IJEMR – October 2015 - Vol 5 Issue 10 - Online - ISSN 2249–2585 Print - ISSN 2249-8672

A Case Study on Conceptual Framework of Lending Technologies for Financing of

Small and Medium Enterprises by Indian Overseas Bank

* Prof. Trilok Nath Shukla

** Deeksha Pattanaik

* Associate Professor & Vice Principal, Bhavan‟s Centre for Communication &
Management, Bhartiya Vidya Bhavan, Bhubneswar
** Student, PGP (II), Bhavan‟s Centre for Communication & Management, Bhartiya Vidya
Bhavan, Bhubneswar

Executive Summary

Quite an important issues involved in SME Finance have come across during the analysis
made in the study which have direct bearing on financing from bankers‟ and
entrepreneurs‟ perspectives. Most of the SMEs being driven as family business and first
generation entrepreneurs do not have proper succession planning to take over business,
which later on ends with family conflicts. They do not have strong capital base and also no
adequate collaterals etc., which posed major problems for bankability of their firms.
Lengthy and complex paper & processing system of loan appraisal observed impediment
for SME sector while this sector considered to be lesser risky, high yielding, faster growing
and sustainable for development. Indian SMEs do not face much competition from
advanced & developing economies (ADEs) and emerging market economies (EMEs), but
these firms are facing stiff competition from domestic large sized firms. The credit
acceleration in the sector had significantly noticed absolute growth but proportion of MSE
credit in net bank credit has been more or less at same level of 14%, which was way back
in year 2000 despite widening the coverage of the MSE sector. This analysis has indicated
that real growth in finance to MSE sector is not adequate in light of significant
contribution of the sector in economy such as employment, manufacturing and export of
the country. Low share of MSE credit does not only hamper equitable growth of economy
but also fails the banks to fulfill their social commitment to the growing society.
Credit appraisal is a holistic exercise, which starts from the time a prospective borrower
walks into the branch and culminates in credit delivery and monitoring with the objective
of ensuring and maintaining the quality of lending and managing credit risk within
acceptable limits. The main objective of this study is to understand the procedure of
lending loans to Micro, Small and Medium Enterprises and to comprehend the complete
procedure of lending loans to MSME, terms and conditions adopted by IOB. The
availability of external finance for small and medium enterprises (SMEs) is a topic of
significant research interest to academics and an important issue to policy makers around
the globe. In this project, a conceptual framework for analysis of credit availability for
small and medium enterprises (SMEs) has been studied. In this framework, lending
technologies are the key conduit through which government policies and national financial
structures affect credit availability. An emphasis should be there on the causal chain from
policy to financial structures, which affect the feasibility and profitability of different
lending technologies. These technologies, in turn, have important effects on SME credit
availability.
The 12th Five Year Plan has a logical strategy for SME sector. Innovation is the sine quo
non-for ambitious growth of the sector. SMEs need such financial product, which covers
life cycle of their firms. Banking sector has therefore, huge opportunities of viable
business from SMEs because this sector stands as strong pillar of inclusive growth in an
economy. Banks now have challenge to customize their products to meet innovative needs
of SMEs at competitive rates for the sector to grow. It is witnessed from the findings of
study that growth rate of SME sector has always been much higher than the overall credit

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growth of banking industry that coins the phrase “…Small is mighty, profitable & good for
sustainability …”
In addition, the findings are open for further survey & research by scholars in academia.
Introduction
SME is a growth engine of economy for any nation across the world. The importance of
this sector in India as compared to corporate giants with respect to its contribution
towards Indian economy can be best understood that they contribute 8% in Gross
Domestic Product (GDP), 45% of manufactured output, 40% of exports, manufacture over
6000 products and provide employment to around 60 million person through 26 million
enterprises as per latest 4th all India census of MSMEs. Recognizing the significant
contribution of this sector in economic growth and also in employment generation in our
country, Government of India has taken good number of initiatives to develop the sector
such as erstwhile definition of „Small Scale Industries‟ was enlarged by increasing
investment ceiling in plants & machineries from Rs. One crore and trading activities have
taken in the ambit of MSMEs by enactment of Micro, Small & Medium Enterprises
Development (MSMED) Act from 2nd October 2006. Generally, the credits facilities are
extended against the security know as collateral. However, even though the loans are
backed by the collateral, banks are normally interested in the actual loan amount to be
repaid along with the interest.
There are a number of distinct transactions technologies used by financial institutions,
including financial statement lending, small business credit scoring, asset-based lending,
factoring, fixed-asset lending, and leasing. These financial structures, in turn, significantly
affect the availability of funds to SMEs by determining the feasibility and profitability with
which different lending technologies may be deployed. A common finding is that large
institutions have a comparative advantage in transactions lending to SMEs based on hard
information, while small institutions have a comparative advantage in relationship lending
based on soft information.
Transactions lending technologies are primarily based on “hard” quantitative data that
may be observed and verified at about the time of the credit origination. This hard
information may include, as examples, financial ratios calculated from certified audited
financial statements; credit scores assembled from data on the payments histories of the
SME and its owner provided by credit bureaus; or information about accounts receivable
from transparent, low-risk obligors that may pledged as collateral by the SME or sold to
the financial institution. This information may be relatively easily observed, verified, and
transmitted through the communications channels within the financial institution. The
relationship lending technology, in contrast, is based significantly on “soft” qualitative
information gathered through contact over time with the SME and often with its owner
and members of the local community. The soft information may include the character and
reliability of the SME‟s owner based on direct contact over time by the institution‟s loan
officer; the payment and receipt history of the SME gathered from the past provision of
loans, deposits, or other services to the SME by the institution; or the future prospects of
the SME garnered from past communications with SME‟s suppliers, customers, or
neighboring businesses. The soft information may often be proprietary to the loan officer
and may not be easily observed by others, verified by others, or transmitted to others
within the financial institution.
For small business credit scoring, large institutions use hard information on the SME
and/or its owner obtained from credit bureaus to infer future loan performance; for asset-
based lending, these institutions use valuations of the assets pledged as collateral to
evaluate repayment prospects; for factoring, they focus on the quality of the accounts
receivable purchased; for fixed-asset lending and leasing, large institutions look to the
valuations of the fixed assets that are pledged as collateral (fixed-asset lending)

