scheme for Promotion of Innovation, Rural Industry & Entrepreneurship (ASPIRE) W~ 3, The Scheme for setting up new and modernizing existing Mini Technology Centers 4, None of the above ro = <> ASPIRE aims at Setting up Livelihood Business Incubators (LBI). ———UE uEE Uitacbid Page 24 of 39 Exercise 3 41. Ascheme that aims at zero defect zero effect W“ 2. Scheme for creating MSMES at Zila Parishads 3. Education by Zee Classes 4. None of the above Back ‘The ZED Certification scheme envisages promotion of Zero Defect and Zero Effect (ZED) manufacturing) amongst MSMEs and ZED Assessment for their certification with the objectives like, developing an Ecosystem for Zero Defect manufacturing, promoting adaption of Quality tools/systems and Energy Efficient manufacturing etc.ee eed ened Institutional Support in States > State Governments have also established a number of institutions for the promotion of industries ‘whose decisions and functions influences industrial activities in the State, Details of these institutions are discussed hereinafter. Directorate of Industries > For promotion and development of village and small industries in states, the executive agency is the Directorate of Industries. > Tt acts under the overall guidance of Development Commissioner MSME which functions as both regulatory and development agency. > Ithas a network of District Industries Centers at District level, Industrial Officer at sub-division level and extension officers at Block levelee uetokd Page 26 of 39 [EXIT District Industries Center > The Industrial Policy of 1977 initially contained the concept of District Industries Centers (DIC). > Tt was a centrally sponsored scheme and was a landmark measure In development of cottage and ‘small industries in smaller towns in India, > The basic purpose of the DIC’s is to generate more employment opportunities for rural people. It ‘was intended to make It the central location for = ranting financial and other facilities to small units = developing close links with development blocks and specialized institutions providing help to set up industries in rural areas = identifying and helping new entrepreneureee tos Dee mmc District Industries Center > The activities carried out by the District Industries Centers is as follows: |= Registration of MSM units (Permanent/Provisional).. Registration of Handicrafts/Cottage industries. ‘Implementation of Prime Minister's Rozaar Yojana, Granting of subsidies to MSM units. Distribution of Project profiles among entrepreneurs. ‘Training for Entrepreneur Development Program. Organization of Industrial Cooperative Societies. Raw Material assistance through SIDCO. Marketing assistance through SIDCO. ‘Conducting Motivation Campaigns. Clearance of licenses etc. through Single Window Meeting, Rehabilitation of sick MSM units. Recommendation of Awards to MSM units. Recommendation of loan applications to banks under KVIC Scheme, . . |= Allotment of sheds in Electrical & Electronic Industrial Estates. . . .Se eed Pere Mar State Finance Corporations (SFCs) > The SFCs were set up under the State Financial Corporation (SFCs) Act, 1954. > There are 18 SFCs across the country mandated to serve as Regional Development Banks for promoting industrial growth. > While 17 of them have been formed under the abovementioned Act, one of them in Tamil Nadu has been formed under The Companies Act. > The first SFC was established in Punjab in 1953 > These Corporations were envisaged to function as Development Financial Institutions (DFIs) mainly for SSIs. Besides providing term loans for setting up new, expansion, modernization, etc., of Industrial units, they are also mandated to provide equity support wherever needed, > These institutions have made significant contribution in developing industrial sector including the MSMEs in India over post more than six decades, > However with the Introduction of financial sector reforms, the business environment for SFCs, as also other players in the financial system, have become increasingly competitive.Institutional Framework eos State Finance Corporations (SFCs) > To enable SFCs to adapt themselves to the emerging environment and promote the growth of the ‘small and micro Industries in the desired manner, the Government of India enacted amendments to the SFC Actin the year 2000 with a view to enlarging thelr shareholders base, providing, them with greater functional autonomy and operational flexibility and enabling them to respond to the needs of the changing financial system, ‘The financial assistance provided by the SFCs is by way of term loon, debentures etc. > Their main resource is refinance provided by SIDEI. > The SFCs have schemes for artisans and specific target groups which are tailor-made to sult different categories. Under the single window concept, working capital finance is also sanctioned. However despite the SFCs having powers for recovery of dues under Section 29 of SFCs Act including powers for seizure and auction of defaulters' assets, study of some of the SFCs have revealed huge non-performing assets The MoU envisaged rescheduling of refinance, cheaper resources support, reduction in interest rate on refinance outstanding, reduction of NPAs, recapitalization, professionalization, capacity/building assistance, risk management, etc. Since FY 2004, SIDBI, with the support and guidance of Government of India, has taken several steps for revival of these Corporations through a tripartite memorandum, wherein, the concerned State Governments have also been made party, besides SIDBI and the SFC concerned. ‘The MoU has envisaged rescheduling of refinance, cheaper resources support, reduction in interest> The MoU has envisaged rescheduling of refinance, cheaper resources support, reduction in interest rate on refinance outstanding, recovery in NPAs, recapitalization, professionalization, capacity/ building assistance, risk management, etc. > With the buoyancy in MSME sector, these Corporations are expected to improve their operations and provide another window of assistance to MSMEs in their areas of operations.ee ead eer) ‘State Industrial Development Corporations (SIDC) ‘The State Industrial Development Corporations have been set up under the Companies Act, at various times, by the State Governments, as companies wholly owned by them. ‘At present, 22 such SIDCs are functioning in India. SIDCs are not merely financing agencies, but are intended to act as instruments for accelerating industrialization in the respective States. Besides providing financial assistance to industrial concerns by way of loans, guarantees and underwriting of or direct subscriptions to shares and debentures, the SIDCs undertake various promotional activities such as conducting techno-economic surveys, project identification, preparation of feasibility studies, selection and training of entrepreneurs. Some of the SIDCs have set up their own Industrial units for demonstration purposes. ‘Where they promote joint sector projects, in association with private promoters, SIDCs take 26% of ‘equity, private co-promoter takes 25% and the rest is offered to the investing public. ‘SIDCs also undertake the development of industrial areas, construction of sheds and provision of infrastructural facilities. They administer various State Government incentive schemes. ‘The IDBI grants refinance to SIDCs against the term loans provided by them. SIDCs also borrow by ‘way of bonds and from the Government and accept deposits for augmenting sources of funds resources.ee eee Page 29 of 39 ‘Small industries Development Corporation (SIDCO) > > For the promotion of MSME units, many state governments, have established a separate corporation which Is known as Small Industries Development Corporation. ‘They undertake all kinds of activities for the promotion of MSMES, right from installation to the stage of commencing production, > Due to the assistance provided by SIDCO, many backward areas in the states have been developed, > The following are the main objectives of SIDCO: = To stimulate the growth of industries in the MSME sector. |= To provide infrastructure facilities like roads, drainage, electricity, water supply, ete. = To promote industrial estates which will provide industrial sheds of different sizes with all basic infrastructure facilities. = To provide technical assistance through training facilities to the entrepreneurs. |= To promote skilled labor through the setting up of industrial training institutes.eeu cuid Cree re eS Exercise 4 Qi. Which is the main executive agency for development of village and small industries in 9 states? 1. District Industries Center 2. District Court 3. Directorate of Industries WW 4, District Development Office For promotion and development of village and small industries in states, the executive agency is the Directorate of Industriesee ae ace Page 30 of 39 Exercise 4 Q2. In which document was the concept of District Industries Center first mooted? 9? 41. The Industrial Action Plan 1977 2. The State Level Development Plan 197 3. The MSMED Act 2006 4, The industrial Policy W ‘The Industrial Policy of 1977 initially contained the concept of District Industries Centers (DIC).Cue akc’ Page 300f 39 | BaT Exercise 4 Q3. Which organization in states is mandated to serve as Regional Development Banks for promoting industrial growth? 4. State Industrial Development Corporations (SIDC) 2. District Industries Center. 3. State Finance Corporations(SFCS) W~ 4, None of the above ‘There are 18 SFCs across the country mandated to serve as Regional Development Banks for promoting industrial growth.See ees eee) Introduction > There are a few agencies and organizations established by the Central/State Gavernment/Public/ Private sectors to directly or indirectly promote the growth and development of the MSME sector. ‘Some of these are detailed hereunder. Housing & Urban Development Corporation (HUDCO) > Housing & Urban Development Corporation Ltd. (HUDCO) Is a public sector company fully owned by Government of India for financing of housing and urban infrastructure activities in India. > HUDCO was incorporated on April 25, 1970 under the Companies Act, 1956. > The objectives for establishment of HUDCO by the GOI are as follows: To undertake housing and urban infrastructure development programs in the country. To provide long-term finance for construction of houses for residential purposes in urban & rural To finance or undertake, the setting up of the new or satellite towns and industrial enterprise for building material To subscribe to the debentures and bonds to be issued by the State Housing (and/or Urban Development) Boards, Improvement Trust, Development Authorities, etc. for financing housing and urban development programs.