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TABLE OF CONTENTS

Sr.No. Topic Pg.


No.
01. Executive Summary. 04
02. Introduction to the Topic. 05
03. Introduction of the Organization. 06
I. History 07
II. Nature of the company 08
III. Mission of the company 09
IV. Management Profile. 10
V. Organizational Structure 11
VI. Product Profile 12
VII. Bank of Baroda & its Subsidiaries 24
04. Industry Analysis 25
05. Company Analysis
I. Financial position of Bank of Baroda 38
II. Profit & Loss Account of Bank of Baroda 39
III. Balance sheet of Bank of Baroda 40
IV. Statement of Cash Flow of Bank of Baroda 41
06. Ratio Analysis 43
I. Importance of Ratio Analysis. 46
07. Introduction to the small-scale enterprises 49
08. Significance of SMEs in Indian Economy 51
09. Reasons for Smes Promotions 52
10. Smes parameters regarding the performance 54
11. The Growth Story Of Indian SMEs 55
12. the growth of small-scale industries since 58
1975-76
13. Drawbacks and barriers 59
14. Assistances and promotions to SMEs by 61
Government
15. Frame-work for Cluster Development 64
16. About MSMED Act 2006 68
17. Conclusions 70
13. Bibliography 71

1
EXECUTIVE SUMMARY

Bank of Baroda’s principal activities are to provide banking


and related services through 2,853 branches in India and 40
overseas branches. The services include accepting deposits,
commercial and institutional credit, project finance, treasury,
forex, investment and risk management and other related
financial services. As a part of my M.B.A curriculum I have
taken my summer training in Bank Of Baroda (Bank of
Baroda tower, Ahmedabad). As per the topic SMEs-Growth
engines for Indian economy, I have analyzed SSI Sector of
India with the help of various web sites related to this sector
and other related sources like journals, magazines etc.

Here, the overall project is based on analysis of Small Scale


sector and it’s contribution and impacts on Indian economy.
On the investment front, Indian small businesses are acting
on their positive economic outlook with increased capital
investment in the first half of 2008. A majority of the SMEs in
the country are planning to hire more workers while none
intended to cut jobs.

The insight of the project report shows the capital structure


of the organization, financial position of the organization,
cash flow, and ratio analysis. The overview of the report
reveals that the SME segment is the growth engine of India
economy. IT is a key strategic tool, which can help India
SMEs get a competitive advantage in the global market
place. However, there is a limited understanding of this
segment in the industry SMEs throughout India are
expanding rapidly – both in terms of hiring and additional
branch offices. “No. 1 challenge for SMEs is increasing

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competition followed by pricing-pressure in the market and
managing customer expectations”
INTRODUCTION TO THE TOPIC

The topic is all about the Small scale enterprises as a growth


engines for Indian economy. Small scale sector has remained
high on agenda of all political parties, intelligentsia and
policy makers since independence as a legacy of Gandhian
philosophy. The special thrust to this sector has been with
the multiple objectives of employment generation, regional
dispersal of industries and as a seedbed for
entrepreneurship. The contribution of small scale industries
(SSIs) has been remarkable in the industrial development for
the country.
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Small scale enterprises are getting more importance than


other sectors. Government of India has opened a special
financial bodies like Small Industries Development Bank Of
India (SIDBI),State Financial Corporation (SFCs) & other
training institutes like Centre for Entrepreneurship
Development (CEDs), Institute Of Entrepreneurship
Development (IEDs),Technical Consultancy Organizations
(TCOs) for the purpose of providing assistance to this sector.

Small industry sector is a major employment provider after


agriculture. Overall, the small industry sector has done quite
well and has enabled the country to achieve considerable
industrial growth and diversification.Being generally low
capital intensive, SSIs suit the Indian economic environment
with scarce financial resources and large population base. In
addition, it is highly labor intensive and has a scope for
building upon the traditional skills and knowledge.

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INTRODUCTION TO THE ORGANIZATION

Bank Of Baroda, is a Body Corporate (Nationalised Bank)


constituted under The Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970, with its Head Office at
Mandvi, Baroda and Corporate Office at Mumbai.

Bank of Baroda, a leading global Bank of Indian origin has


been expanding its international presence with footprints in
25 countries and a Pan India network of 2853 branches is a
fifth largest bank in India. Bank of Baroda is one of the oldest
banking institutions in India, having been established in
1908 from a small building in Baroda, Gujarat State. B.O.B
has a core set of values and culture that it adhere to & at all
times seeks to be trustworthy, international, courageous,
determined and responsive. Today the bank employs 39,529
people. It also has four subsidiaries, BOB Housing Finance
Ltd., BOB Asset Management Co. Ltd., BOBCARDS Ltd. and
BOB Capital Markets Ltd.

For financial year ending 31 March 2008, the bank reported a


net profit of Rs.1436 crore. The bank had a total business of
Rs.2,59,000 crore, as on March 31, 2008, and is eyeing 22
per cent growth to
Rs.3,10,000 crore by the end of this financial year. It is
looking at a growth of 20 per cent in deposits and 23 per
cent in advances. Bank of Baroda sanctions loans/credit
assistance to Small Scale Industries for acquisition of fixed

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assets (factory land/buildings & machinery) and working
capital requirements at very competitive interest rates and
against soft margins Rate of interests effective from
01.06.2003

History

Bank of Baroda was founded on July 20, 1908 with a paid up


capital of Rs.10 lakhs by Maharaja Sayajirao Gaekwad III of
Baroda, one man who made a difference, rooted in Indian
values. Yet Global in vision, rock solid in fundamentals.
Nurture a culture where success does not come in the way of
the need to keep learning a fresh, to keep innovating, to
keep experimenting. It has now come a long way to
becoming the strong trustworthy financial institution. It is
growing day by day. The emblem of Bank of Baroda
represents wealth, safety, industrial development and an
inclination to better and promote the company’s agrarian
economy. It is a coin with an unpraised arm indicating wealth
that indicated that the depositor’s money is in the safe
hands.

Since then bank has traversed an eventful and successful


journey of almost 100 years. Today, Bank of Baroda has a
network of 2853 branches. In mid-eighties, the Bank of
Baroda diversified into areas of merchant banking, housing
finance, credit cards and mutual funds. In 1995 the Bank
raised Rs.300 crores through a Bond issue. In 1996 the Bank
tapped the capital market with an IPO of Rs.850 crores.

Bank of Baroda took the lead in shifting from manual


operating systems to a computerized work environment.

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Today, the Bank has 1918 computerized branches, covering
70% of its network and 91.64% of its business.

Bank of Baroda gives high priority to quality service. In its


quest for quality, the Bank has secured the ISO 9001:2000
certifications for 15 branches by end of the 2005-06.

Nature

The nature of the business that decide the company belongs


to which industry and it helps the many stakeholders and
parties like government, NGO, etc, to decide the parameter
and other concerned issue binding to the organization, for
e.g. environmental protection, tax rate, incentives, and rules
and regulations.

The Bank of baroda belongs to the service sector, which


provides various types of financial solution related to
banking industry.

As Indian economy is emerging as a major services provider


in the world, which can be seen by it’s contribution in GDP of
India which is closed to 55%.

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Mission

“To be a top ranking National Bank of International Standards


committed to augmenting stake holders' value through
concern, care and competence”

About logo

“Bank’s new logo is a unique representation of a universal


symbol. It comprises dual ‘B’ letterforms that hold the rays
of the rising sun. Bank of baroda calls this the Baroda Sun”

The sun is an excellent representation of what bank stands


for. It is the single most powerful source of light and energy –
its far reaching rays dispel darkness to illuminate everything
they touch. At Bank of Baroda, it seeks to be the source that
will help all its stakeholders realise their goals. To bank’s
customers, it seeks to be a one-stop, reliable partner who
will help them address different financial needs. To its
employees, it offers rewarding careers and to its investors
and business partners, maximum return on their investment.