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or directly owned by the institution (leasing). Thus, when informative financial statements
are not available, institutions are often able to use other types of hard information to
assess repayment prospects. Similar arguments apply to potentially misleading
conclusions based on the current framework about other dimensions of a nation‟s
financial structures and the policies that affect these structures. The limited findings from
studies that identify lending technologies suggest that significant variation in the
deployment of these technologies exists across nations – an institutional fact that is not
explained by the current conceptual framework.
Another area of concern regarding SME credit availability is the lending infrastructure of a
nation, which defines the rights and flexibility of financial institutions to fund SMEs using
the lending technology that best fits the institution and the borrower. This infrastructure
includes the commercial and bankruptcy laws that affect creditor rights and their judicial
enforcement; the regulation of financial institutions, including restrictions on lending,
barriers to entry, and direct state ownership of financial institutions; the information
infrastructure, including the accounting standards to which potential borrowers must
comply as well as the organizations and rules for sharing information; the taxes that
directly affect credit extension; and so forth that provide the economic environment in
which financial institutions may lend in a given nation.
Statement of the Problem: -
To study current framework of lending technologies which are often categorized into two
types: transactions lending that is based primarily on “hard” quantitative data and
relationship lending, which is based significantly on “soft” qualitative information
The following steps that are to be analysed are as follows: -
1) To Study & Verify the Borrower‟s Papers, Documents & Necessary information required.
2) To Study the Financial Tools required for the Credit Appraisal of the Project:
a) To Study & verify the Project Report of the Company
b) To Study & analyse the Financial Statements of the Company
c) To Verify the Statutory Approvals required for the Project
3) To Study & analyse the Working Capital Assessment of the Company
4) To study relationship lending Of IOB
Objectives of the Research: -
SME is Gen-Next engine of economic development and it is answer to realize 12th Plan
with special reference to generate employment and export of the country. Also this sector
has huge potential of banks‟ finance for sustainable growth, the instant research project
“A Conceptual Framework Of Lending Technologies For Financing Of Small And Medium
Enterprises By Indian Overseas Bank” hence aims –
a) To study the credit appraisal system for working capital finance to SME‟s
b) To understand the credit appraisal procedure followed to grant loans for MSME.
c) To examine & analyze the status of credit flow to SME
d) To take stock of extant policy frameworks and various provisions for financing to a
SMEs and review them in the light of observations of the study.
e) To study the factors considered and focused on before sanctioning the loan amount.
f) To analyze primary and secondary data for observations and to offer
recommendations to enhance accessibility of bank finance to SMEs.

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Scope and Implication of the Study

Researcher mainly used secondary data for the study. It is mainly collected from the
annual report prepared by the company itself. This policy covers credit facilities to micro
and small enterprises. (Both manufacturing and services sector) and all related issues
such as assessment of credit, margin norms, security requirements, coverage under Credit
Guarantee Scheme etc. The present report is an attempt to understand the Framework of
Lending Technologies by Indian Overseas Bank, Saheed Nagar Branch Bhubneswar to
MSME Units.
Definition of Micro, Small & Medium Enterprises:-
The following chart indicates the threshold investment levels for both Manufacturing
Sector (Investment in Plant & Machinery) and Services Sector (Investment in
Equipment):-

INVESTMENT IN PLANT & INVESTMENT IN

MACHINERY EQUIPMENT

Engaged in Engaged in
ENTERPRISE Manufacturing/Preservation Providing/Rendering
of goods of Services

MICRO Not to Exceed Rs. 10

Not to Exceed Rs. 25 Lakhs Lakhs
ENTERPRISE

More than Rs. 10

SMALL More than Rs. 25 Lakhs but Lakhs but does not
ENTERPRISE does not exceed Rs. 5 Crores. exceed Rs. 2 Crore.

More than Rs. 5 Crores but More than Rs. 2 Crores

MEDIUM
does not exceed Rs. 10 but does not exceed
ENTERPRISE Rs. 5 Crores.
Crores.

 Targets for Lending to Micro & Small Enterprises (MSE) Sector by Domestic
Commercial Banks:-
Advances to Micro & Small Enterprises (MSE) sector shall be reckoned in computing
achievement under the overall priority sector target of 40 percent of Adjusted Net Bank
Credit (ANBC) or credit equivalent amount of off-Balance Sheet Exposure, whichever is
higher. Bank loans above Rs. 5 Crore per borrower/unit to Micro & Small Enterprises
engaged in providing or rendering of services, with investment in equipment as defined
under MSMED Act, 2006 shall not be reckoned while computing achievement under the
overall priority sector targets. In terms of the recommendations of the Prime Minister‟s
Task Force on MSMEs, banks have to achieve a 20 percent Year-on-Year growth in credit
to micro & small enterprises & a 10 percent Year-on-Year growth in the number of micro
enterprise accounts.
In order to ensure that sufficient credit is available to Micro Enterprise within the MSE
Sector, branches should ensure that :-
 40 percent of the total advances to MSE sector should go to Micro (Manufacturing)
enterprises having investment in plant & machinery up to Rs. 10 Lakhs & Micro (Service)
enterprises having investment in equipment up to Rs. 4 Lakhs [say Micro-I] ;

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 20 percent of the total advances to MSE sector should go to Micro (Manufacturing)

enterprises with investment in plant & machinery above Rs. 10 Lakhs & up to Rs. 25
Lakhs, and Micro (Service) enterprises with investment in equipment above Rs. 4 Lakhs &
up to Rs. 10 Lakhs [say Micro-II].
Note: - Thus, 60 percent of MSE advances should go to the Micro Enterprises.
 The target for lending to Micro Enterprises within the MSE Sector (i.e. 60% of total
lending to MSE Sector should go to Micro enterprises) will be computed with reference to
the outstanding credit to MSE Sector as on preceding March 31st.