= To promote, establish, assist, collaborate and provide consultancy services for the projects of designing and planning of works relating to housing and development programs in India and abroad. = To carry out administration of the moneys received from time to time from GOT and other sources 4s grants or otherwise for the purpose of financing or undertaking housing and urban development programs in the country.eae a ere Sc Coir Board > The Coir Board is a statutory body established under the Coir Industry Act, 1953 for promoting the overall development of the coir industry and improvement of the living conditions of the workers engaged in this traditional industry. > India is the largest coir producer in the world accounting for more than 80 per cent of the total world production of coir fibre and is very diverse and involves households, co-operatives, NGOs, manufacturers and exporters. > Nearly 80% of the coir workers in the fibre extraction and spinning sectors are women. > The functions of the Coir Board for the development of coir industry, inter-alia, include, > Promoting exports of coir yarn and coir products and carrying on publicity for that purpose. > Regulating under the supervision of the Central Government, the production of husks, coir yarn and coir products by registering coir spindles and looms used for manufacturing coir products as also manufacturers of colr products.Pui Eat eee sue Coir Board > Regulating under the supervision of the Central Government, the production of husks, coir yarn and Coir products by registering coir spindles and looms used for manufacturing coir products as also manufacturers of coir products. > The following are the activities of the Coir Board. = Undertaking, assisting or encouraging scientific, technological and economic research and ‘maintaining and assisting in the malntenance of one or more research institutes. = Collecting statistics from manufacturers of and dealers in colr products and fram other persons and the publication of statistics so collected. Improving the marketing of coconut husk, coir fibre, coir yarn and coir products in India and elsewhere and preventing unfair competitions; ‘Setting up or assisting in the setup of factories for the producers of coir products with the aid of power. Promoting co-operative organization among producers of husks, coir fibre and coir yarn and manufactures of coir products. Ensuring remunerative return to producers of husks, coir fibre and coir yarn and manufacturers of coir products; Advising on all matters relating to the development of the coir industry,eee ak’ age 33 0f 39 | BAT Institute for the Design of Electrical Measuring Instruments > The Institute was set up in 1960 with the assistance of UNDP and UNIDO mainly to render services to the instrument Industries. > It provides Training & Consultancy in the areas of: = Instrumentation; |= Design & Development of new electrical instruments |= Testing and calibration of instruments = Tool designing and tool making > The Institute is looked upon as a nodal center in view ofits multifarious activities offered to suit various needs of instrument industry.De LeuLd eee Technical Consultancy Organizations > > ‘Technical Consultancy Organizations (TCOs) were created for facilitating technical consultancy for Industrial prajects. ‘These organizations were established by the then All India Financial Institutions (IDBI, ICICI, IFC, etc.) In collaboration with the state level financial/development organizations and ‘commercial banks. ‘There are in all 18 state-level TCOs across India. ‘The major activities of TCOs are as follows Development of Industry Clusters Conducting Industry Potential Surveys/Techno-Ecanomlc Viability (TEV) studles Infrastructure Planning Energy and Environment Research and Management NPA Resolution Vocational Training Technology Facilitation / Preparation of Project Profiles Conducting Entrepreneurship Development Programs Carrying out Market Research far specific products Offering Merchant Banking Services Offering Consultancy for Export-oriented Enterprises Technical Consultancy OrganizationsUae acd ee Exercise 5 Q1. With the support of which UN agency was the “Institute for the Design of Electrical Measuring Instruments’ set up in 19697 e 4. UNICEF 2. UNICORN 3. UNDP Ww 4, USAID ‘The Institute was set up in 1969 with the assistance of UNDP and UNIDO..Teed EES Exercise 5 Q2. Which country is the largest producer of coir fibre 1. India ~ 2. Malaysia 2. Sr Lanka 4. West Indies More than 80 percent of the total world production of coir fibre is in India.Der ueciid cee mmo Exercise 5 Q3. Which of the following was not an objective with which HUDCO was established in 19702 e 41. To provide long-term finance for construction of houses for residential purposes In urban & rural 2. To subscribe to the debentures and bonds to be issued by the State Housing (and/or Urban Development) Boards ete @ 3. To undertake housing and urban infrastructure development programs in the country 4. To develop Industrial estates w/ oo = < HUDCO Is an organization created specifically for working in the field of housing and urban infrastructure activites in India,OE IGEE Luts oid Page 360f 39 | BaT ‘Summary > There isa separate ministry for the MSME called the ‘Ministry of Micro, Small and Mediurn Enterprises’ which has been formed to provide support to existing enterprises in adopting cutting edge technologies etc, create an environment encouraging new enterprises and carry out other actions necessary for the growth and development of the MSME sector. A number of statutory and non-statutory institutions/bodies work under the aeais of the Ministry of MSME and the ministry runs various schemes mostly through these institutions aimed at financial assistance, technology assistance and upgradation, infrastructure development etc for MSME, ‘The ministry also designs suitable policies keeping In mind the welfare of the MSME sector, arranges Entrepreneur Development programs etc. ‘The National Board for MSME and the Advisory Committee for MSME are bodies created under the MSMED Act 2000 and play a vital role in MSME matters. ‘The Office of the Development Commissioner is an attached office of the Ministry and has a number of ‘autonomous bodies attached to It which Includes MSME-Development Institutes, Regional Testing Centers, etc. ‘The main institutions set up by the Central Government includes the 18 Technology Centers present in various parts of the country, the National Small Industries Corporation having a mission of promoting, alding and fostering the growth of micro, small and medium enterprises in the country. contd,Oe uee maak Page 37 of 39 [ EXIT ‘Summary (contd...) > The other Central Government institutions includes the Khadi and Village Industries Commission and tthe Mahatma Gandhi Institute for Rural Industrialization (MGIRI) which have been established to serve the social objective of providing employment in rural areas, the economic objective of producing saleable articles and the wider objective of creating self-reliance amongst people and building up @ strong rural community spirit besides providing acceleration of rural industralization etc, ‘The Central Government has also devised a number of Schemes such as the Prime Minister's, Employment Generation Program (PMEGP) primarily aiming to generate employment opportunities in rural as well as urban areas, the Credit Linked Capital Subsidy Scheme (CLCSS) to facilitate technology upgradation in Micro and Small Enterprises (MSEs) by providing capital subsidy, a Scheme {or Promotion of Innovation, Rural Industry & Entrepreneurship (ASPIRE) seeking to develop human resources, provide a data base etc, and the Scheme of Fund for Regeneration of Traditional Industries (SFURTI) for organizing traditional industries and artisans into clusters to make them competitive ete. There are also different other schemes of the Central Government such as Scheme for Micro & Small Enterprises Cluster Development Program (MSE-CDP), Scheme for providing financial assistance to hadi institutions under MPDA, scheme of Financial Support for ZED certification, scheme for creation ‘of a special hub for Scheduled Caste and Scheduled tribe, scheme for developing industrial estates etc. ‘each of which are focused on providing various services to MSMES.DE ed eee Summary (contd...) > There are a number of institutions/bodies established by the State Governments also for promotion of industries the decisions and functions of which influences industrial activities in the States. > These institutions and bodies include the Directorate of Industries, the District Industries Centers set up for the promotion of MSMES in states and coordinate with the Central institutions for implementation of the schemes. There are also institutions like the State Finance Corporations(SFCs), the State Industrial Development Corporations (SIDC) and the Small industries Development Corporation(SIDCO) working in the states and performing all kinds of activities for the promotion of MSMEs, right from Initiating the process of starting an enterprise to the stage of commencing commercial production like promoting industrial estates, providing industrial sheds of different sizes with all basic Infrastructure facilities, giving technical assistance and training facilities, providing financial assistance to industrial concerns by way of loans, guarantees and underwriting etc. ‘There are also a few other agencies and organizations established by the Central/State Government/ Public/Private sectors to directly or indiractly promote the growth and development of the MSME sector such as HUDCO, Coir Board, Institute for the Design of Electrical Measuring Instruments and Technical Consultancy Organizations which are performing various tasks at the state and central level for uplifting the sector.Credit Process & Administration Part -2eee a Credit Process & Admi Le Tassel Course Description and Units ‘The course describes in detall the process involved in assessment of working capital limits in general, and specifically in respect of such facilities sanctioned to MSMEs. It also gives information about the use of SIDBI-CART software for credit appraisal/assessment of micro and small enterprises usually with limits up to Rs.1 crore, the use of various credit scoring software and one which facilitates online ‘in principle” ‘sanction of loans to MSMEs in"59 minutes’. The course further goes on to detail the process of sanction of facilities/rejection of proposals, documentation after sanction and the usual procedures and precautions which are followed in this respect. Furthermore, it describes how credit monitoring including follow up Is done. Credit monitoring is post-disbursement activity which can be defined as the process of keeping track of a borrower's performance throughout the period, the facilities are in place. The reader is then informed about the review process and how it is nothing but revisiting the various financial estimates (on the