The single-colour, compelling vermillion palette has been


carefully chosen, for its distinctivenes as it stands for hope
and energy.

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It also recognize that bank is characterised by diversity. Its
network of branches spans geographical and cultural
boundaries and rural-urban divides. Its customers come from
a wide spectrum of industries and backgrounds. The Baroda
Sun is a fitting face for its brand because it is a universal
symbol of dynamism and optimism – it is meaningful for its
many audiences and easily decoded by all.

Management Profile

Name Designation

Mr. ravi venkatesan Chairman

Mr. P.S.Jayakumar Managing Director & CEO

Mr. B.B.Joshi Executive Director

Mr. P.J.Bhaliya
Deputy Chief Executive
Bank of Baroda European
Operations
Mr. Mayank K Mehta Executive
Director

Mr. Dhimant Trivedi Chief Executive

Organizational Structure

Organizational structure is one of the most important


decision mode by top management before starting the
business, as it generally depend on the nature and size of
the company, it has lot to do with the job description and job

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specification. The organizational structure is nothing but
hierarchical and departmental process.

Every organization differ in structure. There is a well defined


system in the Bank regarding decision making process.
Lending and administrative decisions are taken at various
levels from JMGS I to Top Executive grade Scale VII and also
by Executive Director and Chairman & Managing Director
depending upon their positions as per the discretionary
lending powers delegated to them by the Board. Branches
receive applications for credit facilities and recommend to
the appropriate sanctioning authority. In the case of major
retail loan products applications are processed at branches
and Centralised Credit Processing Cells at select centers.

There is a well defined organizational structure and clear


system of accountability based on RBI / CVC guidelines. All
credit decisions approved by any sanctioning authority are
reported to the next higher authority for control purpose.
The system of exercising proper delegation of power and
submission of control reports is in place and they are
monitored by control officers and through internal inspection.
By observing the following is a common structure as per
company guidance.

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Product Profile

Followings are the main products of The Bank of baroda.

 Deposits
 Gen-next
 Loans
 Credit Cards
 Debit Cards
 Services
 Lockers

(1) Deposits:
Bank of Baroda offers various deposit plans
that you can choose from depending on the term period,
nature of deposit and its unique saving and withdrawal
features.

Apart from competitive interest rates and convenient


withdrawal options, our deposit plans offer other features
such as overdraft facility, outstation cheque collections, safe
deposit lockers, ATM's etc.

Fixed deposits are categorised into deposits with a term


period of less than 12 months, more than 12 months and
recurring deposits. These deposit plans offer convenient
solutions to both working individuals as well as senior
citizens.

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Current and saving deposits are ideal for individuals who
wish to take advantage of multiple benefits within the same
plan and even be eligible to opt for overdrafts.

(2) Gen-next:

2.1: Gen-Next Junior (Saving Account)

Product Nature:

This is a Special kind of Savings Bank Deposit product for


children to be made available in Gen-Next Pune branch.

Target Group:

Children upto 18 years of age.

Minimum Amount & Balance:

 QAB: Rs 500/-
 Charges for non-maintenance of QAB is Rs 50/ per
quarter only.

Maximum Amount:

 In case of joint accounts with parent and minors (with


sole account) above 14 years, there is no ceiling on the
maximum amount.
 An account in the sole name of minor above 10 years
and below 14 years, maximum limit is Rs 1 lakh.

Single / Joint Accounts:

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 In case of minor below 10 years the account shall be
opened jointly with parents / guardian.
 Minors above 10 years (below 18 years) can open the
account in their sole name subject to :
 Minor is able to read and write any of the recognized
languages, and
 Capable in the opinion of the Bank officials of
understanding the what he / she is doing and SB
account rules and regulations

2.2: Gen-Next Lifestyle

Type Of Facility:

Term Loan (Combo Pack)

Purpose :

 Purchase of Home Furnishings / Consumer Durable


goods (includes color T.V., video camera / refrigerator /
washing machine / music system / air-conditioners /
cooking system etc).
 Purchase of vehicle i.e. two-wheeler / four-wheeler.
 Purchase of Laptop / PC.
 Purchase of any new electronic gadgets like Mobile, i-
Pod, Handycam etc.

Target Group :

Working executives / professionals.

Eligibility:

 Should be an Indian National


 Permanent Employees of State / Central Government,
Public Sector Undertakings, Semi government
Organization, State / Central Govt. Corporations, Urban
Development Authorities, Educational Institutions,

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Universities. Regular Employees of MNCs, Public Ltd
Companies with minimum two years experience out of
which minimum one year service with the present
organization.
 Employees of Private Limited Companies, Regional head
will permit on case-to-case basis.

Present gross annual emoluments / income of the applicant


should not be less than Rs. 2.50 lacs.

Age:

 Minimum – 21 years
 Maximum – 45 years

Maximum Loan Amount:

Subject to maximum of:

 Furniture & Fixture / New Consumer Durables : Rs. 2


lacs
 New Vehicle (Four Wheeler) : Rs. 6 lacs (Two Wheeler) :
Rs. 1 lac
 Old Four Wheeler (Not more than 3 years old) : Rs. 4
lacs
 New modern gadget/s : Rs. 1 lac

Aggregate loan amount should not be more than Rs. 8.00


lacs.

Subject to:

 24 times gross Monthly income.


 Total deductions including EMI of proposed loan should
not exceed 60% of the gross income.

Margin:

 Furniture & Fixture / New Consumer Durables : 20%

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 New Vehicle (Two wheeler / Four wheeler) : 15%
 Old Vehicle (Four wheeler only) : 40%
 New Modern Gadgets (Including Laptop / PC) : 20%

2.3 Gen-Next Power (OD Facility):

Product Nature :

This is a special Savings Deposit product having an in built


feature of overdraft facility to be available at Gen-Next Pune
branch.
Target Group

The product is targeted to working executives and other


working professionals.
Our Bank’s Staff members are not eligible to avail the
product.
Minimum Amount & Balance

There is no minimum balance requirement in the account


and as such no service charges shall be levied towards this.
Maximum Amount

There shall be no ceiling on the amount to be deposited and


credit balance in the account.
Eligibility Criteria:

 Permanent Employees of State / Central Government,


Public Sector Undertakings, Semi government
Organization, State / Central Govt. Corporations, Urban
Development Authorities, Educational Institutions,
Universities. Regular Employees of MNCs, Public Ltd
Companies with minimum two years experience out of
which minimum one year service with the present
organization.
 Employees of Private Limited Companies, Regional head
will permit on case-to-case basis.
 Minimum age of 21 years.

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 Minimum take home Salary should not be less than Rs.
10,000/-.
 Maintaining satisfactorily conducted salary account with
the Bank at least for three months.

Special Feature:

The branch SHALL offer Overdraft facility (Clean/unsecured)


to employees who fulfill the eligibility criteria mentioned
above to meet out their regular short-term personal / family
needs.

Overdraft Facility:

Maximum Age: 45 years. (This product is meant for youth)

Amount: 5 times of net take home monthly salary subject to:

Min Rs. 50,000/-


Max Rs. 2.00 lacs, subject to condition:
Risk Rating Category “A” & “B” Rs. 2.00 lac
Category “C” Rs. 1.00 lac
Category “D” NIL.
For credit rating purpose, model meant for personal loan will
be taken into consideration.

