avinash goyal
Avinash Goyal
Small Scale Industries - 4
Means of Financing
Finance is a key input of production, distribution and development. During the pre-independence period, financial constraints had hampered the rapid growth of industries in the country. After the independence, the Government has built up a network of specialized financial institutions to provide financial assistance to all types of industries including small scale industries.
A growing economy needs the support of financial structure for the industrial development. In India, commercial banks have shouldered the special responsibilities for meeting the financial needs of the diverse sectors of the economy at various stages of development. They have evolved various modes and instruments of financing, designed various organization innovations, moved away from traditional commercial banking and stepped into development banks and responsive to socio-economic needs.
The commercial banks are now meeting the financial requirements of entrepreneurs.
For the medium to large term requirements, State Financial Corporation and other similar financing agencies step into their needs. An appropriate type of credit is granted for the construction of the factory building, purchase of plant and machinery, equipments and for working capital requirements. The loans are advanced for the expansion, renovation and modernization of plant and machinery. Bank and financial institutions provide export finance needed by small industries for letters of credit, issuance of guarantees, extension of pre-shipment and post shipment credit facilities.
Types of Industrial Finance:
Depending upon the nature of the activity, the entrepreneurs require 3 types of finances viz., short, medium term and long term finances.
Short Term Finance: This refers to the funds required for a period of less than one year, usually required to meet variables, seasonal or temporary working capital requirements. Banks provide short-term finance to meet these requirements. Other important sources of finances available are trade credit, installment credit and customer advances.
Medium term finance: The period of one year to five years may be regarded as a medium term. This is required for permanent working capital, small expansions, replacements, and modifications, etc. The fund could be raised by (1) issue of shares, (2) Issue of Debentures (3) Borrowing from banks and other financial institutions, (4) Ploughing back of profits from the existing concerns.
Long term finance: Long term period exceeds a period of 5 years. The finance is required for procuring fixed assets, for the establishment of a new business, substantial expansion of existing business, modernization, introduction of technology, etc. The fund could be raised by (1) issue of shares, (2) Issue of Debentures (3) Loans from financial institutions, (4) Ploughing back of profits from the existing concerns.
Means of finance:
The personal funds of entrepreneurs form a substantial proportion of the total assets of small scale units. The owners of small units, therefore, run a considerably higher risk than those of corporate units.
• The sources that provide the working capital requirements are Commercial Banks, special agencies like State Industrial and Investment Corporation of Maharashtra (SIICOM), the Gujarat Industrial Investment Corporation (GIIC) and cooperative banks.
• The fixed capital needs are usually met by State Governments, State Financial Corporations (SFCs), national Small Industries Corporation (NSIC) for supply of machinery on hire purchase basis, State Small Industries Corporation (SSICs), State Industrial Development Corporations (SIDCs) and the State Bank of India and subsidiaries and other commercial banks.
The balance sheet of small industries clearly enumerates the sources from which the funds are raised. They are: Internal and External sources.
Internal:
Paid Up Capital: By issuing Ordinary shares, Preference shares, Deferred Shares and Forfeited shares.
Reserve Surplus: By providing Capital reserve, Development rebate reserves.
Provisions: By providing provision for Taxation and Depreciation.
External:
Borrowings: From Banks, institutions like IDBI, IFCI, ICICI, and Industrial Dev. Corpn. Etc., from Government and Semi Government agencies, etc.
Trade dues and other current liabilities: Sundry Credits, etc.
Miscellaneous: all the sources of finance are not available to all the small units. It would depend on the status, character and period of time the units have been in operation. For example, a new small unit has no reserves to provide for depreciation. These provisions are built up in gradual stages out of the funds set aside during the course of operations.
The funds a small scale industry raise depend upon the character of the company – private of public, its productive activity and uses to which these funds are put: i.e. fixed assets, or working capital or for day to day affairs of the operations like loans and advances, investments, sundry debtors, etc.
Schemes of Assistance:
Within the broad framework, the following financial assistance is offered by the SFCs, SIDCs and commercial banks;
• New projects in the small and medium size category
• Modernization of small and medium industries
• Rehabilitation of small and medium industries
• Import of capital equipment.