basis, of comparison with actual audited financial statements), covenants, primary/collateral security values etc., ‘on the basis of which the credit facilities were sanctioned to a borrower and observing and documenting deviations/taking steps for its amelioration of deficiencies as well as about the significance of the Loan’ Review Mechanism. Thereafter the role of Internal Ratings by Banks/External Rating by Credit Rating ‘agencies and how rating MSMEs, help in the credit process js elucidated. The course ends by enlightening the reader about Business Development Services Providers and how they provide non-financial services ‘and products to entrepreneurs at various stages of their business needs.Unit 1: Objectives Unit 2: Credit Process-Credit Assessment Unit 3: Sanction & Documentation Unit 4: Credit Monitoring, Follow up and Review Unit 5: Rating-Importance in the Credit Process Unit 6: Role of Business Development Services Providers Unit 7: Summary Unit 8: Test Your SkillsObjectives Obj ‘On completion of this course, you will be able to: > Leam in detail about the credit assessment process for sanction of working capital limits in general and to MSMEs in particular and the use of software in credit appraisal/assessment, credit scoring and in granting ‘in principle’ sanction for micro and small enterprises usually requiring facilities up to Rs.1 crore, Get insights into the steps involved in the sanction of credit limits or rejection of credit proposals, the importance of documentation and how docunentation is carried out after sanction. Acquire knowledge of the concept of Credit Monitoring/Follow up and Review and how they are important for the health, growth and development of MSMEs in the country as well as for the healthy balance sheets of the lenders. Understand the role of Internal Ratings by Banks and External Ratings by Credit Rating Agencies in the credit process Lastly you will acquire knowledge about the Business Development Services Providers and how they play an important part in the progress of MSMEs. Duration © VourCee eer eed Cao Introduction > In the Credit Process function, Credit assessment is very important. > Credit assessment consists of quantifying the need based credit requirements of an enterprise/ proponent on the basis of information submitted by it/him/her and also gathered during credit, appraisal > We shall learn about the various methods of credit assessment of working capital used by Banks and Financial Institutions Assessment as Per Facility > The credit assessment used differs depending on the faclity/facilities being considered to the MSME, > Broadly the assessment is different depending on whether the facility considered is for = Working capital = Term Loan or = Non-fund based facilities. > We shall study how assessment Is done for working capital facilities. > Over and above the aforesaid facility wise assessments, for micro loans/composite loans with limits up {to Rs.100 lacs certain software which appraise and assess the proponents online comprehensively are Increasinaly being used which shall also be discussed in this unit.ore eee SC er aed Cree eS) Worl 9 Capital Assessment Introduction > The funds required to sustain the operating cycle of a unit Is called working capital > The quantum of working capital requirement depends on the level of activity and length of the operating cycle. > The components of working capital are raw materlal/consumables, work-in process, finished goods, recelvables/bills, other expenses, etc., as has already been explained while discussing about working capital cycles in Study Board 5-Sectoral Problems and Evolving Solutions Unit 2 Page 8. > The funds/capital required for maintaining the requirad level of current assets is called Gross Working Capital (GWC). > tis necessary that part of the GWC is financed from long and medium term liabilties/Capital for the enterprise to remain liquid > Therefore medium and long term liability should be more than non-current assets + fixed assets + intangible assets. > Thus working capital is to be financed partially by way of own funds (equity, reserves, etc.), bank borrowings, sundry creditors, other short term finance (power bills, wages & salaries/expenses, etc).> The gap known as the Working Capital Gap (WCG) Is financed by the bank. > Thus in other words ,the difference between total current assets (TCA) and current liabilities (CL) other than bank borrowing is known as WCG. > The example given below will make this concept very clear. feed) conta.Credit Process & Administration Part - 2 Cree asc Introduction (contd...) > For suggesting methods of calculating Working Capital requirements, various committees were constituted from time to time-the most prominent being the Tandon Committee and the Chore ‘Committee. > More details about the aforesaid committees will be discussed later but here it would have to be mentioned that as per the original recornmendations of the committees certain norms were prescribed {or maintaining holding levels of inventory and receivables by industries as under Holding level of Raw Material Holding level of Work-in-process Holding level of Finished goods Ey Receivables Credit Assessment Process Glick each plus point to view the detais. > However nowadays Banks and other financial institutions often assess the credit requirements of borrowers based on total study of borrowers business operations i.<., taking into account the production/processing cycle of the industry as well as the financial and other relevant parameters of the borrowers. > The different methods of assessing working capital requirements and other aspacts will be dealt with in mare detail hereunder.Credit Process & Administration Part - 2 re tae oc Factors which Determine Working Capital Requirements ‘The following factors determine the overall working capital levels of the Industrial enterprises: > Production Policies ‘The production policies (say number of shifts/capacity utilization/distance from unit where raw materials are sourced) being implemented by the management of the unit, determine the fund required to maintain the desired level of inventories. > Manufacturing process: Products having longer manufacturing processes would need a higher level of working capital while others having medium or shorter duration of manufacturing process would need lesser working capital > Credit policy of the ut In order to successfully market thelr products, the enterprise has to allow credit to buyers depending upon a number of factors such as the competition, the practice in the trade, etc. In this process of aiving credit to its buyers, the funds of the unit will get blocked in receivables which will increase the requirements for working capital.> Pace of turnover: ‘The quantum of working capital needed Is also linked to the pace with which the sales are effected. Wherever the sale is at a faster pace i.e, the working capital /operating cycle is smaller, the requirement of working capital is less and vice versa. For example the requirement of working capital In an enterprise carrying on trading activities Is generally less than a manufacturing unit as there Is no manufacturing process Involved and thus the pace of sales are faster > Seasonality: ‘Seasonality Is another Important factor which determines the level of working capital needs, Tt will be seen that where a raw material is available seasonally only, the manufacturer using such raw material has to stock a higher amount during the season, for use during that part of the year (off season) when the raw material Is not available Here the working capital requirement would be higher. Similar there would be a higher requirement of ‘working capital where finished goods are sold seasonally such as in the case of fans/coolers manufacturer but have to be manufactured throughout the year. > Apart from the above important factors which determine the level of working capital requirements, there are other Industry specific factors which have to be taken Inta consideration while assessing ‘working capital limits and which tend to increase or decrease working capital requirements.CAE aS ou Methods of Assessment “There are various methods of assessment of working capital requirements of an enterprise and the method actually employed would depend on the type and scale of activity, limits required, whether new or existing enterprise, credit policy of the Bank, RBI directions etc. > Tandon Committee - First Method of Lending In terms of the First Method of Lending stipulated under the Tandon Committee |= 75% of the working capital gap(WCG) is financed by the lender i.e., the MPBF is 75% of the wee |= 25% has to be brought in as margin by the borrower |= This results in a minimum current ratio of 1.17:1 | Wherever the Net Working Capital (NWC) is more than 25%, the MPBF will be proportionately reduced.> Tandon Committee-Second Method of Lending Under the Second Method of Lending stipulated by Tandon Committee = 75% of the Total Current Assets is the MPF which would be financed by the lender ‘= Minimum Value equal to 25% of the Total Current Assets will have ta be brought In by the borrower as margin = This results in a minimum current ratio of 4.33: = Hore again ifthe actual NWC is more than 25% of the current assets , the MPF will be reduced by the lender proportionately 2 contd.ae Credit Process & Administration Part - 2 Methods of Assessment (contd...) > Operating Cycle Method ‘The Operating Cycle method can be Illustrated explicitly using the following example '= Let us suppose that In respect of M/s ZX & Co., a manufacturer of steel colls, 120 days Average time taken to acquire raw material Process time 40 days Average holding period for finished goods 10 days Average collection period of bills 10 days ‘Therefore the operating cycle is (120+ 40 + 10 + 30) 100 days ‘Therefore, the number of operating cycles ina year = 365/200 = 1.83, (Working Capital turnover ratio) Now, assuming that the sales tumover forecast for M/s ZX& Co. is INR1,00,000 for the next year ‘and the operating expenses is expected to be INR. 60,000 = In M/s ZX®& Co., as shown above, there are 1.83cycles of operation during a year. This means that each rupee of working capital employed gets turned over 1.83times in a year. INR. 32790/ = Thus the working capital requirement of M/s ZX& Co. would be Rs.60000/1.8:Now, assuming that the sales turnover forecast for M/s ZX& Co. is INR1,00,000 for the next year ‘and the operating expenses is expected to be INR. 60,000 = In M/s ZX® Co., as shown above, there are 1.83cycles of operation during a year, This means that each rupee of working capital employed gets turned over 1.83times in a year. ‘= Thus the working capital requirement of M/s 7X@ Co. would be Rs.60000/1.83 =INR. 32790/ "= This implies that, the working capital requirement of ZX &Co Is only INR 32790/ say INR. 33000/- (Since