PROCESSING & DOCUMENTATION CHARGES:


0.50% of limit sanctioned / reviewed subject to minimum of
Rs. 250/- + service tax as applicable.

Security Documents:

 D.P. Note.
 Letter of continuing security.
 A stamped undertaking from the employee authorizing
the employer to remit the salary every month to the
bank for credit of specified SB / Current Account during
the currency of the OD facility and also to deduct from
the retirement / terminal benefits, the outstanding

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overdraft amount with the interest in case of retirement
/ resignation / cessation of employment for any reason.
A copy of the undertaking duly acknowledged by the
employer has to be kept on branch.
 Third party guarantee having adequate net worth.
Cross guarantee may be accepted.

Rate of Interest:

1.5% above BPLR i.e. 14% p.a. with monthly rests. A


Minimum interest of Rs. 10/- shall be charged during a month
if OD is availed. Period: 12 months, subject to annual review.
Other Conditions:

The account is to be brought into credit once in a year.

Interest Rate On Credit Balance In The A/C:

Interest shall be payable on credit balance in the account as


per savings bank account rules viz. relating to periodicity,
rate and system of application of interest, computation of
eligible balances etc.

2.4: Gen Next Suvidha:

Product Nature:

This is a Recurring Deposit product enabling the customer to


make regular savings on monthly basis and earn higher
interest.

Customer Segment:

 Individuals in their single / joint names.


 Minors of age 10 years and above jointly with their
parents / natural guardians.
 Minors below 10 years age through their parents.

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Minimum / Maximum Amount:

There is no minimum balance requirement in the account


and as such no service charges shall be levied towards this.

Maximum Amount:

 “Gen-next Suvidha” Account can be opened with


monthly installments of Rs.100/- or above & in multiples
thereof with a maximum of Rs.10, 000/- per month.
 The number of installments can range from 12 to 36
months (In multiples of 3 months).
 The depositor shall, at the time of opening the account,
stipulate the amount of core monthly installment and
the number of installments payable by him which shall
not subsequently alter.
 The depositor is given an option to deposit higher
monthly installment in the account as and when
available and the maximum amount should not exceed
Rs. 10,000/- per month. However, monthly installments
paid during the time gap of less than 24/12 months
(depending upon the period chosen) at the ending
stage of the account’s tenure, shall not exceed in any
month three times the core monthly installment or Rs.
10,000/- whichever is less.

Rate Of Interest:

As decided by bank from time to time for Term Deposits of


same tenure.

Loan Against Deposit:

 Loan can be considered against the deposit in the


account in accordance to normal guidelines for
advances against Recurring Deposit.
 Interest shall be charged on such loan at the rates
advised from time to time on Loan against Bank’s Own
Deposits.

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(3) Loans:

3.1: Retail Loans:


Bank of Baroda offers a wide
range of retail loans to meet your diverse needs.
Whether the need is for a new house, child's
education, purchase of a new car or home appliances,
our unique and need specific loans will enable you to
convert your dreams to realities.

KEY PRODUCTS

Housing Loan Personal Loan


Vaibhav Lakshmi Loan
Housing Loans to NRIs / PIOs (For Working Women)

Home Improvement Loan Desh Videsh Yatra Loan


Loan Against Future Rent
Receivables Marriage Loan
Advance Against
Advance Against Property Securities

Advance Against Property to NRI Loan to Pensioners


Loan to Defence
Education Loan Pensioners

Car Loan Professional Loan

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Two Wheeler Loan Loan to Doctors

Consumer Durables Loan Traders Loan


Loan for financing
Individuals for
Baroda Loan for Laptop & subscription to Public
Personal Computer Issues /IPO
Baroda Ashray (Reverse Baroda Career
Mortgage Loan) Development Loan

(4) Credit Cards:


Bank of Baroda offers following range
of credit
Cards.

SI LV ER E XC LU SI VE GEN ER AL

GOL D EXCLUS IV E
V IS A / MA ST ER WOMA N / YO UT H

NE XTG EN GO LD COR POR AT E GLOB AL

(5) Debit Cards:

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The Bank of Baroda International Debit Card is accepted at
over 10000 Visa Electron ATMs in India and 850000 ATMs
worldwide. The card is also accepted at any 100000
merchant outlets in India and around 13 millions globally.
The card enables you to enjoy the convenience of cash-less
purchasing power without the fear of overdrawing your
account.

Key Benefits:

 Take advantage of the most widely accepted card and


be able to withdraw from any ATM displaying the VISA
logo, in India and abroad.
 At VISA Electron merchant shops, it can also serve as
your electronic purse, and money gets debited instantly
from your account, as you pay.
 The Card allows you to get mini-statements from Bank
of Baroda ATMs, or to check the balance in your
account, avoiding visits to even our nearest branches .

(6) Services:

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Apart from the Loans, Deposits, Credit and Debit Cards, Bank
of Baroda offers other services to make financial dealings
easy and convenient.

Key Services:

 Demat
 BarodaHealth
 Remittances (Baroda Money Express)
 Collection Services
 ECS (Electronic Clearing Services)
 Government Business (PPF, DSRGE, Tax Collections and
Savings Bonds)

(7) Lockers:

Storing too much jewellery and valuables in the house at


times becomes a security issue and an impediment in case
of natural calamities.

Bank of Baroda offers you, a safe, trustworthy space to store


your valuables, jewellery, documents and other things
dear to you.

Key Benefits:

 State-of-the-art Lockers, the safe deposit vaults with


fully equipped, latest burglar alarm systems.
 For additional safety, the Locker holder assigns a code
word which further increases security.
 Available in different sizes as per your requirement.
 These Lockers and their contents can be nominated to
people near and dear to you

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Terms & Conditions:

 For obtaining a Locker at the Bank of Baroda, you must


be an account holder with our Bank.
 Lockers can be allotted both individually as well as
jointly.
 NRIs do not require any prior permission from the RBI to
hire a Locker with the Bank of Baroda.
 A minimum-security deposit of Rs. 5000/- is required
when the annual rent is Rs. 1000; this deposit is raised
to Rs. 10000 if the Locker rent is above Rs. 1000/-.
 Security deposit will be accepted under a fixed deposit
of 3 years under the banker's lien.
 An acknowledgement will be issued by the bank for
fixed deposit to be kept as security deposit.
 The Locker holder is permitted to add or delete names
from the list of persons who can operate the Locker and
can have access to it.

:Bank of Baroda & its Subsidiaries:

Domestic Overseas
Subsidiary Subsidiary

BOB Asset Management Co. BANK OF BARODA (Botswana)


Ltd. Ltd.
BOBCARDS Ltd. BANK OF BARODA (Kenya) Ltd.

BOB Capital Markets Ltd. BANK OF BARODA (Uganda)


Ltd.
BANK OF BARODA (Guyana)
Ltd.
BANK OF BARODA (UK) Ltd.

BANK OF BARODA (Tanzania)


Ltd
BANK OF BARODA (Trinidad &
Tobago) Ltd.

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BANK OF BARODA (Ghana) Ltd.