In view of the financial constraints being faced by SFCs, SIDCs and commercial banks, it is of interest to the borrowers to know the extent of refinancing assistance being extended by IDBI.
In view of the financial constraints being faced by SFCs, SIDCs and commercial banks, it is of interest to the borrowers to know the extent of refinancing assistance being extended by the IDBI for the aforesaid purpose.
Financial Assistance to Small Scale Units:
Rupee loans to the small scale units are granted at confessional rate of interest of 12.50 per cent per annum for the small scale units location in backward areas. For non backward areas, the interest charges at 13.50 per cent per annum on loans upto 25 lakhs and at 14 per cent on loans in excess of 25 lakhs.
Repayment schedule is fixed by the primary lending institutions after taking into consideration the profitability and debt servicing capacity of the assisted units. The maximum repayment period shall, however, not exceed 10 years from the date of sanction.
Financial Assistance to medium Scale Units:
The medium scale units are also eligible for concessional interest of 12.50 per cent per annum for units located in any industrially backward area. However, in respect of units located in non backward areas, the applicable rate of interest shall be 14 per cent per annum.
Similar to the repayment schedule of the small scale units, the repayment schedule of medium scale units shall also be determined after taking into consideration their profitability and debt servicing capacity, subject to the condition that the maximum repayment period does not exceed 10 years from the date of sanction.
Modernization Assistance to Small and Medium scale units:
The primary objective of this scheme is to encourage industrial units –
• Overcome the backlog of modernization and to adopt improved and updated technology
• Introduce new methods of production
• Prevent mechanical and technological obsolescence (disuse or misuse)
• Encourage replacement or renovation of plant and machinery
• Acquisition of balancing equipment for fuller and more effective utilization of installed capacity.
The Units to be eligible for modernization assistance should have been in existence for a period of at least 5 years. In the case of replacement or renovation, the machinery should have been in use at the unit for a period of at least 5 years.
The Units who intends to avail this scheme should clearly out the project proposals containing the reduction of unit cost of production, technology improvement, improved productivity – both in quality and quantity, better profitability, etc.
The modernization programme should primarily aim at:
• Up gradation of process, technology and product
• Export orientation
• Import orientation
• Energy saving
• Anti pollution measures
• Conservation / substitution of scarce raw materials and other inputs including recycling/recovery of wastes and bye-products
• Improvement in capacity utilization within the existing capacity through increase in productivity
• Improvement in material handling.
Irrespective of location of the unit, interest at the rate of 11.5 per cent per annum shall be charged on all rupee loans for modernization purposes.
Rehabilitation Assistance to Small and Medium Scale Units:
The Rehabilitation Scheme covers all small and medium scale industrial units including ancillary units, units in cottage and village industries which have been assisted by SFCs and SIDCs or self financed and which are classified as sick. Rehabilitation loans extended by commercial banks to such units will also be eligible for refinance order the scheme.
Eligibility Criteria:
Under this scheme, a unit will be classified as sick if it has incurred cash losses during the previous accounting year and is likely to incur cash losses in the current year and there is erosion (deterioration) in its net worth to the extent of 50 per cent of more.
Rehabilitation assistance would be for the following purposes:
1. Margin money for additional term loan and working capital requirements under this programme;
2. Working capital term loans granted by banks to meet irregularities in unit’s working capital account
3. Payment of statutory liabilities, payment of pressing creditors, etc. (to the extent possible such dues should be liquidated over a period of time in instalments.)
4. Cash loss if any incurred during the implementation of nursing programme.
5. Overdue instalments not recovered from the unit.
In order to encourage the rehabilitation of sick units, the rate of interest on rehabilitation assistance has been fixed at 11.5 per cent p.a. irrespective of the location of the unit. Such units have also been totally exempted from any liability on account of commitment charges on undisbursed financial assistance.
Expenditure Eligible for Assistance:
The cost of industrial estate for the purposes of financing is confined to the cost of site development, laying of roads, arrangements or water supply, power transmission and electrification, construction of sheds and construction of blocks for essential amenities such as sanitation, watch and ward, canteen, compound walls, administrative building, etc.