the same rupee is available for redeployment 1.83times during the year). = In this method the quantum of working capital funds needed depends on two factors - the operating cycle and the projected sales = Whenever there Is a reduction In the length of the operating cycle there would be an improvement in the working capital turnover ratio. This leads to economising on working capital or better utilisation of funds. contd,Credit Process & Administration Part - 2 ee eae Methods of Assessment (contd...) > Turnover Method ‘= The Turnover method, which Is derived from the Operating Cycle method, was Introduced as per the recommendations of the "Nayak Committee”. ‘While this method of assessment was initially meant only for SSI (now MSME), it was later resorted for all borrowers requiring Fund Based Limits up to and including INR 5 crore. In the Turnover method, the borrower has to bring in as margin a minimum of 5% of the projected turnover while the lender would finance 20% of the same. In this method the operating/working capital cycle is assumed to be 3 months {In case the cycle is longer, the working capital can be assessed in excess of 25% of the projected turnover keeping minimum margin of I/Sth of the working capital requirement. However unlike in other methods of assessment if the working capital cycle Is shorter, the working ‘capital limits of 20% of the projected turnover would usually be sanctioned and drawing restricted to the drawing power after excluding unpald stock acquired under LC (DA). ‘The, working capital limits to MSMEs are computed on the basis of this method {.e., minimum 20% of thelr estimated tumover, up to credit limits of Rs. 5 crare. contd...Cones One aS Methods of Assessment (contd...) > Cash Budget Method ‘= In this method, the MPBF allowed to a borrower would be the peak level cash deficit calculated on the basis of projected/accepted cash budget statement usually submitted by the borrower for ‘each month of an ensuing year. |= The cash budget statements are thus projected receipts and payments of cash for the next 12 months on account of operating activities/financing activities and investing activities of the borrower. Assessment of Working Capital Limits usually to MSMES. > For limits up to INR 5 crores from the banking system, the turnover method suggested by the Nayak ‘Committee or the first method of lending suggested by Tandon Committee is used, for new as well {a5 existing enterprises. The procedure followed is as under > On comparison of the limit assessed by both methods the higher assessed limit Is usually sanctioned to the borrower subject to any limitation placed ,if any, in an individual Banks Credit Policy for MSMEs = The Actual drawings in the account, as is prevalent in all methods of assessments, are allowed on the basis of drawing power available in the account.> The only exception to the above method, for limits up to INR 5 crore Is where software which appraise and assess the credit requirements of proponents online, in a comprehensive manner, are used, usually for limits up ta INR 1 crore > For limits above INR 5 crore from the banking system, the second method suggested by Tandon Committee or Cash budget method is followed. conte Credit Process & Administration Part - 2 Lean cul Credit Appraisal/Credit Assessment Software(contd...) Credit Appraisal/Credit Assessment Software SIDBI- CART > A software called "Credit Appraisal and Rating Tool (CART)" has been developed by SIDBI. > Loan proposals can be appraised/ assessed conveniently by Banks’ using this software > Credit Ratings of borrowers to determine pricing can also be generated through this software. > Usually credit limits up to INR 1 crore to MSMEs are processed using this software, which also has a maker/checker system which ensures online initiation/generation and sanction of such proposals. > The software has been provided free to Banks by SIDBI under the Small Enterprises Financial Centre (SEFC) Scheme of RBINew Loan Portal - psbloansinSominutes.com > > ‘On 2" November 2018, the Government of India intreduced a quick business loan portal for the MSMEs who wish to expand their existing business. “Public Sector Bank loans in 59 minutes’ is an online marketplace, which enables the MSMEs to apply land get ‘In principle’ approval for loans fram Rs. 10 Lalth to Rs.1 crore in just 59 minutes, ‘This initiative was taken with the objective to ease start of MSME business and promote self- ‘employment in India by reducing the loan approval process and long queues at the bank. Once in principle approval is received it is expected that the loan would be disbursed In 7-8 working days, after expeditious regular sanction. PSB Loans in 59 minutes processes the loans without human intervention tll the stage of sanction, ‘The analysis process Is dane from the various sources of the loan applicant's financlal profile PSB Loans in 59 minutes is Integrated with the latest facilities lIke Income Tax Return, GST and Bank statement so it helps in quick decision making of the loan application. ‘The loan can be availed through psbloansinS9minutes.comee ake eC ead cores teva oc Exercise 1 Qi. Which one of the following is a method of assessing working capital requirements of an enterprise? . 41. Tandon Committee-Second Methed of Lending 2. Turnover Methed 3. Cash Budgeting Method 4. All the above ‘Working Capital requirement of an enterprise could be assessed using any of the abovementioned methods or by the Tandon Committee-First Method of Lending and the Operating Cycle Method.Credit Process & Administration Part - 2 [ore OETA sus Exercise 1 Q2. In the Tandon Committee suggested Second Method of Lending, minimum contribution of the borrower from long term sources? 1. 25% of the Current Assets WW 2, 25% of the Working Capital Gap 3, 20% OF the Working Capital Gap 4, None of the above In this method 25% of the Current Assets has to be brought in by the borrower from medium/long term sources/capital.Credit Process & Administration Part - 2 Pee eran ecu Exercise 1 Q3. Which one of the following is not a factor that directly affects the working capital ments of an enterprise? 4. Seasonality of product manufactured 2. Seasonality of raw Material 2, Distance from raw material source 4. The age of the entrepreneur ~~ nn = "hea fie neem ding ott seme oan |Credit Process & Administration Part - 2 [eS ER ems] Sanction > Once credit appraisal and assessment is completed, the amount proposed to be advanced concretized and the terms ‘and conditions (also called covenants) which would govern the facilities to be provided by the Bank to the proponent/enterprise discussed and finalized, a credit proposal incorporating all details is prepared and sent for sanction at appropriate level. ‘The authority, in the Bank, which will consider the proposal land sanction it, would depend normally on many factors, the Dilemma of the sanctioning authority main being the quantum of credit required by the Enterprise. Powars to sanction/approve various matters including credit proposals are delegated by the Board of the Bank to various levels of individual hierarchy in the Bank or committees called ‘credit, ‘committees’ and is documented in a policy called "Delegation of Authority” or a document having some similar name. ‘The sanctioning authority would carefully consider the facts and figures Incorporated In the propasal, the terms and conditions, the recommendations and sanction or reject the proposal. In case the Bank rejects the proposal for any reason, the reasons have to be documented and conveyed to the proponent.> In most Banks rejection of credit proposals in respect of MSMEs is subject to concurrence by the next higher authority > If sanctioned, the sanctioning authority may stipulate its own additional terms and conditions for the comfort of the lender. > Ifa proponent is not satisfied with the reasons for rejection (if the proposal is rejected) or additional terms and conditions stipulated (if done so by the sanctioning authority) ityhe/she may represent their case to the sanctioning authority for reconsideration. contd,ee aka eok aC Uae) Cree Cea Sanction (contd...) > Most Banks are committed to follow the BCSBI ‘Code of Bank’s Commitment to Micro & Small Enterprises’ which includes the following commitments pertaining to sanction of credit. '= All [oan applications should normally be disposed of within the stipulated time as under from the date of recelpt of application complete in all respects and accompanied by dacuments as per the check list: For credit limit up to Rs.5 lakhs Within 2 weeks For credit imit above Rs.5 lakhs and up to Rs.25 lakhs | Within 3 weeks For credit limit above Rs.25 lakhs Within 6 weeks ‘No collateral security should be insisted upon for credit limits upto Rs. 10/-lakhs. No processing charges to be recovered if loan up to Rs.5 lakhs Is not sanctioned. To follow credit rating system, the parameters of which should be shared with the borrowers. Ifthe proponent, whose request for credit facilities is rejected by the Bank, remains aggrieved even after its/his/her representation, the next step would be to refer the matter to the Bank’s Internal Ombudsman and finally the Banking Ombudsman appointed by RBI for the area. {As its, it has been informed by RBI that a majority of 22% ofall complaints received by the RBI appointed ombudsmen in FY 18 pertained to non-observance of the BCSBI Fair Practices Code which Includes the ‘Code of Bank's Commitment to Micro & Small Enterprises”. contd.Pree eras ‘Sanction (contd...) > Once the credit facilities are sanctioned the Bank conveys its sanction in duplicate by a document called the “sanction letter’ > The sanction letter contains all terms and conditions and is usually accompanied by all documents and related papers. > The proponent/enterprise keeps one copy of the sanction letter while the duplicate Is accepted by the authorized signatory of the proponent and returned to the Bank, > In case the borrower is a limited company then a resolution is passed by its Board for having accepted the terms and conditions as per the Bank's requirements. > Most Banks have a rule asking branches to disburse credit facilities within 2 working days from the date of compliance by the borrawer of all terms and conditions pertaining to the credit and execution of the documentation.Documentation > The documentation applicable for a particular type of advance is given usually in the advances manual of each Bank or in its circulars and itis normally believed, that documentation, represents, that which Is executed by the borrower after sanction of the advance so that It may be avalled through disbursement by the Bank > But in actual legal parlance ‘documentation’ represents any or all proof to be held by the Bank, that the borrower had legally availed of the credit facilities and becomes necessary in the eye of law