FRD
UNIT-3MSME Q1) What are the various government institutions which are established to promote small and medium national industries?A1) Govt. of India has created following Institutions/organization/Corporation/ boards to look into various aspects of promoting and developing industries. They formulate policies, co-ordinate and monitor the progress of industrial products falling under their purview.Khadi & Village Industries Commission All India Handicraft BoardAll India Handlooms BoardsCentral Silk BoardCoir BoardJute BoardAll India Power looms Board All these Commissions/Boards promote only specific industries coming under their purview as is clear from the name of Commission/Board. These corporations frame policies and make programmes for the development of products/industries falling under their purview and coordinate these programmes and monitor the progress of these industries.Beside these commissions and boards, there are certain other Agencies/Institutions at Central level which render service/assistance to industries in their respective fields. NATIONAL SMALL INDUSTRIES CORPORATION LTD.:National Small Industries Corporation Ltd., has its Head Office in New Delhi. It has four regional offices located in Mumbai, Kolkata, Chennai and New Delhi. To avail the facility provided by the NSIC, H.P State is attached with its branch office located at SCO -378, Sector 32-D, Chandigarh. Their main functions are as below:-Supply of machinery on hire purchase basisRegistration of units for participation in purchase programme of central and State Govt. and other Institutions. This scheme is popularly known as Single Point RegistrationMarketing assistance (Internal and export)Development of prototype of machines and equipment etc. BUREAU OF INDIAN STANDARDS (BIS) PARWANOO, SOLAN:It is Central Govt. Department which specifies quality standards for different products. It helps in selecting appropriate machinery and equipment for installing quality facilities. It helps in setting up testing laboratories in units premises and also authorizes units to use ISI mark which manufacture products as per specified standards.The Patent Sub-Office-112,33-C, ChandigarhIt registers the “Trade Mark” of interested units and provides legal protection in case of imitation by others.H.P. Patent Information Centre, State Council for Science Technology & Environment, Kusumpti, Shimla-9It creates awareness and facilitates in registration of Patent/Trade Mark Copy Rights etc. REGIONAL TESTING CENTRE, OKHLA INDL. ESTATE, NEW DELHI:It has its head office at New Delhi and four Regional Centers located at Mumbai, Calcutta, Chennai and New Delhi. Its main function is to provide testing facilities to industrial units at nominal charges.KNITWEAR FACILITY CENTRE, FOCAL POINT LUDHIANA, PUNJAB:Its main function is to assist units manufacturing hosiery goods in obtaining quality mark (wool mark) and testing their products.BICYCLE AND SEWING MACHINE RESEARCH AND DEVELOPMENT CENTRE, FOCAL POINT, LUDHIANA, PUNJAB:Its main function is to produce quality products in bicycles and sewing machines. It provides testing and training facilities in these areas. FOOD AND NUTRITION BOARD, DEPTT. OF FOOD, MINSITRY OF AGRICULTURE, NEW DELHI:Its main function is to provide testing assistance to units producing quality food products. It provides information on laboratory and machinery requirements for getting FPO license. ELECTRONICS TEST & DEVELOPMETN CENTRE, CHAMBAGHAT, SOLAN, HIMACHAL PRADESH:Its main function is to provide testing facilities, commercial facilities etc, to units manufacturing electronics products and also provides training in electronics and development of new electronic products.CONTROLLER OF IMPORTS & EXPORTS, INDERPRASTH, BHAWAN, NEW DELHI:Its main function is to assist units in import of raw materials and export of final products to other countries. RESERVE BANK OF INDIA,40, SDA Complex, Kusumpatti, ShimlaIts main function is to provide guidelines to lending Institutions like IDBI, IFCI, ICICI, SIDBI, and Financial Corporations & Banks in lending money to industrial sectors and control money supply.SMALL INDUSTRIES DEVELOPMETN BANK OF INDIA:It provides finance to small scale industries through its various refinance schemes. It provides refinance through State Financial Corporations, Banks etc at concessional rates. Q2) What is NIMSME? What are the activities performed by NIMSME?A2) National Institute for Micro, Small and Medium Enterprises (NI-MSME) is a national institute aimed to foster the progress of micro, small and medium enterprises in India under Ministry of Micro, Small and Medium Enterprises. NI-MSME is registered