Representative Offices

BANK OF BARODA (Thailand)

BANK OF BARODA (China)

BANK OF BARODA (Australia)

BANK OF BARODA (Malaysia)

Associate Bank Joint Venture


Nainital Bank Ltd. Indo-Zambia Bank Ltd. (Lusaka)

:Banking Industry Analysis:

The analysis consists of 82 scheduled commercial banks,


comprising of 28 Public Sector Banks, 25 Private Sector
Banks and 29 Foreign Banks, as defined by the RBI. The
group of Public Sector Banks (PSBs) includes nationalised
banks, SBI & its Associates and IDBI Ltd .*

With the purpose of gaining a deeper understanding of the


Indian banking industry, an overall profiling of the industry
has been attempted in this section. This study considers only
the 82 banks profiled in this analysis. The data for the study
was collated from sources in the public domain like annual
reports, the RBI documents and the bank websites. Various

23
parameters like efficiency, growth, productivity, etc., have
been examined for gaining insights.

Total Assets

Total assets for the 82 scheduled commercial banks


combined stood at Rs 27,785,739 mn in FY06, of which
Public Sector Banks had the largest share of 72.5%, followed
by Private Sector Banks of 20.2% and Foreign Banks at 7.3%.

* During the year FY06, two domestic banks were


amalgamated - Ganesh Bank of Kurundwad with Federal
Bank Ltd and Bank of Punjab Ltd with Centurion Bank Ltd to
become Centurion Bank of Punjab Ltd, while one foreign
bank, UFJ Bank Ltd merged with Bank of Tokyo-Mitsubishi
Ltd. ING Bank NV closed its business in India. In Sept, 06,
The United Western Bank Ltd was placed under moratorium,
leading to its amalgamation with Industrial Development
Bank of India Ltd. in Oct, 2006, Sangli Bank, another Private
Sector Bank was merged with ICICI Bank. Ganesh Bank of
Kurundwad, Sangli Bank and The United Western Bank have
therefore been excluded of the publication.

The assets for all the profiled banks have grown at a rate of
22.6% over the previous year. It was observed that the asset

24
base of Private Sector Banks was growing more rapidly
compared to the other bank groups. Total assets of private
banks grew by 16% in FY05 and 33% in FY06, over the
previous year. The asset base of Foreign Banks grew by 13%
in FY05 and by 30% in FY06 mainly driven by the growth in
advances of four banks in this group. The Public Sector
Banks maintained a decent year-on-year growth of 15% and
19% in the respective years. However, it should be noted
that the growth of Public Sector Banks is on a very high
base.

Total Income

The total income for the 82 banks stood at Rs 2,215,280 mn


in FY06, of which the Public Sector Banks held the highest
share of 72.7%, Private Sector Banks at 19.5% followed by
7.8% for the Foreign Banks.

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The top ten banks classified on the basis of their respective
total income accounted for nearly 56% of the total income of
the 82 banks. Of these top ten banks, 8 banks were Public
Sector Banks while the remaining two were Private Sector
Banks.

Non-Interest Income/Total Income

The non-interest income for all the 82 banks profiled in this


publication on an average stood at 22.1% of the total
income. Among the bank groups, non-interest income was
the highest for Foreign Banks at 31%, followed by Private
Sector Banks at 19.8%; indicative of the value-added
services these banks offer. For Public Sector Banks, non-
interest income was just 15.3% while interest income was a
high 84.7%. Non-interest income includes fee income
components such as commission, brokerage and exchange
transactions, sale of investments, corporate finance
transactions, M&A deals; and any other income other than
the interest income generated by the bank.

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Net Profit

The net profit for the profiled banks together stood at Rs


248,281.5 mn for FY06. The top ten banks, based on the net
profit classification, accounted for nearly 58.5% of the total
net profit of all the 82 banks. These top ten banks included 6
Public Sector Banks, two Private Sector Banks and two
Foreign Banks. Interestingly, of these top 10 banks, four
banks that managed to make it to the top ten on the basis of
net profit do not feature among the top ten on the basis of
total income.

Bank group-wise, Public Sector Banks continued to dominate


with a 66.6% share in the net profit. The share of Private
Sector Banks in the total net profit stood at 21%, followed by
Foreign Banks having a 12.4% share in the total net profit.
Within the Public Sector Banks, There are 5 banks, 4 foreign
and one private, out of the profiled 82 banks, which made
losses in FY06.

Infrastructure

Banks across all three groups have been rapidly increasing


their infrastructure to tap the under served markets, though
Public Sector Banks are dominant all across in all regions. As
of Mar 06, the total number of branches of the profiled banks
operating in the country was 54,346, of which 88% of the
branches belonged to the Public Sector Banks (PSBs),

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indicative of the extent of penetration these banks have in
the country. Another 11% of the branches belonged to
Private Sector Banks and the rest were of Foreign Banks.

Region-wise, the concentration of branches was highest in


the rural areas, accounting for almost 35% of the total. The
rural segment is entirely dominated by Public Sector Banks
with 95% of the total rural branches belonging to PSBs. 23%
of the branches of PSBs are located in semi urban area, while
19% branches are in the metropolitan regions. The immense
reach of PSBs can be seen by the fact that almost 62% of
total PSB branches are in rural & semi-urban areas.

Group-wise, the presence of Private Sector Banks was largely


in urban areas with almost 30% of their branches in this
region.

As of Mar 06, the total numbers of ATMs installed by profiled


banks were 21,047. Public sector banks once again
accounted for the largest share of installed ATMs with 12,608
machines, followed by the Private Sector Banks with 7,584
ATM’s. Foreign Banks have installed 855 ATMs around the
country.

28
Growth in Deposits, Advances & Retail Credit

Deposits

The overall deposit growth for the profiled banks was at


18.2% for FY06. Group-wise, deposits of Private Sector Banks
witnessed a robust growth of 39.2%, closely followed by
Foreign Banks at 31.7%. For Public Sector Banks the deposits
grew at about 13% for the same time period. The share of
Private Sector Banks in total deposits has been rising
gradually, while that of Public Sector Banks has been
declining over the years.

Growth in Deposits, Advances & Retail Credit

* The above figures are represented as an average % growth


over FY05

Advances

29
Advances for all the profiled banks have grown at about 32%
YoY and that made by Private Sector Banks grew at the
highest rate of 44% for FY06 followed by a growth of 30.7%
for Public Sector Banks and 30% for Foreign Banks. Among
the major components of total advances, there was no
relative change in the percentage share of Bills Purchased
and Discounted, over the last three years. Cash Credits,
Overdrafts and Loans have shown a yearly decline of 4% in
FY05 as a part of total advances. Correspondingly, Term
Loans have been growing and constitute a large component
of advances. In FY04, Term Loans constituted 49.4% of Total
Advances, which increased to 54.2% in FY05, and further to
55.7% in FY06.

Group-wise Average Growth in Term Loans

*All figures in %age

In FY06, Term Loans across the profiled banks grew on an


average of 35.9%. Term Loans provided by the public sector
banks showed robust growth of 59.8% in FY05 which almost

30
reduced to half and stood at 32.2% in FY06. The growth
shown by Private Sector Banks has varied too, with 38.7%
growth in FY05 and 48.9% in FY06. Foreign Banks, however,
have shown a lower growth in term loans in FY06 as
compared to FY05, which grew by 30.2% in FY06 as against
a growth of 37.2% in FY05. This growth in all three bank-
groups can largely be attributed to the growth in retail credit
and the overall economy, among other factors.

Retail Credit

Retail credit for the Public Sector scheduled commercial


banks increased by 35%, which was significantly higher than
the profiled banks’ overall credit growth of 32%. The retail
advances by the Private Banks grew by 48.3%, which too
was well above the overall growth.