as. ‘evidence under The Indian Evidence Act 1872. > According to Section 3 of the aforesaid act "Evidence" means and includes = All statements which the Court permits or requires to be made before it by witnesses, in relation to matters of fact under inquiry; such statements being called oral evidence; = All document including electronic records produced for the inspection of the Court, such statements being called documentary evidence; > Documentation Is therefore the process of obtaining proper documentary evidence (to be produced ‘as evidence in case of need) before or after sanction of credit facilities to a borrower. conta.Credit Process & Administration Part - 2 Page 16 of 3 Documentation (contd...) > Documentation Is therefore initiated by the Bank, the very first time a proponent or representative of the proponent ‘approaches It In the form of oral and documentary evidences ‘and continues till the advance is repaid, After sanction “dacuments’ are executed by the borrower, with regards to the facilities sanctioned, to create 'security’ documents legally binding the Bank and the borrower. Ifthe borrower Is a Company Incorporated under the Companles "Ryecution of Security Documents Act, the borrower would be required to create charge on the secured assets in favor of the Bank within 30 days of the date of the documents. From the lenders perspective it wants the various documentation to ensure inter alia that the borrower provides as much information as possible, in the shortest amount of latency In order to better monitor the borrower's financial situation and to take remedial action If the borrower ‘experiences financial difficulties. ‘While obtaining security dacuments the following are same precautions that have to be taken- = Correct name of borrower/guarantor, = Proper Recital/language in drafting, = Properly stamped,Cee Reed Documentation (contd...) . . . . . > Ad . . Properly stamped, Description of security, Consideration amount, |.e., Amount of loany/limit properly entered, ‘Terms of Repayment, Other Terms mutually agreed upon, Place of execution & date of execution, Duly registered wherever required, Valid & legally enforceable, ditionally the following precautions to be taken-: Documents should be properly filled In. Alteration, if any to be authenticated by executants. Execution should be in the presence of officer responsible for obtaining them as he should be able to identify the executants personally. Same handwriting, same ink for maintaining continuity and uniformity in the fields. Full signature (not initials) & each page to be signed at the end and at also the places wherever Information Is filled in at blank spaces. Date of the dacument to coincide with first disbursement to avold complications at a later date.Cree eS] Exercise 2 Qi. Which one of the following is not correct as regards sanction of credit to enterprises? 9 1. In case the Bank rejects the proposal for any reason, the reasons have to be documented and conveyed to the proponent, 2. The Bank has no right to reject proposals in respect of MSMES 3. In most Banks rejection of credit proposals in respect of MSMES is subject to concurrence by the next higher authority. 4, None of the above > “The Bank does have a right to reject proposals but reason for rejection has to be conveyed to the proponent.a rare Page 17 of 37 [ Bar Exercise 2 2. As per BCSBI ‘Code of Bank’s Commitment to Micro & Small Enterprises’, what is the 9 credit limit up to which no collateral security should be insisted by Banks? e 1.Rs, S lakhs, 2. Rs. 20 lakhs. 3. Rs, 15 lakhs. 4. None of the above W Back Next No collateral security should be insisted upon for credit limits up to Rs. 10/-lacs.Q2. In legal parlance when does documentation commence in respect of credit facilities sanctioned to a borrower? 1. As soon as the proposal is sanctioned. 2. As soon as appraisal is completed 3. The very first time a proponent or representative of the proponent approaches a bank for credit facilities 4, As and when sanction letter Is Issued 4 Documentation is initiated by a bank, the very first time a proponent or representative of the proponent ‘approaches it in the form of oral and documentary evidences and continues til the advance is repaid.Credit Process & Administration Part - 2 ee ean Credit Monitoring & Follow-up Introduction > ‘Once the decision to extend credit facility Is taken and the sanction and documentation is completed, a relationship is ‘established between the borrower and the bank and the ¢ 4 facilities are availed by the borrower. ‘Thereafter the finance given to the borrower is subjected to a systematic sequence of monitoring activities by the Bank which GIennenns is called ‘Credit Monitoring’. Credit Monitoring if carried out effectively plays a significant role in aiding the borrower to operate efficiently and profitably, especially in case of MSMEs, and can be described as: © A logical step after the sanction of credit facility. = A systematic sequence of activities right from extending to executing to winding-up the credit = Atool to optimize the benefits of production. = A means of awareness for the lending Institution about emerging issues or any other related aspects. In light of the above, credit monitoring can be defined as the process of keeping track of borrower's performance throughout the period credit facilities are in place to a borrower.er eee SC ed fore Ce 0 Credit Monitoring & Follow-up Monitoring Process > In light of the above, it can safely be concluded that credit manttoring Is post-disbursement activity ‘which emanates after granting of a credit facility. > As has already been described in the earlier unit, sanction of a loan is subject to certain terms and conditions which may be termed as "cavenants’. ‘The following are some of the standard covenants that can be applicable to all credit sanctions: = Submission of stock statements periodically '= Submission of financial statements at intervals agreed upon = Submission of MSOD (monthly select operational data) = Submission of QIS (quarterly information system) statements = Submission of half-yearly statements '= Submission of fund flow statement Apart from the aforesaid, banks also stipulate certain specific covenants that are specific to borrowers. ‘Thus the need and extent of credit monitoring differs based on the credit rating and the covenants also differ from borrower to borrower. contee eee we Pee C ner aac Monitoring Process (contd...) > A check on the observance of prescribed covenants is a very Important part of credit monitoring function by Banks, > Credit Monitoring also Involves cradit risk monitoring, > Credit risk monitoring is usually done at individual borrower's level and portfolio level. > Here it would be necessary to mention about Credit Administration also which is often synonymous with credit monitoring and involves all activities after credit is sanctioned including issue of sanction letter, ‘execution of documents, perfection of security etc. > For an effective credit monitoring system itis necessary to~ = Ensure that the bank understands the current financial condition of the borrower or counterparty. = Monitors compliance of the existing covenants. ‘= Assesses, where applicable, collateral coverage relative to the obligor's current condition. = Identify contractual payment delinquencies and classify potential problem credits on a timely basis. = Promptly direct problems for remedial management, > For achieving the above, monitoring of the following must be ensured: Fa] Monitor transactions in the account Monitor the stock statements Monitor the other pes ‘Click each plus point to view the detail.eee SC ered Pre aoe Post Sanction Inspections > Post-sanction inspections are conducted by banks as part of credit monitoring for the following purposes: = To verify end use of funds- to see whether it has been used for the purpose for which it was originally sanctioned. = To verify whether the borrower is adhering to all the terms and conditions of sanction |= To verify the progress in the project and ensure that it correlates with the estimates and if there Is any variation to determine reasons for the variations. Post Sanction Inspections = To verify the value of the security and if there Is any adverse changes, take further steps to secure the advances. |= To verify the level of inventory and thereby get an Idea the financial position of the unit. = To verify whether the stocks and other assets charged to the Bank are properly Insured. = To verify the production and sales records and ensuring that they are properly maintained and up dated = To verify and be satisfied that Collection from debtors and payment to creditors are taking place ‘as per the estimates to ensure smooth working of the unit.> Any adverse observations should be properly recorded in the report and steps taken for amelioration of the situation in consultation with the borrower. > Post sanction inspections are an important source of information about the financial and general health of an enterprise and should be carried out periodically as stipulated in the sanction.Credit Process & Administration Part - 2 Pree era Review > Review of an existing facility (also sometimes called renewal) Is nothing but revisiting the various financial estimates (on the basis of comparison with actual audited financial statements), covenants, primary/collateral security values etc,, on the basis of which the credit facilities were sanctioned to a borrower and observing and documenting deviations, if any. > During review, if serious deviations are observed, the matter is immediately taken up with the borrower for amelioration. > Review gives an idea to the Bank of the action It has to take, IF any, in respect of a borrower. > While the audited financials of the enterprise is desirable and should be scrutinized at the time of review, depending on the health of an enterprise and the exposure outstanding Banks may allow review up to certain limits on satisfactory conduct of account, without audited financials.