in Hyderabad, Telangana, under Public Societies Registration Act I of 1350 Fasli with effective from 1st July 1962. The affairs of the Society are managed, administered, directed and controlled through Governing Council constituted by the Government of India as per Rule 22(a & b) of Rules and Regulations of the Society. The Society, as provided under Rule 3 of Rules and Regulations, was constituted by the Government of India. The Institute has been working in the areas of capacity building, research, skill upgradation, job enrichment training in the field of Entrepreneurship and Skill including the development of women pursuing small trades at the cottage industry level from an Incubation centre at NI-MSME. Activities Undertaken1964-2008Research study in developing the first entrepreneurship model – Prof. David Mc-Clelland;s Kakinada Experiment (1964) First International Programme on SMEs in the country (1967) Programme for Young Engineers and Technocrats for the first time in the country (1970) Establishment of a unique Centre in the country named Small Enterprises National Documentation Centre (SENDOC) (1970) Initiated Area Development Programmes in Enterprise Promotion in the country (1971) First study on Growth Centres (1973) Establishing and sustaining a Branch Regional Centre in North-Eastern Region for the first time in the country (1979) Orientation on Small Industry Development for IAS Officers (1986-89) Preparation of case studies and video documentaries on science and technology entrepreneurs in Orissa. West Bengal and Andhra Pradesh (1986) Policy Research Studies on various aspects of Small Industry (1986, 1989, 1992, 1997) The first computerized Software Package Developed on simulation exercises for Small Industry Management (SIMSIM) 1987 Project Apraisal and Evaluation (CAPE-1996) Recognition by the University of Hyderabad as Centre for Advanced Studies and Research in Small Industry Development (1991) Preparation of video on the progress of Integrated Industrial Development (IIC) Centres in States and the National Awards function New Delhi (1995) Compilation of the Directory of Small Enterprises of Excellence (1995) UNESCO Chair (1997) Enterprise Development Government and Effectiveness Programme (EDGE) for Sri Lankan Administrative Officials (1998) Export Production Villages (1999) B2B Transactions with Uganda, Namibia, South Africa, Bhutan (2000), Nigeria (2001), Sudan, Cameroon, Ghana (2002) Child Labour Eradication Programme by International Labour Organization (201), in selected districts of Andhra Pradesh, ILO, Project (2002-03). Entrepreneurship Development Programmes (EDPs) for VRS/Rationalized Employees in State and Central Public Sector Units (from 2001 onwards) Achieved self-sufficiency in recurring expenses (2001-02) Ministry of Heavy Industry & Public Enterprises, Govt. of India recognized the Employee Assistance Cell (EAC) at ni-msme as Nodal Agency for training and rehabilitation of rationalized employees of Central Public Sector Undertakings (CPSUs) (2002) Study on Identification of Projects for specific Resource Base in North-Eastern Region (2003) Vision Document for Empowering Women in Mauritius (2003) Project Profiles on SMEs for Mauritius (2004) Hand-holding, Monitoring and Implementation of MSME Clusters (2004-07) Entrepreneurship Development Inputs in Professional Colleges (2004) Curriculum Development of Entrepreneurship: Comparative Study in selected States of India (2004) Q3) Write the Functions & Objective of Indian Institute of Entrepreneurship, Guwahati.A3) Indian Institute of Entrepreneurship (IIE) is an autonomous organization under the Ministry of Skill Development & Entrepreneurship. The main aim of the Institute is to provide training, research and consultancy activities in Small and Micro Enterprises (SME),with special focus on entrepreneurship development. The Indian Institute of Entrepreneurship (IIE) registered under the Societies Registration Act,1860 was established in the year 1993 in Guwahati by the erstwhile Ministry of Industry (now the Ministry of Micro, Small and Medium Enterprises), Government of India. The Institute began operating from April 1994 with the North East Council (NEC), Governments of Assam, Arunachal Pradesh and Nagaland and SIDBI as its other stakeholders. IIE has been transferred to the Ministry of Skill Development & Entrepreneurship on 22nd May’2015. The headquarter of IIE is at Lalmati, Basistha Chariali, 37 NH bypass,Guwahati-781029. OBJECTIVES1. To promote and develop entrepreneurship.2. To conduct research and provide consultancy for entrepreneurship development.3. To coordinate and collaborate with