Introduction
Small industry has been one of the major planks of India's economic development strategy
since Independence. India accorded high priority to small and medium enterprises (SMEs)
from the very beginning and pursued support policies to make these enterprises viable and
vibrant and over time, these have become major contributors to the GDP. Despite
numerous protection and policy measures for the past so many years, SMEs have
remained mostly small, technologically backward and lacking in competitiveness. The
opening of the Indian economy in 1991 added problems to the SMEs. At the beginning,
small scale enterprises found it difficult to survive. In the last decade, the economic
environment has changed in favour of SMEs. Presently, the SMEs in India are at a crossroad
and intense debate is centered around questions like what would be the future of the
small enterprises? How these enterprises can survive in the international trade arena?
Today, small and medium industry occupies a position of strategic importance in the
Indian economic structure due to its significant contribution in terms of output, exports and
employment. The small scale industry accounts for 40% of gross industrial value addition
and 50% of total manufacturing exports. More than 3.2 million units are spread all over the
country producing about 8000 items, from very basic to highly sophisticated products. The
SMEs are the biggest employment-providing sectors after agriculture, providing
employment to 29.4 milllion people. However SMEs, which constitute more than 90% of
total number of industrial enterprises, are now facing a tough competition from their global
counterparts due to liberalization, change in manufacturing strategies, technological
changes, and turbulent and uncertain market scenario.
since Independence. India accorded high priority to small and medium enterprises (SMEs)
from the very beginning and pursued support policies to make these enterprises viable and
vibrant and over time, these have become major contributors to the GDP. Despite
numerous protection and policy measures for the past so many years, SMEs have
remained mostly small, technologically backward and lacking in competitiveness. The
opening of the Indian economy in 1991 added problems to the SMEs. At the beginning,
small scale enterprises found it difficult to survive. In the last decade, the economic
environment has changed in favour of SMEs. Presently, the SMEs in India are at a crossroad
and intense debate is centered around questions like what would be the future of the
small enterprises? How these enterprises can survive in the international trade arena?
Today, small and medium industry occupies a position of strategic importance in the
Indian economic structure due to its significant contribution in terms of output, exports and
employment. The small scale industry accounts for 40% of gross industrial value addition
and 50% of total manufacturing exports. More than 3.2 million units are spread all over the
country producing about 8000 items, from very basic to highly sophisticated products. The
SMEs are the biggest employment-providing sectors after agriculture, providing
employment to 29.4 milllion people. However SMEs, which constitute more than 90% of
total number of industrial enterprises, are now facing a tough competition from their global
counterparts due to liberalization, change in manufacturing strategies, technological
changes, and turbulent and uncertain market scenario.
DISCUSSION
Current Issues
Lending Facilities to SMEs
The mind set of banks towards SMEs have somewhat changed in the recent past. With the
entry of private banks, increased competition has led to a rush for lending to prime
customers. The multiple financial options from the capital market have also compelled
banks to take more risks in the case of SMEs. The increased lending to SMEs is propelled
by the compulsion of the market as well as by the rapid expansion of these companies.
There was no agreement among the banks on what constitutes an SME. This confusion
was removed by the new Act. But private and foreign banks have their own definition of
SMEs. They follow the International standard of turnover between Rs. 10 crore and Rs.
700 crore. The lending to the SME sector grew by 69% between 2000-01 and 2005-06.
But there exists a stark disparity amongst small players and big players within the SMEs
sector. Loans to bigger companies are growing at a faster pace than loans to the SSI
sector. By the end of 2006, the proportion of SSI loans to total loans has remained small at
6.4 per cent.
Presently, private banks are adopting new methodologies for priority lending to
SMEs. In the past, loans were made without proper study of the viability of the project and
mostly bankers in this sector had no expertise in handling small loans. Now private banks
like ICICI and Kotak Mahindra Bank have separate SMEs division. Today, most of the
lendings are concentrated on priority sectors like auto ancillaries, pharmaceuticals and IT
sector where India had a proven record of competitive advantage. The SMEs sector is still
facing an acute shortage of capital. It needs more pumping of money into capital
investment for further growth and competitiveness of SMEs. For further growth of the
SMEs, in addition of loan facilities, there is need for venture capital investment.