> Usually in such cases the following parameters have to be satisfactory-: Satisfactory conduct and turnover in the account Fulfilment of repayment obligations (Interest/{nstalments) Adequacy of securities, drawing power, insurance coverage etc. Rectification of inspection irregularities (other than non-submission of financial statements) Compliance of all terms and conditions of previous sanction Satisfactory trend in production and/or Sales as per projections: Documentations and mortgages in the account being complete, valid and enforceable Prompt payment of bills under Letters of Credit, realization of Bills Purchased/Bills Discounted etc. ‘Submission of Income Tax/Sales Tax returns filed with Statutory Authority as per time schedule prescribed, wherever applicable (which will also indicate about the sales and profitability of the operations). contd,eee eee eC Cree reas Review (contd...) > Moreover in such cases it Is ensured that the financial statements are obtained within 9 months from the close of the financial year and the sanctioning authority satisfies itself on financial parameters ‘emerging out of the audited Balance Sheet/Profit and Loss Account submitted by the borrowers at a later date. > Ifthe financial parameters emerging from the submitted Balance Sheet are not found satisfactory, appropriate actions are initiated Loan Review Mechanism (LRM) > IN LRM, large borrowers as well as the portfolio as a whole is constantly evaluated for the quality of credit book and also to bring about qualitative Improvements in credit administration, > Banks therefore have to put In place proper Loan Review Mechanism especially for large value accounts with responsibilities assigned in various areas such as, evaluating the effectiveness of loan administration, maintaining the integrity of credit grading process, assessing the loan loss provision, portfolio quality, etc. > The complexity and scope of LRM normally vary based on banks size, type of operations and management practices. > The objectives of LRM in Banks are usually as follows = to identify promptly loans which develop credit weaknesses and initiate timely corrective action;Eee eee eC ert eed Cece Review (contd...) ‘accounts with responsibilities assigned in various areas such as, evaluating the effectiveness of loan administration, maintaining the integrity of credit grading process, assessing the loan loss provision, portfolio quality, etc ‘The complexity and scope of LRM normally vary based on banks size, type of operations and management practices. ‘The objectives of LRM in Banks are usually as follows-: to Identify promptly loans which develop credit weaknesses and initiate timely corrective action; to evaluate portfolio quality and isolate potential problem areas; to provide Information for determining adequacy of loan lass provision; to assess the adequacy of and adherence to, loan policies and procedures, and to monitor compliance with relevant laws and regulations; and to provide top management with information on credit administration, including credit sanction process, risk evaluation and post-sanction follow-up. > Banks are required by RBI to formulate Loan Review Policy and It should be reviewed annually by the Board. > The policy should inter alia address the issue of Identification of specific Loan Review officials. cont.eee we Cree Ee Loan Review Mechanism (contd. » The Loan Review Officers are required to have sound knowledge in credit appraisal, lending practices and loan policies of the bank. > They should also be well versed in the relevant laws/regulations that affect lending activities. > The independence of Loan Review Officers is required to be ensured and the findings of the reviews should also be reported directly to the Board or Committee of the Board. > The Loan Reviews are designed to provide feedback on effectiveness of credit sanction and to Identify incipient deterioration In portfolia quality. > Reviews of high value loans is to be undertaken usually within three months of sanction/renewal or more frequently when factors indicate a potential for deterioration in the credit quality. > The scope of the review should be such so as cover all loans above a cut-off limit to be decided by the Board. > In addition, banks should also target other accounts that present elevated risk characteristics. At least 30-40% of the portfolio should be subjected to LRM in a year to provide reasonable assurance that all the major credit risks embedded in the balance sheet have been tracked.> Ibis also required by RBI that the review should focus on = Approval process; ‘Accuracy and timeliness of credit ratings assianed by loan officers; Adherence to internal policies and procedures, and applicable laws/regulations; Compliance with loan covenants; Post-sanction follow-up; Sufficiency of loan documentation; Portfolio quality; and = Recommendations for improving portfolio quality. > Thus LRM Is supplementary to regular review/renewal of accounts done periodically/internal audit. Note: Some important aspects of Credit Monitoring/Review have been discussed here. However the coverage is nat exhaustive.ene Ea! page 24 of 37 | EXIT Exercise 3 Qi. What is the financial term given to “terms and conditions’ normally governing grant 9 of credit facilities to a borrower? 4. Conveyance 2. Covenants WW 3. Convenience 4, Contents ‘Sanction of a loan Is subject to certaln terms and conditions which may be termed as ‘covenants’. Some of the standard covenants that can be applicable to all credit sanctions are submission of stock |_ statements periodically, submission of financial statements at intervals agreed upon etc.ee eee SCE oe a aed Cree real Exercise 3 Q2. Which one of the following is not part of Credit Monitoring function in a Bank? 9 1. Pre sanetion inspection 2, Monitoring the stock statements 3. Monitoring the transactions in the account 4. Monitoring Compliance of covenants Pre sanction inspection forms part of credit appraisal function in a bank.(ore eee w Cer ad Page 24 of 37 [ Bat Exercise 3 Q3. What one of the following represents the objective of Post Sanction inspections of borrowers? 1. Verify end use of funds 2. Verily whether the borrower is adhering to the covenants 3. Verify the value of the security 4.Allthe above Post-sanction Inspections are conducted by banks as part of credit monitoring Inter alia to verity the aforesaid,Credit Process & Administration Part - 2 Cree asc Introduction > In Study Board 3, Unit 3, Page 24, reference has been made of the use of Rating Agencies in providing third party credit ratings thus facilitating small enterprises to ascertain the strenaths and weaknesses of their operations and taking corrective measures to enhance thelr organizational strength. In Study Board 5, Unit 6, Pages 30-35, short details of various Rating Agencies ‘such as CRISIL, ICRA, India Ratings, SMERA, CARE which are registered by SEBI and empaneled as External Credit Assessment Institution (ECAI) by RBI, have been provided. In this unit we shall study more about the role of the rating system both internal ratings by Banks themselves and external ratings by rating agencies in the growth, development and strengthening of MSMEs and its importance in the credit process. General Internal Rating Policy Guidelines for Banks > The diverse risk factors, prevalent ina counterparty should be captured comprehensively, as a single point indicator, in the rating system adopted by a Bank, to ensure which, standardization of rating is, a must. > Therefore it is imperative that the rating given to a particular borrower/caunterparty brings out the ‘overall risk in lending to him/her/the enterprise and provide Input for fixing the price and setting non price terms besides other relevant information. > The risk rating, in short, should reflect the underlying credit risk of the loan book.Credit Process & Administration Part - 2 ea cd General Internal Rating Policy Guidelines for Banks (contd...) > The risk rating system should normally incorporate the counterparty’s financial position, financial projections and sensitivity, industrial management and other risks, > Banks, while devising a rating system may use any number of financial ratios, operational parameters and collaterals as also qualitative aspects of management and industry characteristics that have bearings on the creditworthiness of the counterparty, Banks can also provide weights for ratios on the basis of the period to which they pertain, giving more weightage to near term developments, making the weightage progressively less as the ratio ages. Within the rating framework, banks can also prescribe certain thresholds beyond which no proposals should be entertained. Any flexibility in relaxation to the minimum threshold and authority for Its approval should be clearly articulated in the loan policy Banks may also consider separate rating framework for different types of borrowers since they exhibit varying nature and degrees of risk. Banks should also, give weightage to the un-hedged market risk exposures of borrowers in the rating framework. ‘The overall credit score should be placed on a numerical scale based on the credit quality, 44let eee SC er aes [ree rea General Internal Rating Policy Guidelines for Banks (contd...) > The updating of the credit ratings should be undertaken normally at quarterly intervals or at least half-yearly intervals, in order to gauge the quality of the portfolio at periadic intervals and is required to be, as far as possible, independent of the review/renewal of the facilities. Variations in the ratings of borrowers aver time indicate changes in credit quality and expected credit losses from the credit portfolio. ‘Thus, if the rating system is to be meaningful, the credit quality reports should signal changes in expected credit losses. In order to ensure the consistency and accuracy of internal ratings, the responsibilty for setting or confirming such ratings should vest with the Loan Review function and examined by an Independent Loan Review Group. Banks are required to undertake comprehensive study on migration (upward-lower to higher and downward-higher to lower) of borrowers In the ratings to add accuracy In expected credit loss calculations. Information from MSMEs is usually a very big constraint and banks must obtain more and better quality of information from their clients, Banks would also be required to communicate the relevant criteria affecting the rating of MSMEs and should inform them about Its assessment in order to allow MSMEs to Improve.ete Ce Ca ed Cera ul External Ratings > As has already been dealt with in this unit, Banks have their own internal credit rating models which are applicable for smaller MSME accounts as per thresholds decided by the Boards of individual, Banks. > However, for higher credit limits, Banks use various External Rating Agencies as per te up with them, > thas also been mandated by RBI that with a view to facilitate credit flow to the MSME sector and enhancing the comfort level of the lending institutions, the credit rating of MSME units done by reputed credit rating agencies should be encouraged. > While undertaking a rating exercise, an external rating agency considers several factors such as the financial position of the firm/the movement of crucial ratios as well as ather qualitative parameters. > The rating normally Is on the basis of Financial Strength Indicators and Performance Capability Indicators.> All the agencies have developed uniform rating scale for the MSMES as given below as per the standards fixed by NSIC Financial Strength High Coy Low Performance Highest SELA SELB ‘SEIC Capability High SE2A SE2B SE2C Moderate SE3A SEIB ‘SERC Weak SE4a, SE4B ‘SEAC Poor SESA SESE ‘SESCEee eee eC ert eed free Re aS Exercise 4 Q1. With which institution are External Credit Assessment Institutions (ECAT) empanelled? 