• Cost of improving land, laying of roads, arrangement
• for water supply, Electrification etc. 15%
• cost of construction of sheds 75%
• cost of essential amenities like sanitary blocks, watch and
• ward, compound walls, canteen, etc. 5%
• Cost of administrative building 3%
• Cost of stamp duty, registration charges, preliminary expenses, etc. 2%
Financing Norms:
The all India financial institutions stipulate a promoter’s contribution norm of 20% of the total project cost for industrial estates set up in notified less developed area and a 22.5% norm in other cases. In the case of estates costing less than Rs. 300 lakhs, the following margin money have been stipulated by IDBI to make them eligible for financing:
1. 15% margin for estates set up by technician entrepreneurs or unemployed engineers where the sheds are to be acquired by them on hire basis.
2. 20 to 30% margin for co-operative estates where the sheds are entirely by small scale units.
3. 30 to 35% margin for estates set up by joint stock companies whose shareholders occupies majority of the sheds.
4. 40 to 50% margin for estates set up by proprietary and partnership concerns.
Repayment Schedule:
In respect of loans being refinanced by the IDBI, a repayment period of 7 to 10 years including an initial moratorium of 2 to 3 years is prescribed. On specific cases, the period may be extended upto 12 years or 15 years as the case may be.
Security:
The financial institution stipulates that the sheds constructed in the industrial estate should be allotted only on rental basis and no hire purchase or outright sale is permitted in order to enable mortgage of sheds with the lending institutions toward security for the loan. In case where no mortgage of land and sheds constructed in the industrial estate is not possible, an unconditional bank guarantee for repayment of loan and interest is insisted upon.
Conclusion:
Finance is required for the project and is available plenty. There is need for careful financial management. A successful project is one which generates its own finances to a greater extent and finances its diversified activities. Internal resources will serve as a backbone of the project.
The generation of internal sources not only benefit the enterprise, but also the entrepreneur, shareholders and the society. A careful application of internal resources will also assist the natural growth of the capital market. Financial management is a integral part of industry and ranks equally in importance with other key components like production and marketing.
Means of Financing
Finance is a key input of production, distribution and development. During the pre-independence period, financial constraints had hampered the rapid growth of industries in the country. After the independence, the Government has built up a network of specialized financial institutions to provide financial assistance to all types of industries including small scale industries.
A growing economy needs the support of financial structure for the industrial development. In India, commercial banks have shouldered the special responsibilities for meeting the financial needs of the diverse sectors of the economy at various stages of development. They have evolved various modes and instruments of financing, designed various organization innovations, moved away from traditional commercial banking and stepped into development banks and responsive to socio-economic needs.
The commercial banks are now meeting the financial requirements of entrepreneurs.
For the medium to large term requirements, State Financial Corporation and other similar financing agencies step into their needs. An appropriate type of credit is granted for the construction of the factory building, purchase of plant and machinery, equipments and for working capital requirements. The loans are advanced for the expansion, renovation and modernization of plant and machinery. Bank and financial institutions provide export finance needed by small industries for letters of credit, issuance of guarantees, extension of pre-shipment and post shipment credit facilities.
Types of Industrial Finance:
Depending upon the nature of the activity, the entrepreneurs require 3 types of finances viz., short, medium term and long term finances.
Short Term Finance: This refers to the funds required for a period of less than one year, usually required to meet variables, seasonal or temporary working capital requirements. Banks provide short-term finance to meet these requirements. Other important sources of finances available are trade credit, installment credit and customer advances.
Medium term finance: The period of one year to five years may be regarded as a medium term. This is required for permanent working capital, small expansions, replacements, and modifications, etc. The fund could be raised by (1) issue of shares, (2) Issue of Debentures (3) Borrowing from banks and other financial institutions, (4) Ploughing back of profits from the existing concerns.
Long term finance: Long term period exceeds a period of 5 years. The finance is required for procuring fixed assets, for the establishment of a new business, substantial expansion of existing business, modernization, introduction of technology, etc. The fund could be raised by (1) issue of shares, (2) Issue of Debentures (3) Loans from financial institutions, (4) Ploughing back of profits from the existing concerns.