Category Sub-Targets

MICRO-1:
Mfg. Sector: Units with Investment in Plant &
Machinery up to Rs. 10 Lakhs, 40.00 %
&
Service Sector: Units with Investment in
Equipment up to Rs. 4 Lakhs

MICRO-2:
Mfg. Sector: Units with Investment in Plant &
Machinery above Rs. 10 Lakhs & up to Rs. 25 20.00 %
Lakhs, &
Service Sector: Units with Investment in
Equipment above Rs. 4 Lakhs & up to Rs. 10
Lakhs
Total Finance to MICRO out of total Micro & 60.00 %
Small Sector :-

 Credit Appraisal:-
Proper identification of the enterprises, verification of applicant(s) & his/her/their
antecedent in accordance with KYC Norms/Guidelines, their experience in the proposed
line of activity, educational & social background, technical/professional competence,
integrity, initiatives, etc.
 Checking out for Willful Defaulter‟s List of RBI, Specific Approval List (SAL) of ECGC,
CIBIL reports individuals as well as commercial etc.
 The acceptability of the product manufactured, its market demand/supply position,
market competition, marketing arrangement, etc.
 Evaluation of State & Central Govt. Policies (enabling environment) with specific
reference to the Enterprise in question, Environmental stipulations, availability of
necessary infrastructure-roads, power, labour, raw material & markets.
 Techno-economic Appraisal of units to be carried out as per guidelines circulated
by our TAD department from time to time. At present it is HOBC 107/46 dated
06.06.2013.
 Project Cost, the Proponent‟s own financial contribution, projections for following three
years, & other important parameters which would include the BEP, Liquidity, Solvency &
Profitability Ratios, etc.

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 Credit Tenure :-
The Term Loan exposure to MSME Sector would generally be for a term of 7-10 year
maturity, while working capital will be on demand.
 Working Capital Assessment:-
A. Turn-Over Method :-
For working capital limits requirement up to Rs.5 crores, turnover method would be
applicable as per “Nayak Committee Recommendations”. Under this Method, Working
Capital is assessed at 25 % of the Projected Turnover based on the assumption of a three
month operating cycle.20% of the turnover is provided by way of bank finance &
balance 5% or 1/5th of the working capital required should be brought in by the
borrower by way of net working capital contribution. It is abundantly clarified that this
20% is the minimum WC limit to be sanctioned even if the proponent’s operating
cycle is shorter than 3 months.

MPBF (Maximum Permissible Bank Finance) Method:-

This is the Conventional Method of assessing working capital for units with Longer
Operating Cycle and/or for units requiring working capital in excess of Rs. 5 crores. The
assessment is based on the build-up of Current Assets & Current Liabilities. 25% of
current assets should be brought in by the borrower/promoter by way of net working
capital contribution. As a measure of incentives for exports, stipulation of providing
margin on export receivables has been waived. As such the minimum margin required will
be 25% of total current assets excluding export receivables.
B. Cash Budget Method:-
Here the working capital requirement is more than Rs. 5 crore assessments should be
carried out under cash budget method especially where the borrower is engaged as
contractor or revenue is recognized on progressive billing basis, etc. Under this method,
the peak level cash deficit will be the level of total working capital finance to be extended
to the borrower. The Peak Level Cash deficit will be ascertained from the projected Cash
Budget Statement submitted by the borrower. The Cash Budget Statement would
comprise of projected receipts & payments for the next 12 months on account of business
operations including advance payment, mobilization advance, non-business operations,
cash flow from capital accounts & other sundry items.
Branches should obtain & scrutinize latest audited financials of the constituent in all
cases of WC limits request of Rs. 10 Lakhs & above. In case provisional balance sheets
are submitted by the constituent, adverse variation between the provisional & audited
financials should not exceed 5%. In the event of deviation beyond 5%, branches should
have a discussion with the constituent to find out the reason for such variation & report to
the sanctioning authority.
C. Benchmark Ratio for Credit Proposals:-
Following benchmark ratio shall be observed for credit proposals where WC is assessed on
projected working capital method:-

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Medium
Micro & Small
Enterprises under
Enterprises under
manufacturing
SL. manufacturing sector
RATIO sector and Service
NO. and Service Sector
Sector falling
falling under regulatory
under regulatory
guidelines
guidelines

1 Current Ratio 1.17 & Above 1.25 & Above

Debt Equity Ratio

(Total Term
2 3:1 3:1
Liability/ Tangible
Net Worth)

3 TOL/TNW 4.5:1 4:1

Average DSCR (Debt

4 Service Coverage 1.50:1 1.50:1
Ratio) for Term Loan

 Collateral Security & CGTMSE:-

Credit facilities extended to a single Micro & Small Enterprise, borrower (i.e. erstwhile SSI)
either by way of Term Loan or by way of Working Capital or both, without any
Collateral Security or Third Party Guarantee, will be covered, for eligible activity, under
SIDBI‟s Credit Guarantee Fund Trust for Micro & Small Enterprise (CGTMSE). A
composite limit up to Rs. 100 Lakhs will be considered By branches to meet working
capital & Term Loan requirements of Micro & Small Entrepreneurs.