Credit Deposit Ratio

The Credit-Deposit ratio (C-D ratio) is the proportion of loan-


assets created by the bank from the deposits received.
Among the 82 banks profiled, the aggregate C-D ratio stood
at 70.1% in FY06 as compared to 62.7% in FY05. Among the
profiled bank-groups, foreign banks had the highest C-D ratio
of 85.8% in FY06, which was slightly lower than that of FY05.
An opposite trend was seen with private banks, where in
their C-D ratio stood at 73.4% in FY06, higher than 70.9% for
FY05. Public sector banks too showed a growth in their C-D
ratio at 68.2% as compared to 59.5% in FY05. As seen
earlier, the high rate of bank credit growth during the last
two years has resulted in this unique behaviour of credit-
deposit (C-D) ratio.

31
Priority Sector Advances / Total Advances

As instructed by the RBI, a target of 40% of net bank credit


was stipulated for priority sector lending by domestic
scheduled commercial banks, both in the public and private
sectors. Within this, sub-targets of 18% and 10% of net bank
credit had been stipulated for lending to agriculture and
weaker sections, respectively.

In FY06, the average credit to the priority sector by the


profiled Public Sector Banks accounted for 41.6% of their
total credit, a little above the stipulated target level of 40%.
In FY05, the profiled private banks lending to the priority
sector constituted 39.6% of their total advances. The Public
Sector Banks contributed 15.6% of their total credit to the
agriculture sector and private banks contributed 11.9% for
the same, both falling short of the stipulated sub-targets of
18%.

Operating Efficiency

Net NPAs to Net Advances (Net NPAs/Net Advances)

On an average, the net NPA/Net Advances ratio for the 82


banks was 1.4% in FY06. Of this, the net NPAs to net
advances ratio for the Public Sector Banks was estimated to
be 1.4%, closely followed by Private Sector Banks at 1.8%.
For Foreign Banks, the ratio was much lower at 0.9%.

The graph below depicts that the asset quality of all the
banks has been improving for the past couple of years. It is
evident that there has been a sharp decline in non-
performing loans of Public Sector Banks and Private Sector
Banks.

32
Operating Expenses

The operating expenses are those expenses that cover the


day-to-day functioning of the bank like employee costs and
charges for normal running of business. Among the profiled
82 banks, the ratio of operating expense to total expense for
the Public Sector Banks was 26.5%, Private Sector Banks was
28.4%, while for Foreign Banks the ratio was nearly one-third
of their total expenses and stands a little higher compared to
their peers.

Intermediation cost is the ratio of operating expense to total


assets, and when seen in conjunction with non-interest
income explains how much is the non-interest income able to
cover up the operating expenses of the banks. This gap (the
excess of operating expenditure over non-interest income as

33
a percentage to total assets) has been narrowing
considerably over the past few years. Among the profiled
banks, for Public Sector Banks this gap was 0.9%, for private
banks 0.4% and for Foreign Banks it stood at 0.2% for the
year ending Mar 06.

Capital Adequacy Ratio

The Capital Adequacy Ratio is a measure of the amount of a


bank’s capital expressed as a percentage of its risk weighted
credit exposures. The RBI guidelines require a capital
adequacy ratio of 9%. All the banks profiled in this
publication have a capital adequacy ratio of above 9%; with
most of the banks placed well above the 9% mark.

Return on Assets

In the list of 82 banks profiled, the return on assets for


Foreign Banks was highest at 1.5%, followed by Private
Sector Banks at 0.9%; and Public Sector Banks at 0.6%. The
graph depicts that the return on assets bounced back
smartly for Foreign Banks after the slight decline it witnessed
in FY05. The return on assets for the Private Sector Banks
has more or less remained the same with just a slight decline
in it. While the return on assets for Public Sector Banks
shows a very sharp decline.

Return on Equity

34
Of the 82 banks profiled in the publication, the Return on
Equity for Public Sector Banks was estimated to be the
highest amongst its peers at 16%, closely followed by Private
Sector Banks at 11.1% and 9.2% for Foreign Banks. Bank of
Baroda has achieved 15% return on equity for the
financial year 2007-08.

As shown in the graph depicting the trend in Return on


Equity over the last four years, it is observed that the Return
on Equity for Private Sector Banks fell drastically from 21.1%
in the year 2003 to 11.1% in the year 2006. The Return on
Equity for Public Sector Banks too showed a sharp decline
from 21.8% in 2003 to 16% in 2006. As for Foreign Banks,
the return on equity showed a marginal decline from 11% in
2003 to 9.2% in 2006.

One of the reasons for the declining RoE could be the large
amount of resources raised from primary capital market to
strengthen the capital base. As per RBI data ,the equity
capital for public sector banks jumped close to five times
from Rs 11040 mn in 2003-04 to a whopping Rs. 54130 mn
in the year 2005-06. The private sector banks which had a
low capital base in 2003- 04, also witnessed a huge jump in
equity capital and ended the year with an equity capital of
Rs. 56540 mn in 2005-06.

Net Interest Margin

35
It is defined as the excess of interest income over interest
expense, as an percentage to total bank assets. Broadly
speaking, this ratio reflects the allocative efficiency of
financial intermediation, a lower ratio being indicative of
upper efficiency. The net interest margin in FY06 stood at
3.5% for Foreign Banks its due to the fact that tradionally,
the Foreign Banks can mobilise low-cost deposits. ; followed
by 3.4% for Private Sector Banks and 3.13% for Public Sector
Banks.

Productivity

Business per employee is the total revenue generated on a


per employee basis where as Net Profit per employee gives
an indication of the ability of labour to generate profit.
However, both can be used as tools for measuring the
efficiency of an organisation with respect to its human
assets.

In FY06, the Foreign Banks on an average generated


business worth Rs 101.27 mn per employee, which was the
highest among the various bank groups. The business
generated per employee by public sector and private banks
stood at Rs 41.64 mn and Rs 49.54 mn respectively.

Correspondingly, the profitability per employee for Foreign


Banks was highest at Rs 2.20 mn per employee, followed by
private banks with Rs 1.87 mn per employee. Public sector
banks showed an aggregate Rs 0.21 mn profitability on per
employee basis. This indicates that profit generation with
respect to its human resource is highest in Foreign Banks
followed by private banks, and lowest in Public Sector Banks.

36
Company Analysis

Followings are included for the purpose of company


analysis

Capital structure of the Bank of Baroda:

(Rs
From crore) Authorized Issued Paid Up Paid Up Paid Up
Capital(rs.in
Year To Year capital Capital Shares(Nos) Face Value crore)

37
2006 2007 1,500.00 367 364266000 10 364.27

2005 2006 1,500.00 367 364265500 10 364.27

2004 2005 1,500.00 296 293265400 10 293.27

2003 2004 1,500.00 296 293261700 10 293.26

2002 2003 1,500.00 296 296000000 10 296

2001 2002 1,500.00 296 296000000 10 296

2000 2001 1,500.00 296 296000000 10 296

1999 2000 1,500.00 296 296000000 10 296

1998 1999 1,500.00 296 296000000 10 296

1997 1998 1,500.00 296 296000000 10 296

1996 1997 1,500.00 388.46 203537400 10 203.54

1996 1997 1,500.00 388.46 92462600 6 55.48

1995 1996 1,500.00 740.94 740935900 10 740.94

Financial position of Bank of Baroda:

Profit & Loss Account for the Year ended 31st March, 2007
Amount in Rupees
(000's Omitted)
As on 31st March, 2007 As on 31st March, 2006
I. Income
Interest Earned 9212,63,72 7049,95,39
Other Income 1173,24,10 1127,39,03
Total 10385,87,82 8177,34,42
II. Expenditure
Interest Expended 5426,55,70 3875,08,73
Operating 2544,31,34 2384,75,27