other organizations in undertaking training, research and other activities to increase outreach of the institute.4. To provide consultancy and monitoring service to MSMEs/ potential entrepreneurs and enhancing employability of participants.5. To promote greater use of information technology in the activities/ functions of the IIE.6. To comply with statutory responsibility.FUNCTIONS1. Designing and organising training activities for different target group and undertaking research in the relevant to entrepreneurship.2. Improving the efficiency, effectiveness and delivery of the change agents and development practitioners i.e. trainers, support organizations engaged in enterprise building. etc.3. Provide consultancy service to the prospective and existing entrepreneurs.4. Increasing the outreach of activities of the institute through collaborative activities and increasing their effectiveness through use of different tools of information technology Q4) What is NSIC? What are its various Schemes.A4) National Small Industries Corporation (NSIC), is an ISO 9001:2015 certified Government of India Enterprise under Ministry of Micro, Small and Medium Enterprises (MSME). NSIC has been working to promote, aid and foster the growth of micro, small and medium enterprises in the country. NSIC operates through countrywide network of offices and Technical Centres in the Country. In addition, NSIC has set up Training cum Incubation Centre managed by professional manpower.Schemes of NSICNSIC facilitates Micro, Small and Medium Enterprises with a set of specially tailored scheme to enhance their competitiveness. NSIC provides integrated support services under Marketing, Technology, Finance and other Support service. Marketing Support Marketing has been identified as one of the most important tool for business development. It is critical for the growth and survival of MSMEs in today's intensely competitive market. NSIC acts as a facilitator and has devised a number of schemes to support enterprises in their marketing efforts, both domestic and foreign markets. These schemes are briefly described as under : Consortia and Tender MarketingSmall Enterprises in their individual capacity face problems to procure & execute large orders, which deny them a level playing field vis-a'-vis large enterprises. NSIC forms consortia of Micro and Small units manufacturing the same product, thereby pooling in their capacity. NSIC applies the tenders on behalf of single MSE/Consortia of MSEs for securing orders for them. These orders are then distributed amongst MSEs in tune with their production capacity. Single point Registration for Government PurchaseNSIC enlists Micro & Small Enterprises (MSEs) under Single Point Registration scheme (SPRS) for participation in Government Purchases. The units enlisted under Single Point Registration Scheme of NSIC are eligible to get the benefits under Public Procurement Policy for Micro & Small Enterprises (MSEs) Order 2012 as notified by the Government of India, Ministry of Micro Small & Medium Enterprises, New Delhi vide Gazette Notification dated 23.03.2012 and amendment vide order no. S.O. 5670(E) dated 9th November 2018. The enlistment under SPRS is completely online. Login: www.nsicspronline.com Issue of the Tender Sets free of cost.Exemption from payment of Earnest Money Deposit (EMD),In tender participating MSEs quoting price within price band of L1+15 per cent shall also be allowed to supply a portion upto 25% of requirement by bringing down their price to L1 Price , where L1 is non MSEs.Consortia facility for Tender Marketing.MSME Global Mart B2B Web Portal for MSMEs Q5) What is SIDBI? What the major activities that are performed by SIDBI ?A5) Small Industries Development Bank of India (SIDBI) is a development financial institution in India, headquartered at Lucknow and having its offices all over the country. Its purpose is to provide refinance facilities and short-term lending to industries, and serves as the principal financial institution in the Micro, Small and Medium Enterprises (MSME) sector. SIDBI also coordinates the functions of institutions engaged in similar activities. It was established on 2 April 1990, through an Act of Parliament. It is headquartered in Lucknow. SIDBI operates under the Department of Financial Services, Government of India. SIDBI is one of the four All India Financial Institutions regulated and supervised by the Reserve Bank of India; other three are India Exim Bank, NABARD and NHB. But recently NHB came under government control by taking more than 51% stake. They play a statutory role in the financial markets through credit extension and