As per the guidelines of RBI, Micro & Small Enterprises with limits up to Rs. 10 Lakhs
may be sanctioned credit facilities without any Collateral Security. For customers with
good record of accomplishment, this waiver of Collateral Security may be extended for
limits up to Rs. 25 Lakhs with the approval of the Zonal Manager. Credit limits up to Rs.
100 Lakhs for all eligible activity are to be mandatorily covered under CGTMSE & no
Collateral Security or Third Party Guarantee to be obtained. However, obtaining
Collateral Security, Third Party guarantee in lieu of CGTMSE cover may be
considered with prior approval from GM-NBG.
 Rehabilitation of Sick Units & Debt Restructuring :-
The Bank‟s extant instructions & RBI‟s guidelines on the Rehabilitation of Sick Units
would be applicable for units in MSME Sector also. In addition, RBI revises these areas
from time to time.
 Structured Mechanism for Monitoring Credit Growth to the MSME Sector :-
In view of the concerns emerging from the declaration in credit growth to the MSE Sector,
an INDIAN BANK’S ASSOCIATION (IBA) led Sub-Committee (Chairman: Shri K.R.
Kamath) was set up to suggest a structured mechanism to be put in place by banks to
monitor the entire gamut of credit related issues pertaining to the sector. Based on the
recommendations of the committee, banks have been advised to:-

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 Strengthen their existing systems of monitoring credit growth to the sector & put in
place a system-driven comprehensive performance “Management Information System
(MIS)” at every supervisory level (branch, region, zone, head office) which should be
critically evaluated on a regular basis.
 Put in Place a system of e-tracking of MSE Loan applications & monitor the loan
application disposal process in banks, giving branch-wise, region-wise, zone-wise & state-
wise positions. The position in this regard is to be displayed by banks on their websites. In
this connection, a web-based system of Centralized Branches are required to fill in the
necessary details in the register online, on receipt of the application under MSME. On
clicking the submit button “Acknowledgement Slip” would be generated with a running
serial number. A print out of the application should be handed over to the applicant &
simultaneously the running serial number should be recorded on the hard copy of
application for future reference (HOBC 107/6 dated 08.04.2013). The Package is being
developed by HO-IT team further to take care of all other requirements as mandated by
RBI.
IOB Guidelines on MSME
Advances to MSE sector will be assessed like any other advance (except for the specific
relaxations and concessions given in this policy) and credit decisions will be taken based
on viability, merits and commercial judgment in each case as per general norms of
lending. The credit appraisal will be made in a transparent and non-discriminatory
manner. All genuine and just requirements of the MSE units will be considered and
adequate amount of credit will be sanctioned to ensure that the unit does not suffer for
want of funds at a later date.
Necessary credit support will be extended to MSE units for business restructuring,
modernization, expansion, and diversification and technological up gradation as may be
required from time to time.
The following type of credit facilities will be extended to MSE units.
1. Term Loans
2. Project Finance
3. Working Capital Finance
4. Purchase and discounting of Bills
5. Negotiation of Bills
6. Non fund based facilities such as LC and LG
7. Pre shipment/Post shipment finance
8. Credit facilities under Bank‟s special credit schemes such as Sanjeevani, Easy Trade
Finance, Commercial Cash Credit against Jewellery, etc.,
9. Any other type of credit depending on specific need
Strategies:
To improve the flow of credit to MSE sector and to achieve the various targets and
commitment for the MSE sector, the bank will adopt the following strategies:
 Branch Managers and other officials handling MSE credit will be imparted training to
enable them to properly understand the nuances of MSE finance and opportunities in the
sector.
 MSE credit processing centres will be set up at key locations to ensure prompt and
efficient processing for all MSE credit applications for credit limits of more than Rs.10
lakhs.

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 Simplified loan application forms in bilingual formats will be made available for loans to
Micro Enterprises.
 Region wise and branch wise targets will be fixed for lending to MSE sector and monthly
review notes on Region wise performance will be placed to Top Management.
 A separate target will be fixed to branches for sanction of loans under CGTMSE cover in
order to increase the coverage under Credit Guarantee Scheme of CGTMSE.
 Thrust will be given to cluster based financing.
 SME branches and specialized SME branches will be opened at potential centres,
identified clusters and industrial estates to enhance the flow of credit to MSE sector.
 At corporate level, bank will enter into MOU/tie up arrangement with the corporate and
other agencies to formulate specific schemes for delivery of credit to MSE sector.
 Latest technology will be adopted for on line submission of MSE credit applications,
tracking of applications and for MIS requirements.
 New credit products will be developed for MSE sector to meet the emerging requirements
of the sector from time to time.
 Bank will implement all Government of India/State Government sponsored schemes for
MSE sector and disburse credit under such schemes.
 Bank will avail refinance from SIDBI to augment the resources for lending to MSE sector,
whenever considered necessary.
Concluding Remarks
The loan policy for MSE sector will operate within the overall loan policy of the Bank and
subject to guidelines/instructions of Regulatory Authorities/RBI/Government of India.
Therefore, the policy will be amended with the approval of the Board whenever revised
guidelines are received from the Regulatory Authorities. This policy will be in force until a
review is made by the Board of Directors for accommodating the emerging requirements.
Review of Literature
Kristin Hallberg, (2000) Governments in both industrialized and developing countries
provide a wide variety of programs to assist small- and medium-scale enterprises (SMEs).
Despite the success of SME strategies in a few countries, the majority of developing
countries have found that the impact of their SME development programs on enterprise
performance has been less than satisfactory? This paper investigates the economic
rationale for intervention in support of small- and medium-scale enterprises, on both
theoretical and empirical grounds.
Krishna Kumar (2003) He views that In India foreign collaborations have generally been
to have the technological transfer, which involves high cost. It is important to understand
the MSME‟s single handedly cannot afford this cost, however if a group of MSME‟s of
similar nature of work come together the burden of the foreign collaborations can be
shared effectively.
Y.Srinivas (2005) MSMEs play a very significant role in the economy in terms of balanced
and sustainable growth, employment generation, development of entrepreneurial skills
and contribution to export earnings. However, despite their importance to the economy,
most SMEs are not able to stand up to the challenges of globalisation, mainly because of
difficulties in the area of financing.
Sickness and Rehabilitation of MSMEs in India (2005): The author feels that the SMEs
will fail in a sector for a variety of reasons. There are a multitude of reasons for failure,
however, not all of them related to competition. Lack of knowledge, available capital,
qualified workers or even motivation on the part of the owner are all viable reasons for
business failure. Whatever the reason for failure, the business must have some sort of
recourse to „declare‟ its sickness