Means of finance:
The personal funds of entrepreneurs form a substantial proportion of the total assets of small scale units. The owners of small units, therefore, run a considerably higher risk than those of corporate units.
• The sources that provide the working capital requirements are Commercial Banks, special agencies like State Industrial and Investment Corporation of Maharashtra (SIICOM), the Gujarat Industrial Investment Corporation (GIIC) and cooperative banks.
• The fixed capital needs are usually met by State Governments, State Financial Corporations (SFCs), national Small Industries Corporation (NSIC) for supply of machinery on hire purchase basis, State Small Industries Corporation (SSICs), State Industrial Development Corporations (SIDCs) and the State Bank of India and subsidiaries and other commercial banks.
The balance sheet of small industries clearly enumerates the sources from which the funds are raised. They are: Internal and External sources.
Internal:
Paid Up Capital: By issuing Ordinary shares, Preference shares, Deferred Shares and Forfeited shares.
Reserve Surplus: By providing Capital reserve, Development rebate reserves.
Provisions: By providing provision for Taxation and Depreciation.
External:
Borrowings: From Banks, institutions like IDBI, IFCI, ICICI, and Industrial Dev. Corpn. Etc., from Government and Semi Government agencies, etc.
Trade dues and other current liabilities: Sundry Credits, etc.
Miscellaneous: all the sources of finance are not available to all the small units. It would depend on the status, character and period of time the units have been in operation. For example, a new small unit has no reserves to provide for depreciation. These provisions are built up in gradual stages out of the funds set aside during the course of operations.
The funds a small scale industry raise depend upon the character of the company – private of public, its productive activity and uses to which these funds are put: i.e. fixed assets, or working capital or for day to day affairs of the operations like loans and advances, investments, sundry debtors, etc.
Schemes of Assistance:
Within the broad framework, the following financial assistance is offered by the SFCs, SIDCs and commercial banks;
• New projects in the small and medium size category
• Modernization of small and medium industries
• Rehabilitation of small and medium industries
• Import of capital equipment.
In view of the financial constraints being faced by SFCs, SIDCs and commercial banks, it is of interest to the borrowers to know the extent of refinancing assistance being extended by IDBI.
In view of the financial constraints being faced by SFCs, SIDCs and commercial banks, it is of interest to the borrowers to know the extent of refinancing assistance being extended by the IDBI for the aforesaid purpose.
Financial Assistance to Small Scale Units:
Rupee loans to the small scale units are granted at confessional rate of interest of 12.50 per cent per annum for the small scale units location in backward areas. For non backward areas, the interest charges at 13.50 per cent per annum on loans upto 25 lakhs and at 14 per cent on loans in excess of 25 lakhs.
Repayment schedule is fixed by the primary lending institutions after taking into consideration the profitability and debt servicing capacity of the assisted units. The maximum repayment period shall, however, not exceed 10 years from the date of sanction.
Financial Assistance to medium Scale Units:
The medium scale units are also eligible for concessional interest of 12.50 per cent per annum for units located in any industrially backward area. However, in respect of units located in non backward areas, the applicable rate of interest shall be 14 per cent per annum.
Similar to the repayment schedule of the small scale units, the repayment schedule of medium scale units shall also be determined after taking into consideration their profitability and debt servicing capacity, subject to the condition that the maximum repayment period does not exceed 10 years from the date of sanction.
Modernization Assistance to Small and Medium scale units:
The primary objective of this scheme is to encourage industrial units –
• Overcome the backlog of modernization and to adopt improved and updated technology
• Introduce new methods of production
• Prevent mechanical and technological obsolescence (disuse or misuse)
• Encourage replacement or renovation of plant and machinery
• Acquisition of balancing equipment for fuller and more effective utilization of installed capacity.
The Units to be eligible for modernization assistance should have been in existence for a period of at least 5 years. In the case of replacement or renovation, the machinery should have been in use at the unit for a period of at least 5 years.
The Units who intends to avail this scheme should clearly out the project proposals containing the reduction of unit cost of production, technology improvement, improved productivity – both in quality and quantity, better profitability, etc.