refinancing operation activities and cater to the long-term financing needs of the industrial sector. SIDBI is active in the development of Micro Finance Institutions through SIDBI Foundation for Micro Credit, and assists in extending microfinance through the Micro Finance Institution (MFI) route.Its promotion & development program focuses on rural enterprises promotion and entrepreneurship development. In order to increase and support money supply to the MSE sector, it operates a refinance program known as Institutional Finance program. Under this program, SIDBI extends Term Loan assistance to Banks, Small Finance Banks and Non-Banking Financial Companies. Besides the refinance operations, SIDBI also lends directly to MSMEs. State Bank of India is the largest individual shareholder of SIDBI with holding of 16.73% shares, followed by Government of India and Life Insurance Corporation of India. SIDBI has floated several other entities for related activities, including:SIDBI Venture Capital Limited (SVCL)- for providing Venture Capital (VC) assistance to MSMEs; Micro Units Development & Refinance Agency (MUDRA) - for ‘funding the unfunded’ micro enterprises in the country; Receivable Exchange of India Ltd. (RXIL) to enable faster realisation of receivables by MSMEs; SMERA Ratings Limited (SMERA) - for credit rating of MSMEs, renamed as Acuite Ratings & Research Limited.; India SME Technology Services Ltd (ISTSL)- for technology advisory and consultancy services and India SME Asset Reconstruction Company Ltd. (ISARC) for speedier resolution of Non-Performing Assets (NPA) in the MSME sector. SIDBI supports the Government of India in its initiatives and work as a nodal agency for some of the schemes related to development of MSMEs, such as Make in India and Startup India. Q6) Write a short note on SIMERAA6) SMERA is the nation’s initially Rating office fundamentally concentrating on the Indian Micro, Small and Medium Enterprise (MSME) section. SMERA’s essential goal is to give Ratings that are exhaustive, straightforward and solid. This would encourage more prominent and less demanding stream of credit from the keeping money division to MSMEs. SMERA Credit Ratings gives an extensive and autonomous outsider assessment of the general state of the candidate. Presently, SMERA offers Obligor Ratings which considers the budgetary and non-money related elements that have bearing on the credit value of the candidate. At current, SMERA offers following MSME Rating Greenfield and Brownfield Grading Microfinance Institutions (MFI) Rating Green Rating Risk Management Solutions SMERA’s Rating will likely upgrade the market remaining of the candidate among banks, exchanging accomplices and forthcoming clients. Moving toward a FICO assessment organization is a decent alternative for small and medium enterprises (SMEs) given the issues they confront in looking for back. As indicated by a RBI give an account of patterns and advance in saving money 2010, just 13% of the enrolled SMEs approach back from formal sources. SMERA survey an association’s money related reasonability and ability to respect business commitments, give an understanding into its deals, operational and monetary sythesis, threreby evaluating the hazard component, and highlights the general soundness of the undertaking. They additionally benchmark its execution inside the business. SMERA for the most part have eight evaluations, extending from SME 1-8, with 1 meaning the most elevated rating and 8 the least. For giving this service, the organizations charge an expense which depends on the company’s turnover and reaches from 44,000 to 1.21 lakh. These evaluations are substantial for a year and can be recharged by paying a suitable charge. It is cash well spent. For, a great rating implies a higher possibility of sacking a credit. “There is a great deal of data asymmetry in the market. A decent FICO assessment furnishes us with the underlying certainty for the venture. It additionally goes about as a last affirmation,” says Sunil Munhot, executive and overseeing chief, Small Industries Developmental Bank of India (SIDBI).Advantages of rating Concessional financing: A great rating can help you increase speedier and less expensive credit for your wander. The offices that give rating to SMEs—Crisil Ratings, SME Rating Agency of India (SMERA), Icra, Credit Analysis and Research (CARE), Onicra, and Fitch—have tie-ups with a few banks to offer particular financing costs in view of ratings. For example, Crisil Ratings has such a working course of action with 35 banks and money related establishments, while SMERA has gone into such agreements with 29.