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Keshab DAS (2007) Despite an elaborate and dynamic policy framework, the progress of
Indian MSMEs continues to be hindered by some of the basic constraints as poor credit
availability, low levels of technology (hence, low product quality and limited exportability)
and inadequate or no basic infrastructure, both physical and economic. The MSMED ACT
attaches importance to networking with stakeholders both upstream and downstream in
the entire global value chain, from raw material procurement to processing /
manufacturing to marketing to customer services.
Bhatendra Kumar Gupta (2008)In India, the MSME sector is the second largest employer
after agriculture. With the growth in the Indian Economy, it is of need for the MSME to
raise capital is becoming increasingly critical. He says that there is a need for the
dedicated STOCK Exchange for the MSME sector to cater to their needs better which are
different from the large industries.
RBI’s Report of Working Group on Rehabilitation of Sick SME’s (2008) A Working
Group was constituted under the chairmanship of Dr. K. C. Chakrabarty, Chairman and
Managing Director, Punjab National Bank to suggest measures for improving credit flow to
the SME sector as well as measures for early implementation of rehabilitation/nursing of
sick SME units by examining feasibility of bringing in additional capital through
alternative routes, such as, equity participation, venture financing, etc. Support schemes
like Credit Linked Capital Subsidy Scheme in case of units in other (than rural) areas,
KVIC Margin Money Scheme (for units in rural areas) may be extended for rehabilitation
packages also. Many other recommendations have also been given.
Shamika Ravi (2009) The MSME sector has often been termed the „engine of growth‟ for
developing economies. The MSME Development Act of 2006 is perhaps the most crucial of
these recent policy changes.
Sankar De (2009): This article pot rays the enormity of the challenge and outlines a
possible partial remedy. SME‟s in India face may challenges, but perhaps none are as
difficult as the challenge of financing, both short term and long term.
Ramesh V Penumaka (2009) It reflects that while the government can be a facilitator of
growth and promoter of equity , the role of the large enterprises is also critical, The MSME
could be the steroid the Indian economy needs at this juncture. The SME provides not
only the much needed boost for growth, employment and exports but also more
significantly, contributes to geographical and social equity.
Raja, SME Times (2010): The challenges that the SMEs face today seem to be primarily
in the area of ICT and to quote specifically, ERP. The SMEs lament that whenever they
approached the usual ERP firms, the first question they were faced with was that of their
turnover as they are quoted based on their turnover.
Seema Sharma & Milind Sharma (2010): The purpose of this paper is to examine the
relative production efficiency of state-wise clusters in the registered small-scale sector in
India. The author says that, most of the states are found to be operating at decreasing
returns to scale, which signifies the scope for investment and further employment
generation.
Report of the Task Force on MSME (2010) The MSME sector in India is highly
heterogeneous in terms of the size of the enterprises, variety of products and services
produced and the levels of technology employed. While one end of the MSME spectrum
contains highly innovative and high growth enterprises, more than 94 per cent of MSMEs
are unregistered, with a large number established in the informal or unorganized sector.
Besides the growth potential of the sector and its critical role in the manufacturing and
value chains, the heterogeneity and the un-organised nature of the Indian MSMEs are
important aspects that need to be factored into policy making and programme
implementation.

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Risk and Capital Management in MSME’s- by SIDBI (2010) The advent of globalization
offers both challenges and opportunity to MSMEs. The challenge for them is to remain
competitive and consistently deliver value to customers. Risk Capital is an important
instrument for not only start-ups and innovative / fast growing companies but is also
critical to those looking at growth. However, the sources of risk capital are limited in
developing countries. It is encouraging to note that with global integration of economy,
emerging markets like India are sought after destinations for successful Private Equity
(PE) funds. Majority of the MSMEs are owner driven with lesser inclination towards formal
organizational structures. The non-corporate structure and small size of the majority of
MSMEs in India makes the venture capitalists and other risk capital providers reluctant to
investing in them due to higher transaction costs and difficulties in exits out of such
investments. Thus, it is critical to have appropriate risk capital products and focused
funds for MSMEs of different size and constitution.
Sangeeta Baksi (2010) TIFAC is of the opinion that, there are few programs, which are of
utmost importance in the MSME- led technology development efforts, which promote the
public private partnership. More so, the technological development has never been a
straight forwards process. Technological innovations have been the key to the survival of
the MSMEs.
C.B. Bhave(2010) In this opinion the MSME‟s are a catalyst in most of the economies and
constitute a major part of the industrial activity. He foresees that the SME Stock
Exchange will be a great boon to this sector, as it will provide a wide pool of capital,
increased status and credibility and other benefits.
Roopa Kudva (2011) The Managing Director of CRISIL says it is not easy to attract
MSME‟s to do a credit rating, however it is important to have the credit rating done if the
MSME‟s wants to position itself in the international market as well as there is a rebate
from the bankers in the lending terms. Unfortunately, the 75% subsidy is available only
for the first time /year the MSME gets its rating done subsequently they have to bear the
entire cost next year, which is a strain on the purse strings.
Tarak Shah (2011) The major problem of inadequate financing to SMEs needs an urgent
attention amongst the others such as adequate credit delivery to SMEs, better risk
management, technological up gradation of Banks esp. Public Sector Banks, attitudinal
change in Bankers. A number of issues and business practices of global players and
markets can be observed, learnt and adapted for ensuring competitiveness of Indian SMEs
SME Chamber of India (2011) SMEs are now exposed to greater opportunities than ever
for expansion and diversification across the sectors.
Vijay Kumar (2011) Talking about a few basic issues being faced by the MSMEs sector is
lack of awareness, investment and resource, "Zero wastage and continuous design
improvement hold the key to survival and growth of MSMEs."
Mehul Kapadia (2011): Every bit of capital investment is crucial for an SME. Seasonal
peaks are one of the greatest reasons for companies under-provisioning or over-
provisioning. This can later result in a heavy loss and idle resources. Large enterprises
have the capability and the resources to execute such transformations smoothly, but
SMEs face a significant challenge in doing so, given their limited resources and capital.
Annual Report of MSME 2011-2012 gives the overall view of MSMEs with respect to its
performance and growth in production, employment, export, number of industries, detail
view of various schemes and of various departments of MSMEs.
Annual Report of MSME 2012-2013 gives the overall view of MSMEs with respect to its
performance and growth in production, employment, export, number of industries, detail
view of various schemes and of various departments of MSMEs.