9 3. Ral © 4rer Various Rating Agencies such as CRISIL, ICRA, etc., are registered with SEBI and empaneled as External Credit Assessment Institution (ECAI) by RBI.ee page 29 of 37, | BAT Exercise 4 2. Which one of the following is not a requirement under Internal Rating Policy Guidelines for Banks? 1. The risk rating should reflect the underlying credit risk of the loan book. 2. The ratings should be vetted by an external agency. W 2. The risk rating should be drawn up In a structured manner. 4, The rating should take into consideration risk due to the unhedged forex exposure of the borrower. = Back Next ‘The internal rating is not required to be vetted by an external agency but are required to be examined by an Independent Loan Review Group.Credit Process & Administration Part - 2 Ce anol Exercise 4 Q3. How does rating migration study help a Bank? 1 In minimizing slippages 2. In calculation of profit & loss of a Bank 3. In calculation of expected credit losses from the credit portfolio a 4. All the above Variations In the ratings of borrowers over time indicate changes in credit quality and expected credit losses from the credit portfolio.Cee r Ce acl Introduction > Business Development Services (EDS) Providers are those entities usually providing non-financial services and products to entrepreneurs at various stages of thelr business needs, > These services are primarily aimed at skills transfer, business advice etc. > The field of business support has been growing alongside the MSME development process In India, and internationally Increasing Role of BDS Providers > For their growth and development, MSMEs require access to a range of skills and abilities in areas such as organization, management, production, marketing, selling, strategy, finance and law. > However the participants in the sector are, more often than not, reluctant to acquire these skills for various reasons such as cost considerations, lack of information, lack of confidence in the efficacy of the schemes created to support these developments, lack of specific education etc. > The development of enterprise in a country Is mainly dependent on the culture, values and beliefs prevalent there and to that extent the growth differs from country to country and from place to place even within @ country. > Business Development Service (BDS) Providers may be tasked with the role of coordinating between various agencies to bring about the required change in perception as regards entrepreneurship.> BDS Providers are ideally suited to carry out the various functions which facilitate entrepreneur development in a community such as providing hand holding, business strategies/plans, legal advice etc. > BDS Providers may help enterprises by providing services in the form of mentors, advisors, consultants, technical experts, legal experts at the individual level as well as NGO/Central/State Government levelseee et Coe anu BDS Providers in India > Most 8DS facilitators and BDS providers in India are not as developed in providing services as those found in industrialized countries and may be stated to he In the ‘Formative Stage" only However nowadays the major functions of a BDS Provider Is, Increasingly being undertaken by entities such as MSME DO and ‘other government/semi government and private institutions, though they are not providing services uniformly thraughout the country. > But it appears that the services rendered by the central and state entities have not been as effective as envisaged initially, in growth and development of MSMEs. It is now understood that the Private sector service providers are better equipped to help businesses in various ways such as giving MSMEs access to new technologies/financial help etc., and thereby capable of contributing in a more positive way in the growth and development of MSMEspage 32 of 37. [ext | ‘Types of BDS Providers > Business Development Services Providers are of 2 types: = Operational- helping in setting up an enterprise by providing services such as In various registrations/land, machinery, equipment procurement/assistance in subcontracting arrangements etc. = Strategic - help the enterprise owners to get new ideas on how to improve their business, increase productivity, reduce costs, access more profitable markets, etc. Role of BDS Providers > Business Development service Is a key component of the market support structure that fosters MSME upgrading and build MSME competitiveness and productivity. > BDS Providers are expected to provide MSMEs with new services or services for the modern economy to help enterprises in facing the opportunities and stresses of the knowledge economy and global markets and the requirements for sustainable development. > Thus what is now primarily required are Knowledge Intensive Services (KIS) that provide strategic Information permitting businesses to adapt to technological development, international competition, changes in lifestyle trends ete.Credit Process & Admi z eee nase Role of BDS Providers (contd...) > Thus the main role of BDS Providers in MSMEs development and growth are to be in the following areas~ = Management and Administration - including Management Consultancy, Legal, Accounting, Financial Strateay and Fiscal advice, Takeovers and Restructuring, Business Planning, and Costing Production - including Architectural and Engineering Consultancy, Distribution Logistics, Operational Leasing, Repair and Maintenance, and Quality Control. |= Research and Development - including Contract Research, Testing and Specialist Advice = Human resources - including Training, Recruitment, Job Evaluation = Information and Communication - including Data Banks, Information Services, Software Services, Systems Design and Implementation, Marketing - including Advertising, Sales, Promotion, Market Research, Public Relations Trade Fair Participation and Export Promotion. BDS Facilitator > ABDS facilitator has a job akin to BDS Provider. > However the BDS facilitator does not solve the problems/constraints of an enterprise by itself but link the enterprise to competent professional BDS providers, such as training establishments, marketing specialists, chartered accountants, cost accountants, legal experts, trade fair organizers and Industry, ‘Trade Chambers etc.ey array Page 24 0f37 [ Bar Exercise 5 Q1. Which one of the following is a reason for MSMEs showing reluctance to engage 9 Business Development Service Providers? e 1. Cost considerations 2. Lack of awareness 3. Lack of confidence in ther efficacy 4. the above = = > MSMEs are, more often than not, reluctant to acquire the services of BDS providers for various reasons such as cost considerations, lack of information, lack of confidence in the efficacy, lack of specific education etc.Credit Process & Administration Part - 2 Pee iera Exercise 5 Q2. Which one of the following represents a role not usually played by BDS providers? 4. Helping In MSMEs obtaining Bank finance 2. Providing proper legal advice 3. Preparing business plans 4, Providing Management Consultancy = = Back Next L Business Development Services (BDS) Providers usually help provide non-financial services only.Page 34 of 37 [ BaT Exercise 5 Q3. When a BDS provider helps a MSME set up an enterprise, what type of business development service does it fall under? 1. Operational Service y/ 2. Strategic Service 3. Market support service 4, None of the above Under operational service, BDS providers help in setting up an enterprise by providing services such as in various reaistrations/land, machinery, equipment procurement/assistance In subcontracting arrangements etc,Summary > Credit assessment consists of quantifying the need based credit requirements of an enterprise/ proponent on the basis of information submitted by it/him/her and also gathered during credit, appraisal. > Assessment is done based on type of faclity required by an enterprise/proponent and is broadly different depending on whether the enterprise requires Working capital, Term Loan or Non-fund based facilities. > As far as assessment of working capital requirements are concerned (which Is addressed n this Unit), itis done by using either the first/second method of lending as stipulated by the Tandon, Committee, the Operating Cycle Method or the turnover method suggested by the Nayak Committee > The quantum of working capital required by an enterprise depends on various factors such as seasonality, pace af turnover of finished goods, manufacturing pracess employed by the enterprise etc. > For MSME up to Rs.5 crore the method employed for assessment is by both the turnover method and the Tandon committee-first method of lending except in the case of small limits usually up to Rs. crore, where increasingly appraisal/assessment is being done online using special software. > Aiter appraisal and assessment, a proposal in respect of credit facilities to the proponent is prepared ‘and sanctioned at appropriate level and a sanction letter Issued in duplicate for acknowledgement by the borrower.Aiter appraisal and assessment, a proposal in respect of credit facilities to the proponent is prepared ‘and sanctioned at appropriate level and a sanction letter issued in duplicate for acknowledgement by the borrower. The credit facilities approved is usually subject to certain covenants, stipulated in the proposal or by the sanctioning authority, being fulfilled by the borrower as stated in the sanction letter. The proposal may also be rejected for which reasons have to be conveyed to the proponent. ‘The proponent has a right to represent against the abovementioned rejection and approach a complaint redressal forum set up in the Bank and by RBI if aggrieved. ‘Thereafter correctly drawn documents have to be executed by the borrower with regards to the facilities sanctioned to create security docurnents legally binding the Bank and the borrower. contd...ee eee SC aed Cee eae ‘Summary (contd...) > Once a decision to extend credit facility Is taken and the sanction and documentation is completed/ covenants complied with, the facilities are disbursed after which the credit facilities are subjected to 2 systematic sequence of monitoring activities by the Bank which is called "Credit Monitoring’. > A check on compliance by the borrower of the covenants is @ very important part of credit monitoring function as is credit risk monitoring and proper credit administration, > Review is also a very important function in Banks and is nothing but revisiting the various financial estimates (on the basis of comparison with actual aucited financial statements), covenants, primary/collateral security values etc., on the basis of which the credit facilities were sanctioned to a borrower and observing and documenting deviations, if any for taking up with the borrower for ‘amelloration. > Loan Review Mechanism Is another tool with Banks to constantly evaluate the quality of credit book and bring about qualitative improvements in credit administration. > Banks resort to an internal rating system (for smaller limits) and external credit rating agencies (beyond a threshold) to rate enterprises, which In turn helps the Bank to discover not only the financial condition of an enterprise but also several qualitative parameters that have bearing on its credit worthiness.