As per Crisil Ratings, the financing cost lessening for its customers ranges from 0.5-1.25% and around 35% of the undertakings have revealed a diminishment in the credit handling time. “Now and again, banks have moved toward them with assets,” says Ramraj Pai, executive, Crisil Ratings. SMERA criticism proposes that ventures appreciate loan fee concessions to the degree of 0.25% to 1%. “Much of the time, investment funds from the decreased obtaining cost surpasses the rating expense,” says Parag Patki, CEO, SMERA. Q7) What are the common guideline or instructions for lending in MSME sector?A7) Issue of Acknowledgement of Loan Applications to MSME borrowersBanks are advised to mandatorily acknowledge all loan applications, submitted manually or online, by their MSME borrowers and ensure that a running serial number is recorded on the application form as well as on the acknowledgement receipt. Banks are further advised to put in place a system of Central Registration of loan applications, online submission of loan applications and a system of e-tracking of MSE loan applications. CollateralBanks are mandated not to accept collateral security in the case of loans up to Rs.10 lakh extended to units in the MSE sector. Banks are also advised to extend collateral-free loans up to Rs. 10 lakh to all units financed under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC. Banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to Rs.25 lakh (with the approval of the appropriate authority). Banks are advised to strongly encourage their branch level functionaries to avail of the Credit Guarantee Scheme cover, including making performance in this regard a criterion in the evaluation of their field staff. Composite loanA composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window. Revised General Credit Card (GCC) SchemeIn order to enhance the coverage of GCC Scheme to ensure greater credit linkage for all productive activities within the overall Priority Sector guidelines and to capture all credit extended by banks to individuals for non-farm entrepreneurial activity, the GCC guidelines were revised on December 2, 2013. Credit Linked Capital Subsidy Scheme (CLSS)Government of India, Ministry of Micro, Small and Medium Enterprises had launched Credit Linked Capital Subsidy Scheme (CLSS) for Technology Upgradation of Micro and Small Enterprises subject to the following terms and conditions: (i) Ceiling on the loan under the scheme is Rs.1 crore. (ii) The rate of subsidy is 15% for all units of micro and small enterprises up to loan ceiling at Sr. No. (i) above. (iii) Calculation of admissible subsidy will be done with reference to the purchase price of plant and machinery instead of term loan disbursed to the beneficiary unit. (iv) SIDBI and NABARD will continue to be implementing agencies of the scheme. Streamlining flow of credit to Micro and Small Enterprises (MSEs) for facilitating timely and adequate credit flow during their ‘Life Cycle’:Debt Restructuring Mechanism for MSMEs (i) All scheduled commercial banks are advised to follow the guidelines / instructions pertaining to SME Debt Restructuring, as contained in circular DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015 on ‘Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ and as updated from time to time. (ii) All commercial banks are also advised in terms of our circular RPCD. SME&NFS.BC.No. 102/06.04.01/2008-09 dated May 4, 2009 Q8) What is factoring? What are the various ways factor could raise funds for MSME?A8) Factoring as a form of business financing dates back to 4,000 years. The Romans were the first to sell promissory notes at a discount and widespread documented use of factoring occurred in the American colonies before the Industrial revolution. With the advent of the industrial revolution, factoring became more focused on the issue of credit. Factors could guarantee payments for approved customers by assisting customers in determining their creditworthiness and setting credit limits. In India, prior to the 1930s, factoring occurred primarily in the textile and garment industries which later spread to other industries also. The factoring arrangement accelerates cash flows through faster collections ensures liquidity to boost working capital, facilitates exports by offering competitive terms of trade, protects against credit losses and optimize receivables management process. Factoring can be considered as a form of short-term commercial financing based on the selling of trade credit at a discount, or for a prescribed fee plus interest (Forman and Gilbert, 1976). Factoring is a financial option which converts credit sales into cash. The account receivable in factoring can be for a product or service. Factoring is a service that covers the financing as well as non-financing services in domestic and international trade. The first factoring company SBI Global Factors Ltd. started operation in April 1991. The other factoring