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Final Report of Fourth All India Census of MSME gives a sound, accurate and
comprehensive database of MSMEs for sound policy formation.
Garg, Ishu and Walia, Suraj. (2012) confirms that the significant growth of MSMEs have
been taken place over a period of time and this sector is the major donor to gross domestic
Methodology
The methodology adopted to carry out study is described below:
a) Use of primary and secondary data relating to SME finance
b) Secondary data has been collected from published reports and other data source
from various sites such as Reserve Bank of India, SIDBI, GOI and banks in their
various committee reports, speeches and periodical reports.
c) Statistical techniques viz. ratio analysis used to draw inference
Type of Research
The study conducted is a descriptive, analytical and conclusive type of research. The
study is descriptive because it is in the descriptive study, that the data is collected for a
definite purpose and here the purpose is definite i.e. the data is collected, to find out the
lending procedures of Micro, Small and Medium Enterprises (M.S.M.E).It deals with the
MSME policy and guidelines of Indian Overseas Bank and assessing the balance sheet and
working capital of a particular enterprise. It is analytical as because the study is been
conducted with the calculation of current ratio, debt equity ratio, debt service coverage
ratio, holding period , working capital assessment, credit rating and finally overall analysis
of different ratios. The study is conclusive because after doing the study the researcher
comes to a conclusion regarding the Credit Rating of the Account on the basis of which
the Credit will be appraised by the bank for providing the Working Capital Finance to
Micro, Small and Medium Enterprises (M.S.M.E)
Source of Data Collection
The data was collected from the Company‟s Loan Policy Document 2013-2014. It
includes:-
Report on SME Units
Financial Data of the Company
Internet Data
Books on Financial Institution
Type of Data
Primary Data:-
The primary data was collected directly from the bank manager as whenever required for
making the project report more appropriate.
Secondary Data:-
The secondary data collected from the already sanctioned loan files
Collection of secondary data from Management journals
Bank and Borrower‟s Annual Report
Project proposal
Respective Banks Web Sites other sites
Reference from Management Books

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The software used during the analysis is MS Excel 2013 and MS Word 2013.
After Scrutinization of all the Documents, the Bank decides whether to Approve the
loan to the respective Company or not. If No, then the subject matter ends up there.
In addition, if Yes, then the Bank goes for the Project Report of the Company,
Financial Statements of the Company, & finally for the Statutory Approvals & their
Scrutinization.
The Financial Tools Required for Credit Appraisal of A Company:-
A. Project Report Of The Company :-
The Project Report of the Company comprises of the following:-
a) Cost of Project (C.O.P), b) Means of Finance (M.O.F), c) Utility Details of the Project,
d) Capacity Utilisation of the Project, e) Project‟s Implementation & Drawdown Schedule, &
f) Repayment Schedule
B. Financial Statements of the Company: -
In the Financial Statements, the Bank goes for the following: - Estimation of Sales,
Estimation of Profit, Calculation of various types of Ratios such as: - the Current Ratio,
the Debt-Equity Ratio (D.E.R), the Debt Service Coverage Ratio (D.S.C.R), the Interest
Service Coverage Ratio (I.S.C.R) & the Break-Even Point (B.E.P).
 Working Capital Assessment:
The Working Capital Assessment refers to the day-to-day expenses required for the proper
functioning of an organisation. Here, the Bank goes for the assessment of Working Capital
of the Company in order to know whether the Loan amount proposed by the respective
Company is Acceptable or not. The following tools required for the Assessment of the
Working Capital are the Holding Period (otherwise known as the Operating Cycle Time-
period) & the various methods of Working Capital Assessment are Turnover Method &
Second Method of Lending (otherwise known as the Maximum Permissible Bank
Finance Method (M.P.B.F)).
 Holding Period: - It refers to the time between an Assets Purchase & its Sales. It is
otherwise known as “Operating Cycle Time-period”.
Case Analysis:
XYZ Enterprises is a partnership firm managed by three partners including one female
member among them. MRX, MS Y and MR Z. The company is managed by professionally
qualified managers and skilled staff. The organization culture reverberates the general
understanding and protocol of doing business ethically. The management team that leads
the company today, forms the integral part of the pedigree of successful experience in the
business of PROJECTS CONSTRUCTION /EPC/PMC/MFG. OPERATIONs and Execution
capabilities deeply involving BASIC & DETAILED ENGINEERING, PLANNING, PROJ.
MGT., CIVIL, MECHANICAL, ELECTRICAL, INSTRUMENTATION, UTILITIES AND MISC.
FACILITIES UPTO COMMISSIONING AND START UP OF PROJECTS/ OPERATIONS.

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Data Presentation:
Calculation of Various Items: -
Amount in Rs. Lakhs
Analysis
Calculation of Current Ratio As the ideal current ratio is
Current Ratio 1.25:1. The position of the
(C. R.) company is quite stable to meet
49.54 all the requirements. Current
Current Ratio =
liability was much more in the
Current Assets 7.02 8.71 1.45 1.4 1.47 year 2013-14 because of less
/ Current
demand in the market. The CR is
Liabilities 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 more than the ideal ratio so it is
acceptable.
Calculation of
Net Working Net Working Capital
Capital (N. W. Analysis
C.)
The net working capital of the
Net Working 155.21 firm is increasing day by day,
Capital = 7.64 31.16 95.63 113.76 127.47 which gives a good signal to meet
Current assets- the short-term funds easily
Current 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
liabilities
Calculation of
Debt Equity Debt Equity Ratio Analysis
Ratio (D. E. R.)
The ideal debt equity ratio is 2:1
Debt-Equity
and in case of this firm it less
Ratio = Total 0.84 0.81
0.76 than the ideal ratio so it in
Outsider‟s
decreasing form. This shows the
Liabilities 0.03 0.12 0.06
Company is doing well enough in
(T.O.L) /
all of its business operations
Tangible Net 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Worth (T.N.W)
Analysis
Calculation of
Debt Service From the Debt Service Coverage
Coverage Ratio Ratio Analysis, it is found that
(D. S. C. R.) Debt Service Coverage the Debt Service Coverage Ratio
Ratio (D.S.C.R) is increasing in a
D.S.C.R= Profit
positive manner year by year.
After Tax +
2.31 2.68 7.02 3.64 2.53 2.68 Therefore, the Company is able
Depreciation +
to repay the debt including the
Interest for the
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 interest to the bank within the
current year /
respective time frame. The ideal
Installment +
ratio is 1.5:1 so it more than the
Interest
ideal ratio.