38
Expenses
Provisions and 1388,54,33 1090,54,45
Contingencies
Total 9359,41,37 7350,38,45
III. Profit
Net. Profit for the
year 1026,46,45 826,95,97
Available for
Appropriation 1026,46,45 826,95,97
Appropriation

Transfer to :

a) Statutory
Reserve 256,61,61 206,73,99
b) Capital Reserve 14,31,65 7,61
c) Revenue and
Other

Reserves

I) Investment
Fluctuation

Reserve - -1042,54,43
II) General
Reserve 502,50,35 1448,04,53
II) Statutory
Reserve (Foreign) 57,00 503,07,35 6,96,58 412,46,68
d) Dividend
(including
Dividend Tax)
I) Interim
Dividend 124,60,65 -
II) Proposed
Dividend 127,85,19 252,45,84 207,67,69 207,67,69
TOTAL 1026,46,45 826,95,97
Basic & Diluted
Earnings per
Share Rs..28.18 Rs.27.10
Balance Sheet as on 31st March, 2007

Amount in Rupees

(000's Omitted)
As on As on
31.3.2007 31.3.2006

39
Capital & Liabilities
Capital 365,52,76 365,52,74

Reserves & Surplus 8284,41,00 7478,90,72

Deposits 124915,97,93 93661,99,16

Borrowings 1142,56,16 4802,20,07

Other Liabilities & Provisions 8437,69,61 7083,90,04

143146,17,46113392,52,73
Total

Assets
Cash and balances with Reserve Bank of India 6413,52,02 3333,43,34

Balances with Banks and Money at Call and Short 11866,84,51 10121,20,60
Notice
Investments 34943,62,75 35114,21,87

Advances 83620,86,98 59911,77,84

Fixed Assets 1088,80,75 920,72,69

Other Assets 5212,50,45 3991,16,39

143146,17,46113392,52,73
Total

Statement of Cash Flow for the year ended 31st March, 2007
(000's omitted)
Year ended Year ended
31.03.2007 31.03.2006
A. Cash flow from operating activities:
Net Profit before taxes 16542587 8920074
Adjustments for :
Depreciation on fixed assets 1942849 1111313

40
Depreciation on investments (including on Matured 5442072 6096190
debentures)
Bad debts written-off/Provision in respect of non- 2190869 3200090
performing assets
Provision for Standard Assets 1760349 47400
Provision for Other items(Net) 299718 1836215
Profit/(loss) on sale of fixed assets(Net) -128475 3020
Payment/provision for interest on subordinated 2172062 1969417
debt(treated separately)
Dividend received from subsidiaries/others (treated -318721 -127566
separately)
Sub total 29903310 23056153
Adjustments for :
(Increase)/Decrease in investments -3927008 13506034
(Increase)/Decrease in advances -239281783 -168314035
(Increase)/Decrease in other assets -17024574 -2649422
Increase/(Decrease)in borrowings -36596391 31613670
Increase/(Decrease) in deposits 312539877 123285273
Increase/(Decrease) in other liabilities and 10320723 3717501
provisions

Direct taxes paid(Net of refund) -4833814 -3536105


Increase in Capital Reserve on a/c of merger of 439034 —
BOBHFL
Net cash from operating activities (A) 51539374 20679069
B. Cash flow from investing activities :
Purchase of fixed assets -3914373 -2014206
Sale of fixed assets 328321 186730
Changes in Trade related investments (Subsidiaries 190848 3310300
& others)
Dividend received from subsidiaries/others 318721 127566
Net cash from investing activities (B) -3076483 1610390
C. Cash flow from financing activities :
Share capital 2 710000
Share premium 12 15351111
Unsecured Subordinated Bonds 4491000 7700000
Dividend paid including dividend tax -2524584 -2076769
Interest paid / payable on unsecured subordinated -2172062 -1969417
bonds
Net cash from financing activities (C) -205632 19714925
Net increase in cash & cash equivalents (A)+(B)+ 48257259 42004384
(C)
Cash and cash equivalents as at the beginning of 134546394 92542010
the year
Cash and cash equivalents as at end of the year 182803653 134546394

41
Ratio Analysis

Financial statement analysis may be done for a variety of


purposes, which may range from a simple analysis of the
short-term liquidity position of the firm to a comprehensive
assessment of the strengths and weaknesses of the firm in
various areas. It is helpful in assessing corporate excellence,

42
judging creditworthiness, valuing equity shares, forecasting
bond ratings, predicting bankruptcy, and assessing market
risk.

If we want to compare the financial statement of one


company with that of the other company it is difficult, as
there would be a problem of differences in size of these
companies. One way to avoid this problem is to calculate
and compare financial ratios of the both the companies.

A ratio is the arithmetical relationship between two figures.


Financial ratio analysis is a study of ratios between various
items or groups of items in financial statements. Financial
ratio has been classified in several ways. They are as follows,

o Liquidity Ratios.

Liquidity ratios to measures the ability to pay interest


regularly , finance structure ratios to measure the
solvency thus the ability of the company to return the
principal amount on maturity. Liquidity refers to the
ability of a firm to meet its obligations in the short-run,
usually one year. Liquidity ratios are generally based on
the relationship between current assets and current
liabilities. The important liquidity ratios are, Current
Ratio, Acid Test Ratio

o Profitability Ratios.

Liquidity ratios to measures the ability to pay interest


regularly , finance structure ratios to measure the
solvency thus the ability of the company to return the

43
principal amount on maturity. Liquidity refers to the
ability of a firm to meet its obligations in the short-run,
usually one year. Liquidity ratios are generally based on
the relationship between current assets and current
liabilities. The important liquidity ratios are, Current
Ratio, Acid Test Ratio

o Assets Turnover Ratios.

Asset turnover ratios are basically Productivity ratios which


measure the output produced from the given inputs
deployed. Assets are the inputs which are deployed to
generate production or sales. The same set of assets when
used intensively produces more output or sales. If the assets
turnover ratio is high, it shows efficient or productive use of
inputs or assets. These ratios are based on the relationship
between the level of activity, represented by sales or cost of
goods sold, and levels of various assets. The important
assets turnover ratios are total assets turnover, net fixed
assets turnover, inventory turnover, and debtor’s turnover.

o Finance Structure Ratios.

Finance structure ratios indicate the relative mix or


blending of owners’ funds and outsiders’ debt funds in
the total capital employed in the business. It should be
noted that equity funds are the prime fund which
increase progressively through reinvestment of profits,
while outside debt funds are supplementary funds and
are added at the discretion of the management.
Management prefers to choose debt only when it helps
in enhancing the earnings of equity

o Valuation Ratios.

44
The valuation ratios are the result of the management of the
above four categories of the functional ratios. Valuation
ratios are generally presented on the per share basis and
thus are more useful to the share holders and the other
interested parties may be external.

It includes the following ratios


(1)earning per share
(2)dividend per share
(3)book value per share
(4)earning yield
(5)Dividend yield etc.

Valuation ratios indicate how the equity stock of the


company is assessed in the capital market. Since the
market value of equity reflects the combined influence
of risk and return, valuation ratios are the most
comprehensive measures of a firm’s performance.
Valuation ratios are the result of the management of
above categories of the functional ratios. Valuation
ratios are generally presented on a per share basis and
thus are more useful to the equity investors.

45
IMPORTANCE OF RATIO ANALYSIS.

Ratios are the relative information which is amenable for


comparison. Business units are interested in assessing
whether they have progressed or digressed over the period.
Ratios transform the absolute rupee data of the financial
statements into the pure relative unit less information.
Following type of comparison can be made with the help of
ratios.

