Small Scale Industries

I. Introduction

Small Scale Industries (SSI) play a pivotal role in the employment generation and export promotion strategies, among others, of industrialization in many develop as well as developing countries including India. Considering their unique features, governments in both industrialized and developing countries provide a wide variety of programmes to assist small and medium scale enterprises.

The primary justifications for the special policy support to SSI are:

1. They have the capacity to produce a large number and variety of goods with relatively low investment, that they offer greater employment opportunities per unit of capital investment as compared to large enterprises and that the scope for organizing their growth on a decentralized pattern over a large area results in achieving distinct socio-economic advantages such as better and fuller utilization of untapped resources of capital and skill and more equitable distribution of national income.

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2. It is appropriate, therefore, that each country should have developed its own strategy for the development of SSI and has offered liberal concessions and attractive incentives for entrepreneurship growth and SSI development.

SSI on the whole has bright prospects, but due to individual enterprise’s weakness in scale and limitations in personnel, information, management and especially financing, the development of these enterprises does not go smoothly (Wang, 2004). Particularly, improving the SSI entrepreneur’s access to financing services is justified on the ground that a robust industrial base contains a flourishing SSI sector and that increasing SSI access to services normally available to larger, established firms.

II. Small Scale Industries

2.1Small Scale and Ancillary Industries

Small scale industrial units are those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) does not exceed Rs.1 crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery. In the case of ancillary units, the investment in plant and machinery (original cost) should also not exceed Rs. 1 crore to be classified under small-scale industry.

The investment limit of Rs. 1 crore for classification as SSI has been enhanced to Rs.5 crore in respect of certain specified items under hosiery, hand tools, drugs & pharmaceuticals, stationery items and sports goods by the Government of India.

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2.2. Tiny Enterprises

The status of ‘Tiny Enterprises’ may be given to all small scale units whose investment in plant & machinery is up to Rs. 25 lac, irrespective of the location of the unit.

III. Small Scale Industries – 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.

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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.

3.1 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.

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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.

3.2 Means of finance: Credit Flow

Credit is the prime input for sustained growth of small scale sector and its availability continues to be a matter of concern. Credit provided for creation of fixed assets like land, building, plant and machinery is called long term credit. Credit provided for running the industry for its day to day requirement for purchasing raw material and other inputs like electricity and water etc. and for payment of wages and salaries is called short term credit or working capital.

Institutional Arrangement

Small Scale Industrial Sector is provided working capital by commercial banks and in some cases by cooperative banks and regional rural banks. Term loans are provided by State Financial Corporations (SFCs), Small Industries Development Corporations (SIDCs), National Small Industries Corporation (NSIC) and National Bank for Agriculture and Rural Development (NABARD). Financial assistance from NSIC and to some extent from SIDCs is available in the form of supply of machinery on hire purchase basis/deferred payment basis. Small sized SSI and tiny units also get some term loans from commercial banks alongwith working capital in the form of composite loans.

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Refinance to these institutions is provided by the Small Industries Development Bank of India (SIDBI). Such refinance comprises assistance provided to State Financial Corporation Bills, Finance Scheme, Special Capital/Seed Capital Scheme, new debt instruments and to National Small Industries Corporation. Long term loan are provided to the smalls scale industrial units by SFCs mainly through Single Window Scheme and National Equity Fund as also direct assistance provided to State Financial Corporations in the form of refinance. Some part of working capital for pre-operative expenses is also provided by State Financial Corporations to Small Scale Industrial Units under the Single Window Scheme.

3.2.1 Credit to SSI Sector from Public Sector Banks

The table below gives the positions with regard to flow of credit to SSI Sector:-