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Calculation of Working Capital Assessment: -

Comparative statement of Current assets and Current liabilities
Projection Projection
Current Assets 31.03.2016 31.03.2017
(**) (in Lakhs) (in Lakhs)

Raw Materials including stores, spares, consumables

& other items included in the process of 48.42 54.13
manufacturing (Rs. in Lakhs)
Raw Material Consumed (Rs. in Lakhs) 442.09 515.78
Raw Material Holding Period (in months) 1.31 1.26
Stock in Process (Rs. in Lakhs) 23.56 26.74
Cost of Production (Rs. in Lakhs) 679.44 794.71
Stock in Process Holding Period (in months) 0.42 0.40
Finished Goods (Rs. in Lakhs) 0.60 0.70
Cost of Sales (Rs. in Lakhs) 679.34 794.61
Finished Goods Holding Period (in months) 0.01 0.01
Receivables other than export & deferred receivables
278.63 299.44
(Rs. in Lakhs)
Domestic Sales: excluding
679.34 794.61
Deferred Payment Sales (Rs. in Lakhs)
Receivables Holding Period (in months) 4.00 3.67
CURRENT LIABILITIES
Creditors for purchase of raw materials, stores &
36.34 42.39
consumable spares (Rs. in Lakhs)
Purchase of Raw Materials, Stores & Consumable
171.65 182.72
Spares
Creditor’s Holding Period (in months) 2.54 2.78
Operating Cycle in months 4.11 3.4
(**) for 9 months of operations

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Projection Projection
1st METHOD OF LENDING 31.03.2016 31.03.2017
(in Lakhs) (in Lakhs)

a. Total Current Assets (C.A.) 449.12 487.93

Total Current Liabilities excluding Bank

b. 171.65 182.72
Borrowings(C.L.)

c. Working Capital Gap (a-b) 277.47 305.21

Minimum Stipulated Net Working Capital (25% of

d. 69.3675 76.3025
“c”)

e. Actual/Projected Net Working Capital 127.47 155.21

f. Bank Finance (c-d) 208.10 228.91

g. (c-e) 150.00 150.00

h. M.P.B.F (Lower of “f” & “g”) 150.00 150.00

i. Limit Proposed 150.00 150.00

Assessment of Working Capital is done under Nayak Committee Method

Projected Turnover for the year 2015-16: Rs 835.89 Lac
Adjusted Turnover: Rs.835.00 Lac
25% accepted turnover: Rs.208.75 Lac
Less 5% margin: Rs.41.75 Lac
Or Actual NWC available: Rs.95.63 Lac
PBF: Rs.113.12 Lac
Requested by the party Rs. 150.00 Lac. The excess margin available in the system will be
utilized for the machinery to be purchased for the proposed unit.
Recommendations
SME sector is perceived as a profitable endeavor for banking business despite significant
differences in lending practices, business models, drivers and obstacles in SME finance.
Numerous issues relating to SME finance have been analyzed in the study based on first
hand impressions of entrepreneurs and banks officials and observations have made by
using industry level statistics on selected data. The following measures are recommended
from bankers‟ as well as entrepreneurs‟ perspective based on the empirical observations of
the study which probably would help bankers in making their SME loan book strong for
sustainable development of banking industry and inclusive growth of Indian economy.
a) Human capital is the key driver of finance in banking. It is a sort of special breed of
capital, which needs skills to handle loan proposals of entrepreneurs who have dream
projects and thus involves behavioral appraisal of promoters and financial viability of
ambitious project to be undertaken by firms. The covenant of “one size fits to all” does
not make much sense in the present competitive environment. Therefore, there is a need
to differentiate finance officer and general banking officers in terms of their service
conditions, postings, grooming, attitude, promotions, creativity and many more.