companies which made considerable presence are Canbank factors Ltd and India Factoring and Finance Solutions. The various ways in which factors could raise funds are:(a) Promoters’ contribution towards equity (b) Equity capital from public (c) Raising Public deposits (d) Issue of debentures to public (e) Line of credit from banks and (f) Borrowings from short-term money market. In 2009-10, SBI Global Factors the total income from factoring is Rs. 4931 million compared to 2008-09 which was Rs.6765 million. In 2009-10, Can Bank Factors the total Income from factoring is of the order of Rs. 84.56 million compared to 2008-09 which was Rs.85.08 million. In 2008, the total factoring business was worth Rs 33,228 crore which is 1.24 percent of the total bank credit. In this scenario, this paper focus on the conceptual framework, process and procedures and problems and the role of factoring as a financing option especially to Micro Small and Medium Enterprises (MSME) and the changes brought about to bring in vibrancy to this financing option. In factoring, a factor buys the accounts receivable of a company and pays up to 80 percent of the amount immediately on agreement. Factoring company pays the remaining amount to the client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client and the type and range of factoring services available in India are based on the need of business organizations. Q9) What is Credit Process and Credit AssessmentA9) Credit ProcessThe credits or loans can be used for setting up new enterprise or stepping up (expansion, diversification, modernization, technology upgradation). These can be for the following:Acquisition of factory, land and construction of building spaces, Purchase of Plant and Machinery including lab equipment, testing equipment, furniture, electric fittings, etc Meeting working capital requirements, like raw materials, stock-in-progress, finished goods, etc Trade Finance (Bill discounting) – for paying the creditors, while awaiting payment from debtors Launch of new product range, expansion of business, warehousing need, credit for marketing and advertising purpose Additional monitory assistance for any eligible purpose. MSME (Micro, Small & Medium Enterprises) are classified in two ways:Manufacturing Enterprises engaged in the manufacture or production of goods pertaining to any industry or deploying plant and machinery in the process of value addition to the final product having a distinct name or character or use; andService Enterprises engaged in providing or rendering of serviceAs per the revised Classification w.e.f. 1st July 2020, MSMEs are now defined on the basis of Composite Criteria of “Investment in Plant & Machinery / equipment and Annual Turnover”. MSME Classification (Manufacturing Enterprises and Enterprises Rendering Services):
Value of Plant and Machinery or EquipmentIn terms of RBI Circular dated August 21, 2020 , the value of Plant and Machinery or Equipment for all purpose of MSME classification and for all the enterprises shall mean the Written Down Value (WDV) as at the end of the Financial Year and not cost of acquisition or original price, which was applicable in the context of the earlier MSME classification criteria. Credit AssessmentA Credit Assessment provides an indication of creditworthiness on an unrated entity or proposed financing structure. Credit Assessments are not credit ratings. It is an indicator of our opinion of creditworthiness that may be expressed in descriptive terms, a broad rating category or with the addition of a plus (+) or minus (-) sign to indicate relative strength within the category.It reflects our view of the general credit strengths and weaknesses of an issuer, obligor, a proposed financing structure, or elements of such structures.It may also pertain to limited credit matters or carve out certain elements that would ordinarily be taken into account in a credit rating. Companies considering a full, interactive ratings analysis may have reservations about the process involved and whether the ultimate result will meet their needs. Some companies might be concerned over the amount of management time involved in a full ratings analysis, the cost and the likelihood of their achieving a rating grade that they perceive "acceptable". A Credit Assessment gives companies the opportunity to examine their credit particulars without committing to the more resource-intensive full rating analysis. The process may help management identify strategic "issues". Moreover, if the Credit Assessment level is acceptable to management, a more detailed, public ratings analysis can be completed. A Credit Assessment usually represents a point-in-time evaluation (i.e., we generally do not maintain ongoing surveillance or updates of credit assessments), and is confidential. A credit assessment is generally requested by the entity, or the sponsor of an obligation, to be assessed. Credit Assessments are expressed using our traditional