The modernization programme should primarily aim at:
• Up gradation of process, technology and product
• Export orientation
• Import orientation
• Energy saving
• Anti pollution measures
• Conservation / substitution of scarce raw materials and other inputs including recycling/recovery of wastes and bye-products
• Improvement in capacity utilization within the existing capacity through increase in productivity
• Improvement in material handling.
Irrespective of location of the unit, interest at the rate of 11.5 per cent per annum shall be charged on all rupee loans for modernization purposes.
Rehabilitation Assistance to Small and Medium Scale Units:
The Rehabilitation Scheme covers all small and medium scale industrial units including ancillary units, units in cottage and village industries which have been assisted by SFCs and SIDCs or self financed and which are classified as sick. Rehabilitation loans extended by commercial banks to such units will also be eligible for refinance order the scheme.
Eligibility Criteria:
Under this scheme, a unit will be classified as sick if it has incurred cash losses during the previous accounting year and is likely to incur cash losses in the current year and there is erosion (deterioration) in its net worth to the extent of 50 per cent of more.
Rehabilitation assistance would be for the following purposes:
1. Margin money for additional term loan and working capital requirements under this programme;
2. Working capital term loans granted by banks to meet irregularities in unit’s working capital account
3. Payment of statutory liabilities, payment of pressing creditors, etc. (to the extent possible such dues should be liquidated over a period of time in instalments.)
4. Cash loss if any incurred during the implementation of nursing programme.
5. Overdue instalments not recovered from the unit.
In order to encourage the rehabilitation of sick units, the rate of interest on rehabilitation assistance has been fixed at 11.5 per cent p.a. irrespective of the location of the unit. Such units have also been totally exempted from any liability on account of commitment charges on undisbursed financial assistance.
Expenditure Eligible for Assistance:
The cost of industrial estate for the purposes of financing is confined to the cost of site development, laying of roads, arrangements or water supply, power transmission and electrification, construction of sheds and construction of blocks for essential amenities such as sanitation, watch and ward, canteen, compound walls, administrative building, etc.
• Cost of improving land, laying of roads, arrangement
• for water supply, Electrification etc. 15%
• cost of construction of sheds 75%
• cost of essential amenities like sanitary blocks, watch and
• ward, compound walls, canteen, etc. 5%
• Cost of administrative building 3%
• Cost of stamp duty, registration charges, preliminary expenses, etc. 2%
Financing Norms:
The all India financial institutions stipulate a promoter’s contribution norm of 20% of the total project cost for industrial estates set up in notified less developed area and a 22.5% norm in other cases. In the case of estates costing less than Rs. 300 lakhs, the following margin money have been stipulated by IDBI to make them eligible for financing:
1. 15% margin for estates set up by technician entrepreneurs or unemployed engineers where the sheds are to be acquired by them on hire basis.
2. 20 to 30% margin for co-operative estates where the sheds are entirely by small scale units.
3. 30 to 35% margin for estates set up by joint stock companies whose shareholders occupies majority of the sheds.
4. 40 to 50% margin for estates set up by proprietary and partnership concerns.
Repayment Schedule:
In respect of loans being refinanced by the IDBI, a repayment period of 7 to 10 years including an initial moratorium of 2 to 3 years is prescribed. On specific cases, the period may be extended upto 12 years or 15 years as the case may be.
Security:
The financial institution stipulates that the sheds constructed in the industrial estate should be allotted only on rental basis and no hire purchase or outright sale is permitted in order to enable mortgage of sheds with the lending institutions toward security for the loan. In case where no mortgage of land and sheds constructed in the industrial estate is not possible, an unconditional bank guarantee for repayment of loan and interest is insisted upon.
Conclusion:
Finance is required for the project and is available plenty. There is need for careful financial management. A successful project is one which generates its own finances to a greater extent and finances its diversified activities. Internal resources will serve as a backbone of the project.
The generation of internal sources not only benefit the enterprise, but also the entrepreneur, shareholders and the society. A careful application of internal resources will also assist the natural growth of the capital market. Financial management is a integral part of industry and ranks equally in importance with other key components like production and marketing.