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b) First generation entrepreneurs and family business being unique peculiarity of SMEs;
have either no credit rating or poor credit rating for want of its awareness, it is therefore
recommended that a need of handholding approach to be experienced by both
entrepreneurs and bank officials. Banks in consultation with SMEs association at all
levels such as Chamber of Commerce, Industry Associations etc. should conduct
Entrepreneurs Development Programme (EDP) for incubation and entrepreneurship to set
up industries, which will realize theme of 12th Plan of generating 30 Million employments,
and 25% increase in manufacturing production.
c) Technology backwardness and lack of innovation have been causes of failure of SMEs.
Further, the promoters do not have not fund for technology up gradation. Banks should
therefore, mandatorily consider loan for capex investment in technology up gradation and
innovation of SMEs; otherwise it may lead to diversion of funds from working capital to
capital expenditure or increase in private borrowings. . This loan for technology up
gradation should be subsidized from government fund by way of capital subsidy or
interest subvention etc.
d) Since credit requirement of SMEs to the largest extent are small, which qualify for
guarantee under CGTMSE, it is liquid security as compared to any other tangible
collaterals. It is, therefore, recommended that banks should encourage collateral free &
activity oriented lending which are of self-liquidating in nature.
e) State Governments should have provision of preferential and green channel treatment
to SMEs in respect to clearance & approvals to be given for setting up business, providing
uninterrupted power supply or back end capital subsidy on loans for purchase of power
back up investment like DG sets, provide land & common facilities in industrial estates at
acquisition cost for making them competitive with large firms indigenously and globally
f) Huge amount of expenses are to be incurred towards market making movement and
such type of expenses are of capital nature, which should be amortized in due course of
time. It is therefore, recommended that investment for market development activities
illustrated here in the report should be considered as permissible cost of project for
finance at par with capex in plant & machinery, else without taking this aspect into
account, the assessment of loan limit would be ab-initio incomplete. A scheme of clean
overdraft for marketing development may be worked out.
g) Government procuring policy regarding buying at least 20% of annual purchase from
SMEs has been put in place but not being adhered to in its letter and spirit by big giants.
Since MSEs do not have expertise/skills for approaching to the large corporate, DIC or
Directors, MSME establishments at regional level should own responsibility of providing
details of products of these MSEs to the Government/PSU buyers reinforcing mandatory
guidelines and also verifying their compliance from time to time. In addition, banks should
mark lien in total working capital limit as sub-limit reserved for purchasing from SMEs
while sanctioning credit facilities to large corporate.
Conclusion from Analysis: -
Sales
The firm is constituted during Dec 2010 with three partners. The gross receipt was Rs
40.11 lakhs during 2011-12 and it was increased to Rs 90.35 lakhs as on 31.3.2013. Due
to global recession, it was increased to Rs 92.18 lakhs as on 31.3.2014. However, the firm
has estimated Rs 261.53 lakhs during the current financial year. As there are substantial,
work orders on hand, the firm projects around Rs 835.89 lakhs as of 31.3.2016.
NPAT
The firm has earned profit Rs 0.20 lakhs during 2012-13 and it was increased to Rs 0.84
lakhs as on 31.3.2014.

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However, it expects Rs 6.10 lakhs during the current financial year. The firm projects Rs
20.33 lakhs NPAT as of 31.3.2016. The profitability of the firm seems too achievable as per
projections, which comes within 2.33% of net sales.
TNW
The TNW of the firm is quite satisfactory due to unsecured loans from the partners.
However, the firm has projected each year to plough back of profits in the business.
TOL/TNW
The captioned ratio is projected within one, which reveals there is less outside liabilities in
comparison to Net Worth of the firm.
CR/NWC
The current Ratio is very high due to own capital invested in the business. However, it will
be 1.45:1 as on 31.3.2015 due to proposed borrowing from banks. As per projections the
liquidity position of the firm quite healthy. However, the financial indicators of the
company are satisfactory.
However, the relationship of the customer with the bank based on the financial
transactions and other parameters play a very important role while deciding the lending of
fund.
References:
1. Chakrabarty K C (Dr), Deputy Governor of RBI - Keynote address on 21.5.10 at formal
release of the Indian Micro, Small & Enterprises Report 2010 at ISED, Kochi, key note
address at launch of course on „Customer Service and Banking Codes & Standards”
on12.11.10 at IIBF, Mumbai, Keynote address on 20.12.2011 at Central Bank of India
SME Conclave at Mumbai, Address at „SME Banking Conclave 2012‟ organized by SME
Chamber of India on 4.2.2012 at Mumbai
2. Das Keshab-SMEs in India-Issues & Possibilities in times of globalization, Chapter-3
3.Das S C, Invert is Journal of Management, Vol.2, No 2, 2010, pp131-143 - Is Small and
Medium Sized Enterprises (SME) Financial Reporting Limited in Practices : An Exploratory
Study
4. Khandelwal Anil K (Dr) - Report of the Committee on HR Issues of PSBs
5. Mahapatra B, Executive Director, Reserve Bank of India on March 3, 2012 - Address at
the National Conference on Emerging Macro CH. 8 : RECOMMENDATIONS Environment,
Regulatory Changes and Bank Competitiveness, organized by the National
6.Nair Committee Report constituted by RBI „to re- examine the existing classification and
suggest revised guidelines with regard to priority sector lending classification and related
issues‟ which has place on RBI web portal for seeking views/ comments from public,
banks/FIs
7. Prime Minister‟s High Level Task Force Report on MSMEs, Government of India,
January 2010
8. RBI Guidelines – Master Circular – Lending to Micro, Small & Medium Enterprises
(MSME) Sector RBI/ 2011 12/83, RPCD.SME & NFS. BC. No. 09/ 06.02.31/2011 - 12
July 1, 2011
9. Reserve Bank of India-Master Circular on Lending to MSME Sector - number RBI/2011
12/83, RPCD.SME & NFS. BC. No. 09/06.02.31/2011 - 12 dated July 1, 2011
10. Reserve Bank of India Report on Trend & Progress of Banking in India 2010-11
(Sector-wise NPAs of Domestic Banks - Table IV.18)

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11. SIDBI Report on MSME Sector - 2010. Extract of studies/survey on Contemporary

studies taking 200 MSMEs (42 Micro, 114 Small & 44 Medium Enterprises) into its
sample from all over India.
12. Sujata Rao & K J Soumya, Institute of Management Studies & Research, Mumbai -
Strategies for Enhancing Competitiveness of Firms, Industry Sectors & Country. Paper
presented in conference on Global Competition and Competitiveness of Indian Corporate
13. Thorsten Beck, Asli Demirgüç-Kunt, María Soledad Martínez Pería, Policy Research
Working Paper 4785 on “Bank Financing for SMEs around the World Drivers, Obstacles,
Business Models and Lending Practices; The World Bank, Development Research Group,
Finance and Private Sector Team, November 2008
14. UNCTAD Secretariat - Improving the competitiveness of SMEs through enhancing
productivity capacity - Background paper
15. Yojana - A publication of Ministry of Information & Broadcasting, Government of India
(GOI) - Vol. 56 - January 2012
16. Business Standard, Mumbai reporters,14th March, 2012 - SME Exchange & Economic
Times news dated 2.3.2012 - BSE SME Exchange will start Operations on March 13,
2012.

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