credit rating symbols, but in lower case. Q10) What is Risk Rating ? What are its various advantages and disadvantages.A10) Risk Rating is assessing the risks involved in the daily activities of a business and classifying them (low, medium, high risk) on the basis of the impact on the business. It enables a business to look for control measures that would help in curing or mitigating the impact of the risk and in some cases negating the risk altogether. In situations where the risk cannot be mitigated or negated the business has to accept that the risk is open and there are no control functions to curb the impact. It depends on the likelihood of the risk event occurring and the severity of the impact on the business and its employees. Risk is rated on the impact on the business which can be economic or reputational and its likelihood of occurring in the near future. This is the common pattern of risk across businesses. Thus, Risk Rating refers to the classification of risks and their impacts on the business in terms of reputational or economic damage to an organization or a sector. Organizations should consider in conducting at least a yearly review of the risk rating due to the fast-paced business environment.It enables a business to be well informed about all the potential risks that can cause an impact to the business along with the likelihood of the event’s occurrence. Impact of Risk RatingLow: A low rated event is one with little / no impact on the business activities and the reputation of the firm.Low/Medium: Risk events that can impact on a small scale are rate as low/medium risk.Medium: An event that would result in risks that can cause an impact but not a serious one is rated as medium.Medium/High: Severe events that can cause a loss of business but the effects are below a risk that is rated as high.High: A major event that can cause reputational and economic damage that will result in huge business and client base losses. Likelihood RatingThis rates the risk on the basis of its recurrence which can change depending on the type of the business that is being considered. For example, for a fast-food company, a frequent likelihood rating will be something that can happen every day whereas for an investment bank it would be something that happens in a month or so. Frequent Likely Possible Unlikely Rare AdvantagesStudying the risk involved in a business activity helps in taking appropriate measures to either curb the effects of the risk or completely eliminate the risk. Event risk helps in a better understanding of the risk and working towards enhancing the current procedures. DisadvantagesThis is an assumption of the impact it can have on the business which if not done diligently can cause economic and reputational damage to the organization which may eventually result in loss of business. This is a complex process and requires a high level of experience and thoughtfulness to foresee potential risks that can impact the smooth functioning of the business.
As per Crisil Ratings, the financing cost lessening for its customers ranges from 0.5-1.25% and around 35% of the undertakings have revealed a diminishment in the credit handling time. “Now and again, banks have moved toward them with assets,” says Ramraj Pai, executive, Crisil Ratings. SMERA criticism proposes that ventures appreciate loan fee concessions to the degree of 0.25% to 1%. “Much of the time, investment funds from the decreased obtaining cost surpasses the rating expense,” says Parag Patki, CEO, SMERA. Q7) What are the common guideline or instructions for lending in MSME sector?A7) Issue of Acknowledgement of Loan Applications to MSME borrowersBanks are advised to mandatorily acknowledge all loan applications, submitted manually or online, by their MSME borrowers and ensure that a running serial number is recorded on the application form as well as on the acknowledgement receipt. Banks are further advised to put in place a system of Central Registration of loan applications, online submission of loan applications and a system of e-tracking of MSE loan applications. CollateralBanks are mandated not to accept collateral security in the case of loans up to Rs.10 lakh extended to units in the MSE sector. Banks are also advised to extend collateral-free loans up to Rs. 10 lakh to all units financed under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC. Banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to Rs.25 lakh (with the approval of the appropriate authority). Banks are advised to strongly encourage their branch level functionaries to avail of the Credit Guarantee Scheme cover, including making performance in this regard a criterion in the evaluation of their field staff. Composite loanA composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window. Revised General Credit Card (GCC) SchemeIn order to enhance the coverage of GCC Scheme to ensure greater credit linkage for all productive activities within the overall