The Small Industries Development Bank of India (SIDBI) was set up in 1990 under
the Act of Indian Parliament as the principal financial institution for promotion, financing,
development of industry in the small sector and coordinating the financial activities of other
institutions engaged in similar activities. Since its inception, the bank is promoting SSI
sector to meet the requirement of setting up of new projects, expansion, diversification and
modernisation of the sector. However, after working more than 1-1/2 decades, the
institution has not proved to be sufficient to meet the requirement of SMEs in India. This
can be mainly attributed to the governmental clutches on the banks.
The main identified sources of finance to SSI units are:
• Public Sector/Commercial banks
• State Financial Corporations
• Small Industries Development Bank of India
• Informal sources
Out of these financial resources, banks are a preferred source of financing by virtue of their
better reach and accessibility.
entry of private banks, increased competition has led to a rush for lending to prime
customers. The multiple financial options from the capital market have also compelled
banks to take more risks in the case of SMEs. The increased lending to SMEs is propelled
by the compulsion of the market as well as by the rapid expansion of these companies.
There was no agreement among the banks on what constitutes an SME. This confusion
was removed by the new Act. But private and foreign banks have their own definition of
SMEs. They follow the International standard of turnover between Rs. 10 crore and Rs.
700 crore. The lending to the SME sector grew by 69% between 2000-01 and 2005-06.
But there exists a stark disparity amongst small players and big players within the SMEs
sector. Loans to bigger companies are growing at a faster pace than loans to the SSI
sector. By the end of 2006, the proportion of SSI loans to total loans has remained small at
6.4 per cent.
Presently, private banks are adopting new methodologies for priority lending to
SMEs. In the past, loans were made without proper study of the viability of the project and
mostly bankers in this sector had no expertise in handling small loans. Now private banks
like ICICI and Kotak Mahindra Bank have separate SMEs division. Today, most of the
lendings are concentrated on priority sectors like auto ancillaries, pharmaceuticals and IT
sector where India had a proven record of competitive advantage. The SMEs sector is still
facing an acute shortage of capital. It needs more pumping of money into capital
investment for further growth and competitiveness of SMEs. For further growth of the
SMEs, in addition of loan facilities, there is need for venture capital investment.
The Small Industries Development Bank of India (SIDBI) was set up in 1990 under
the Act of Indian Parliament as the principal financial institution for promotion, financing,
development of industry in the small sector and coordinating the financial activities of other
institutions engaged in similar activities. Since its inception, the bank is promoting SSI
sector to meet the requirement of setting up of new projects, expansion, diversification and
modernisation of the sector. However, after working more than 1-1/2 decades, the
institution has not proved to be sufficient to meet the requirement of SMEs in India. This
can be mainly attributed to the governmental clutches on the banks.
The main identified sources of finance to SSI units are:
• Public Sector/Commercial banks
• State Financial Corporations
• Small Industries Development Bank of India
• Informal sources
Out of these financial resources, banks are a preferred source of financing by virtue of their
better reach and accessibility.
Conclusion
Small industry in India has found itself in an intensely competitive environment since 1991,
thanks to globalisation, domestic economic liberalisation and dilution of sector-specific
protective measures. The international and national policy changes have thrown open new
opportunities and markets for the Indian small industry. Concerted effort is needed from the
government and small industry to imbibe technological dynamism.
thanks to globalisation, domestic economic liberalisation and dilution of sector-specific
protective measures. The international and national policy changes have thrown open new
opportunities and markets for the Indian small industry. Concerted effort is needed from the
government and small industry to imbibe technological dynamism.
Technological upgradation and in-house technological innovations and promotion of inter-firm linkages need to be encouraged consciously and consistently. Financial infrastructure needs to be
broadened and adequate inflow of credit to the sector be ensured taking into consideration
the growing investment demand, including the requirements of technological transformation.
Small industry should be allowed to come up only in designated industrial areas for better
monitoring and periodic surveys. A technologically vibrant, internationally competitive small
and medium industry should be encouraged to emerge, to make a sustainable contribution
to national income, employment and exports. It is essential to take care of the sector to
enable it to take care of the Indian economy.
broadened and adequate inflow of credit to the sector be ensured taking into consideration
the growing investment demand, including the requirements of technological transformation.
Small industry should be allowed to come up only in designated industrial areas for better
monitoring and periodic surveys. A technologically vibrant, internationally competitive small
and medium industry should be encouraged to emerge, to make a sustainable contribution
to national income, employment and exports. It is essential to take care of the sector to
enable it to take care of the Indian economy.
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