1). Intracompany comparison.

Under the intracompany comparison, the relative data of the


same company are made with the preceding period. There
are two ways through which this can be done,

~ Current year with preceding year.


~ Time series and trend series.

2). Intercompany comparison.

Under this type of comparison, the relative data of company


is compared with the other company, industry average, and
national average of international standards.

3). Strategic comparison.

Ratios represent the quotient relationships between two


relevant variables of the financial statements an individual
item to individual item, an individual item to group item or a
group item to group item, which develop the meaningful
relationships between these two sets of variables. It is
necessary to dig out the facts behind the figures.

~ To compare the actual ratios with the budged ratios.


~ It helps in planning the future activities.
~ The comparison of company ratios with competitive
company ratios.

46
~ The comparison with national ratios.

Key Financial Ratios: 2007-08

Return on Average Assets (ROAA)= EBIT___ x 100


Total Assets

=0.89%

As per the calculation the return on average assets


improved from 0.80% to 0.89% on year-to-year basis
which shows 11.25% increases than previous financial
year. It shows efficient utilization of the total assets of the
Bank of Baroda.

Earning per share = Net Profit - Preference Dividend


Total Number of Equity Shares

= Rs.39.41 (Rs.28.18 last year)

It shows significant increase in the earning per share by


39.85% compare to other banking companies’ the bank of
baroda holds a bulwark over increasing the value of share
holders.

Book Value per Share = Equity capital + Reserves – Misc.


expenses
No. of equity shares

= Rs 261.54 [Rs 231.59 at end-March,


2007]

Bank of baroda’s book value per share has decreased by


more than 11%.

47
Return on Equity (ROE) = Net Profit x 100
Net Worth

=15.07% [12.17% Last


year]

Return on equity has increased by 23.82% as compare


to last year. It shows efficient utilization of available financial
resources, which result in to less operating expenses and
higher net profit.

Cost-Income Ratio = Total operating expenses


Net Profit

= 49.21% (51.30% last


year)

The cost income ratio shows proportion between total


expense incurred and net profit realized. The higher the ratio
the less efficient utilization of resources, but here the ratio
has shown the declination by more than 5% that means it
has used its resources effectively and also shown
improvement in cost control.

48
Introduction to the small-scale enterprises

 Small (Manufacturing) enterprises:


Enterprise
engaged in the manufacture/production or preservation of
goods and whose investment in plant and machinery
( Original cost excluding land and building and the items
specified by the Ministry of small scale
Industries vide its notification No.S.O.1722(E) dated
October 5,2006.).does not exceed Rs.5 Crore.

 Small (service) enterprises:


Enterprise engaged in
the providing/rendering of services and whose investment
in equipment ( Original cost excluding land and building
and furniture, fittings and other not directly related to the
service rendered or as may be under the micro small and
medium enterprises development (MSMED),Act 2006 )
does not exceed Rs.2 crore.

 Micro (Manufacturing) enterprises:


Enterprise
engaged in the manufacture/production or preservation of
goods and whose investment in plant and machinery
( Original cost excluding land and building and the items
specified by the Ministry of small scale

49
Industries vide its notification No.S.O.1722(E) dated
October 5,2006).does not exceed
Rs.25 lakh, irrespective of the location of the unit.

 Micro (service) enterprises:


Enterprise engaged in
the providing/rendering of services and whose investment
in equipment ( Original cost excluding land and building
and furniture, fittings and other not directly related to the
service rendered or as may be under the micro small and
medium enterprises development (MSMED),Act 2006 )
does not exceed Rs.10 lakh.

 Medium (Manufacturing) enterprises:


Enterprise
engaged in the manufacture/production or preservation of
goods and whose investment in plant and machinery
( Original cost excluding land and building and the items
specified by the Ministry of small scale
Industries vide its notification No.S.O.1722(E) dated
October 5,2006.) is more than
Rs.5 crore but does not exceed Rs.10 crore.

 Medium (service) enterprises:


Enterprise engaged in
the providing/rendering of services and whose investment
in equipment ( Original cost excluding land and building
and furniture, fittings and other not directly related to the
service rendered or as may be under the micro small and
medium enterprises development (MSMED),Act 2006 ) is
more than
Rs.2 core but does not exceed Rs.5 crore.

50
 Khadi and Village industries Sector (KVI):
All
advances granted to units in KVI sector, irrespective of
their size of operations, location and amount of original
investment in plant and machinery. Such advances will be
eligible for consideration under the sub target (60 per
cent) of the small enterprises segment within the priority
sector.

:Significance of SMEs in Indian Economy:

The Indian industrial economy is characterized by


a dynamic and versatile set of enterprise actors, who are
small and medium in terms of scale of operations. This SME
category has been leading a typical competitive advantage
to Indian industry in terms of controlling sufficient markets
globally. It is because of their ability to make available low-
volume customized products, flexible response and lower
fixed overhead costs. The other typical behavior of these
SME’s is that in most of the cases depending upon their
specialization, they have evolved as clusters.

The small scale sector produces a wide range of products,


from simple consumer goods to highly precision and
sophisticated end-products. As ancillaries, it produces a
variety of parts and
components required by the large enterprises. The sector
has emerged as a major supplier of mass consumption goods
like leather articles, plastics and rubber goods, fabrics and
ready-made garments, cosmetics, utensils, sheet metal
components, soaps and detergents, processed food and
vegetables, wooden and steel furniture and so on. More
sophisticated items manufactured by the

51
small scale sector now include television sets, electronic
desk calculators, microwave components,air conditioning
equipment, electric motors, auto-parts, drugs and
pharmaceuticals.

The importance of SME’s as compared to Corporate


Enterprises with regard to their contribution towards Indian
economy can be best understood that they have a share of
40% in terms of volume, 80% in terms of employment, 60%
in terms of exports and 92% in terms of number of
enterprises. These figures are indicative of the economic
significance of SME’s.

S Contribution to Corporate SME’s (%)


No. Indian Economy Enterprises (%)
1 In terms of volume 60 40
2 In terms of 20 80
employment
3 In terms of exports 40 60
4 In terms of no. of 7 to 8 92
enterprises

: The following are the main reasons for the


promotion of
small-scale industrial units:

1. It has proved to be a powerful instrument for a rapid


and decentralized growth of a developing economy like
India with a large army of unemployed labour and
scarcity of capital resources.
2. The small scale sector is considered as an important
means for checking concentration of economic power in
a few hands and bringing about economic dispersal and
more equitable distribution of national income.
3. This sector is also considered very effective in
promoting the industrial development of backward
area.

52
4. It also helps in checking the unplanned migration from
rural and semi-rural areas to the urban areas.
5. It greatly encourages the development of new
entrepreneurial initiative and thereby injects
competitiveness in our industrial economy.
6. Small scale sector also assumes great significance from
India's stand point since this sector accounts for more
than 35 percent of India's total exports.

:MSMEs and their role in socio economic development:

The importance of Micro, small and medium enterprises


(MSME) for its contribution in the Indian economy growth is a
matter of record and needs no further elaboration. However
with the changing focus from economic growth to inclusive
growth, MSMEs sector role in the socio economic
development of India needs to be understood, explored and
facilitated. What is so significant about MSMEs that makes
them special in their relation to socio economic development
of the country? Here are few facts which may give answer to
this question.
(1) Wide spread reach: There are around 12.34 million (1)
MSMEs, including 1.9 million registered one which are spread
out across the length and breadth of India. They may be
touching the lives of 123.4 million directly or indirectly which
is roughly 10% of India’s population.