Priority Sector guidelines and to capture all credit extended by banks to individuals for non-farm entrepreneurial activity, the GCC guidelines were revised on December 2, 2013. Credit Linked Capital Subsidy Scheme (CLSS)Government of India, Ministry of Micro, Small and Medium Enterprises had launched Credit Linked Capital Subsidy Scheme (CLSS) for Technology Upgradation of Micro and Small Enterprises subject to the following terms and conditions: (i) Ceiling on the loan under the scheme is Rs.1 crore. (ii) The rate of subsidy is 15% for all units of micro and small enterprises up to loan ceiling at Sr. No. (i) above. (iii) Calculation of admissible subsidy will be done with reference to the purchase price of plant and machinery instead of term loan disbursed to the beneficiary unit. (iv) SIDBI and NABARD will continue to be implementing agencies of the scheme. Streamlining flow of credit to Micro and Small Enterprises (MSEs) for facilitating timely and adequate credit flow during their ‘Life Cycle’:Debt Restructuring Mechanism for MSMEs (i) All scheduled commercial banks are advised to follow the guidelines / instructions pertaining to SME Debt Restructuring, as contained in circular DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015 on ‘Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ and as updated from time to time. (ii) All commercial banks are also advised in terms of our circular RPCD. SME&NFS.BC.No. 102/06.04.01/2008-09 dated May 4, 2009 Q8) What is factoring? What are the various ways factor could raise funds for MSME?A8) Factoring as a form of business financing dates back to 4,000 years. The Romans were the first to sell promissory notes at a discount and widespread documented use of factoring occurred in the American colonies before the Industrial revolution. With the advent of the industrial revolution, factoring became more focused on the issue of credit. Factors could guarantee payments for approved customers by assisting customers in determining their creditworthiness and setting credit limits. In India, prior to the 1930s, factoring occurred primarily in the textile and garment industries which later spread to other industries also. The factoring arrangement accelerates cash flows through faster collections ensures liquidity to boost working capital, facilitates exports by offering competitive terms of trade, protects against credit losses and optimize receivables management process. Factoring can be considered as a form of short-term commercial financing based on the selling of trade credit at a discount, or for a prescribed fee plus interest (Forman and Gilbert, 1976). Factoring is a financial option which converts credit sales into cash. The account receivable in factoring can be for a product or service. Factoring is a service that covers the financing as well as non-financing services in domestic and international trade. The first factoring company SBI Global Factors Ltd. started operation in April 1991. The other factoring companies which made considerable presence are Canbank factors Ltd and India Factoring and Finance Solutions. The various ways in which factors could raise funds are:(a) Promoters’ contribution towards equity (b) Equity capital from public (c) Raising Public deposits (d) Issue of debentures to public (e) Line of credit from banks and (f) Borrowings from short-term money market. In 2009-10, SBI Global Factors the total income from factoring is Rs. 4931 million compared to 2008-09 which was Rs.6765 million. In 2009-10, Can Bank Factors the total Income from factoring is of the order of Rs. 84.56 million compared to 2008-09 which was Rs.85.08 million. In 2008, the total factoring business was worth Rs 33,228 crore which is 1.24 percent of the total bank credit. In this scenario, this paper focus on the conceptual framework, process and procedures and problems and the role of factoring as a financing option especially to Micro Small and Medium Enterprises (MSME) and the changes brought about to bring in vibrancy to this financing option. In factoring, a factor buys the accounts receivable of a company and pays up to 80 percent of the amount immediately on agreement. Factoring company pays the remaining amount to the client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client and the type and range of factoring services available in India are based on the need of business organizations. Q9) What is Credit Process and Credit AssessmentA9) Credit ProcessThe credits or loans can be used for setting up new enterprise or stepping up (expansion, diversification, modernization, technology upgradation). These can be for the following:
| Investment in Plant & Machinery or Equipment | Annual Turnover |
Micro | Not more than Rs. 1 Crore | Not more than Rs. 5 Crore |
Small | Not more than Rs. 10 Crore | Not more than Rs. 50 Crore |
Medium | Not more than Rs. 50 Crore | Not more than Rs. 250 Crore |
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