> For their growth and development, MSMEs require access to a range of skills and abilities in areas such as organization, management, production, marketing, selling, strategy, finance and law which is being increasingly provided by Business Development Services Providers/Facilitators. > These important functionaries for MSMEs usually come in the shape of mentors, advisors, consultants, technical experts, legal experts at the Individual level as well as NGO/Central/State Government levels.Pe et ee cos) Technological Advancements and the Sector Senaen tre kutic Course Description and Units ‘The course commences by providing information on what constitutes technological change and then goes on ‘0 detail how technology, to be effective in bringing about change, is required to aim at fueling innovation and business agility, should be easy to integrate with existing systems and processes and help in leveraging communication/information management etc. Tt also discusses how for development of MSMES itis necessary to offer them a conducive environment, which after globalization, calls for an approach with knowledge playing a predominant role. The course further goes on to detall the specific schemes that have been evolved by both the Government of India and other entities/institutions, engaged in the growth and development of SMES, for improving them technologically in various ways. Further it describes the institutional framework available for technology transfer between MSMEs and research institutions in India and the role played by certain entites/insttutions in the country focused on technological advancement of MSMES. Unit 1: Objectives Unit 2: Role of Technological Changes Unit 3: Schemes that Support Technological Advancement Unit 4: Institutional/Entity Support for Technological Advancement Unit 5: Summary Unit 6: Test Your SkllsDee Gena hice Peer mens Objectives ‘On completion of this course, you will be able to: > Understand the important role played by technology in the development and growth of MSMEs. > Acquire knowledge of specific schernes that have been evolved by both the Government of India and other entities/institutions, for improving MSMEs technologically in various ways. > Learn in detall about the institutional framework available for technology transfer between MSMEs and research institutions in India and the role played by certain entities/institutions which focus on helping MSMEs in technological advancement. Peres fisee Cea eu Ros is Crete Ems Introduction > Technological change, as far as enterprises (Including MSMEs) are concerned, is an increase in the efficiency of a praduct or pracess that results in an increase in output, without an increase in input. {In other words, a product or process is invented which is then used to get a bigger reward for the same amount of work. Thus technological change in industry is linked to innovation. > Technology is in most cases are owned by a limited number of countries and organizations. > Technology transfer, for development and growth of industry therefore (as Is the case with all technology transfers) carries with it politico-legal issues. > Industrial competitiveness in a globalized world is inextricably linked to adoption and adaptation of appropriate technolosies. > Inthe process of development, every technology creates a particular order which causes disorder in the surrounding environment, > Technology therefore plays @ crucial role in the development of MEMES.> Technology not only helps in evolving a multi-pronged strategy but also in maximizing business opportunities for these enterprises. > Technologies for MSMES, to be effective, Is required to alm at fueling innovation and business agility, should be easy to integrate with existing systems and processes and help in leveraging communication/Information management ete. > Capacity of the MSMEs to Innovate Is usually high but scaling their effort to commercial levels is extremely limited > They suffer fram lack of capital to indulge in the luxury of adopting newer technologies. > Today in India, most MSMEs, especially in rural areas undertake manufacturing using old methods and outdated technology contd.Se Cea eu ieee Introduction (contd...) i Large number of these MSMEs generally suffer from technological obsolescence save some new generation enterprises and those in ICT/Biotechnology and some such industries. ‘This happens in the developing nations mainly on account of lack of information on emerging technologies, overconfidence on adaptation and reverse engineering processes, laggard approach of the financing institutions for technology investment proposals etc. But times have changed and the competition Is fierce even domestically, unlike In the past, when buyers were simply looked forward to purchasing products at the lowest prices. Moreover on account of globalization, newer and newer technologies are resulting in better products which become available to the consumers and they tend to gravitate towards these products at the expense of similar low quality/cheaper products manufactured using obsolete technology. ‘Thus innovation Is king as far as MSMEs are concerned and compels governments to put in place appropriate policies to protect the innovators through Intellectual Property Rights (IPR) on one hand and to facilitate transfer of the technologies that promote faster economic development through appropriate investment and fiscal policies on the other.Pe nr t ot kattccs Deno Changes in Technology > The effect of changes in technology on industry can have the following variants namely = Innovation Effect: Tn this case. |The technological innovation results in the alteration of the existing product or a creation of @ new product leading to change in the consumption patterns of the people. Examples of such innovations earlier are pressure cookers/hotplates/refrigerators etc. Dynamically continuous innavations involve the creation of new product or the alteration of an existing one without changing the existing consumption patterns. = Substitution effect: Substitution, in its simplest form, occurs when an older and more expensive technology Is replaced overtime by a better, more convenient and cheaper technology which captures a greater part of the ‘market share and finally the older technology vanishes from the market. ‘A good example Is the substitution of black and white television with color TV,See Cn eur occ renee) ‘Changes in Technology (contd...) = Diffusion effect: Diffusion is the spread in society of a technology for the benefit of the users. In this case, at any given time, the number of Individuals who have adopted the Innovation gives a good measure of the diffusion. Interpersonal influence and mass media are both major causes of diffusion when individuals adopt a technology. > Innovation, syndication, diffusion and substitution stages are seen in the life cycle of a technology {and usually involve large capital consumption/investment and takes a long time to fructify. > Moreover itis often seen that even before it is fully utilized and breaks even a new technology arrives to substitute it or through diffusion it loses market share. > Then there Is the Issue of technalagy divide which Is the gap between use of technology between the ‘educated rich and the relatively less literate and lower income countries and districts/ homes within ‘a country which hampers diffusion. > Although technology modernization and upgradation in good time is critical to both domestic and ‘export competitiveness, it continues to be somewhat of a casualty in India.MSME sector in general is not capable of investments in R & D/innovation because of the cost and other reasons to be discussed. Further, when technology is changing, enterprises have to invest in training workers to stay competitive, “Thus smaller enterprises in particular benefit from public policies that encourage coordination and ‘economies of scale and subeldization of thelr efforts. In order to enable MSMEs overcome the problems of technological backwardness and enhance their access to new technologies, itis necessary to offer them a conducive environment, which after globalization, calls for an approach with knowledge playing a predominant role, ‘There is a need to understand and assess the real needs of the MSMEs and accordingly devise approaches that ensure thelr sustainable growth. ‘The need today Is also to use modem technologies to hamess human capabilities through the process of increased communication, cooperation and linkages, both within the enterprise as well as across enterprises and knowledge-praducing organizations.ee re PC rane Sur Recess Page 7 of 23 Exercise 1 QL. Which one of the following is not a desirable trait for technological change to be effective for MSMEs? 1. Fucng innovation 2. Fueling increase in working capital requirements y/ 3. Resulting in business agility 4. All the above Technologies for MSMEs, to be effective, is required to aim at fueling innovation and business agility, should be easy to integrate with existing systems and processes and help in leveraging communication/ information management etc. Increase in working capital due to technological change is not desirable.Exercise 1 Q2. Which one of the following is an important reason for MSMEs in India being required to adopt technological changes? 1. Globalization 2. Competition 3. Availabilty for Import of new and better products 4. all the above W cal wh. {Qn account of globalization, newer and newer technalogles are resulting in better praducts which become available to the consumers and they tend to gravitate towards these products at the expense of similar low quality/cheaper products manufactured using obsolete technology thus the competition is flerce even domestically.See CUS Raisins Carey Exercise 1 Q3. What is the name given to the ‘effect’ of the technological change which results in alteration of the existing product? e 4. Diffusion effect 2, Substitution effect 3. Innovation effect vw 4. Fusion effect In the case of diffusion effect the technological innovation results in the alteration of the existing product. or a creation of a new product leading to change in the consumption patterns of the people. Examples of ‘such innovations earlier are pressure cookers/hotplates/refrigerators etc.