(2) Major share in GDP: MSMEs combined output is roughly


7% of country’s Gross Domestic Production (GDP).
(3) Big employment generator; MSME sector is the second
largest manpower employer in the country next only to
agriculture sector. It provides employment to more than 20
million people which is roughly 2 % of country’s population.
Looked from social angle, it helps in solving the
unemployment and under-employment problem in the
society.

53
(4) Facilitates balanced regional development: Dispersion
of MSMEs in all parts of the country helps in removing
regional imbalances by promoting decentralized
development of industries. MSMEs can be found every
where, which may be rural, urban, coastal, desert,
mountains, forest, backward/ forward areas. This
decentralized concept also helps in reducing the other
problems like pollution, congestion, housing, sanitations etc.
(5) Helps in equitable distribution of wealth/ income: When
the entrepreneurial talent is allowed to grow in different
regions and areas, the income is also distributed instead of
being concentrated in the hands of few. This help in solving a
big social issue of bridging the gap between rich and poor.
(6) Act as nursery for entrepreneurship: MSMEs provide a
natural habitat for entrepreneurs. Through this platform, the
latent/ raw talent available locally can hone their skills and
talents, to experiments, to innovate and transform their
ideas into goods and services needed by the society.

The table below represents several parameters


regarding the performance of the small scale sector in
India from
1973-74 to 2001-02:

54
Comparative performance of SSIs in terms of
compound annual growth rate

Areas of Compound annual growth rates (in %)


performance

From 1973-74 From 1973-74 From 1991-92


to 2001-02 to 1990-91 to 2001-02
No. of units 7.86 9.51 5.22

Production 17.70 19.80 14.47

Employment 5.80 6.99 4.01

Exports 20.4 20.73 17.77

:The Growth Story Of Indian SMEs:

The economic performance of India has often been equated


with the slow growth rate of around 3.5 % never quite
entering into the ‘take off’ stage of the Rostow's model.

55
Some economists believed, as though the nation was
destined for it. At the time of India's independence in the
year 1947, the nation had a plethora of serious problems to
face, viz. shortage of food-grains, poor infrastructure,
lack of financial resources, high rate of illiteracy and poor
industrial base. To build the nation's economy, following the
socialist path of development an overwhelming importance
was attached to the public sector units, which the first Prime
Minister of India called them "Modern Temples of India.

The Industrial Policy Resolution of 1948, which marked the


evolution of Indian Industrial Policy, outlined the broad
contours of the policy and defined the role of the state in
industrial development both as an entrepreneur and a
regulatory authority. In order to optimize the utilization of
scarce resources and reduce the threat of re-colonization by
the multinationals, centralized planning was adopted with
wide ranging controls on private trade, investment, land
ownership and foreign exchange.

The foundations of the policy for the small-scale


industry were laid in the Second Five Year Plan .

In 1956, the government announced its second industrial


policy which unambiguously chose equity as the guiding
principle for small industry development. The operative
statement says: “small scale industries provide immediate
large scale employment, offer a method of ensuing a more
equitable distribution of national income and facilitate an
effective mobilization of resources of capital and skill which
might otherwise remain unutilised”.

1977 Policy Statement:

56
A high watermark in the evolution of the policy for small
industry was the ‘Industrial Policy Statement’ of 1977. It was
then that the protection of small industry touched its acme.
The important planks of the 1977 industrial policy statement
were:

 Whatever can be produced by small, cottage industries


must only be so produced.
 The number of products reserved for SSI was increased
from 180 to 504 an further to 836 items in 1996.
 Special attention to be given to the `Tiny Sector’
defined as enterprises with investment inplant and
machinery of upto Rs. 1 lakh and situated in towns and
in villages with population less than 50,000.
 Special Legislation will be introduced to give due
recognition and adequate protection to the self-
employed in cottage and household industries.
 Special arrangements for marketing of the products of
Small Scale Sector will be made by providing services
such as product standardization, quality control,
marketing surveys, etc.

1980 Policy Statement:

The recognition of the importance of ancillary industry found


expression in the policy statement of 1980 which laid
emphasis on ancillaries. Moreover, the program for the
development of rural and backward areas was accelerated.
The Industrial Policy Statement of 1985 made incremental
changes and took into account the impact of inflation. The
investment ceiling for SSI was raised to Rs.35lakh and for
ancillaries to Rs.45lakh.

Leading to a liberal regime :

The Industrial Policy of July 1991 marks a conscious shift


from the regulated and controlled policy to a liberal one.

57
Most of the medium and large industrial units, with a few
exceptions, would no longer need licenses. Full foreign
ownership will henceforth be possible in export – oriented
enterprises. Import of capital goods has been significantly
made free from restrictions. Foreign equity participation is
also encouraged. The openness that has come with the
ongoing economic reform process during the last five years
has hastened several changes and the debate has shifted
from the 'whys' to 'hows' indicating high level of
acceptability of the reform process. With the lifting of several
trade and investment related restrictions, India is witnessing
a mini-revolution in its economic growth faced with the
challenges of global market and competitiveness.

Impact is felt now :

The impact of these reforms that were started in the year


1991-92, is now becoming clear as per the Economic Survey
for 1995-96. Salient features of the economic growth in the
post-liberalization era are given as under:

 Growth of GDP at factor cost during 1995-96 is


estimated to be 6.2% in 1994-95 that has gone up from
a level of 0.8% in the crisis year of 1991-92.
 After a low employment growth during the crisis year of
1991-92, annual total employment growth has
averaged at 6.3 million jobs per year over 1992-93 to
1994-95 and has reached 7.2 million during 1994-95.
The Gross domestic savings rates touched a record high
of 24.4%. Real gross and capital formation also reached
a record of 22.2% in 1994-95.

 After declining by 6.2% in the crisis year 1991-92, the


growth of real wages of unskilled agricultural labor
averaged 5.1% per annum in the following three years.
 Provisional estimates by the Planning Commission
indicate that in 1993-94, the incidence of poverty had
declined to below 19% of India's population.

58
 After registering a decline in the dollar value of exports
in 1991-92, the country has witnessed a strong three
year boom with annual export growth averaging 19%
during the period 1993 to 1996.

The following table depicts the growth of small-scale


industries since 1975-76. It reveals that the growth
of the small-scale industrial units has out paced the
growth of total industrial sector:

Comparative growth of small scale industries and


industrial sector (in percentage)
Year SSI Sector Industrial Sector
1975-76 17.9 6.7
1976-77 10.2 9.5
1977-78 12.7 4.2
1978-79 10.2 7.6
1979-80 14.0 (-1.6)
1980-81 8.8 4.0
1981-82 8.5 9.3
1982-83 8.1 3.2
1983-84 10.3 6.7
1984-85 12.0 8.6
1985-86 12.8 8.7
1986-87 13.2 9.2
1987-88 12.7 7.3
1988-89 13.4 8.6
1989-90 NA NA
1990-91 NA NA
1991-92 3.1 0.6
1992-93 5.6 2.3
1993-94 7.1 6.0
1994-95 10.1 9.4
1995-96 11.4 12.1
1996-97 11.32 5.6

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1997-98 8.43 6.7
1998-99 7.70 4.1
1999-2000 8.16 6.5
2000-2001 8.23 5.0

Drawbacks of Indian SMEs

Small and medium scale organisations are considered


backbone of economic growth in all countries.
Sinceeconomic reforms in 1991, Indian small and medium
enterprises (SME) are facing a very different scenario
compared with the protective environment of the past. Due
to global competition, technological advances and changing
needs of consumers, competitive paradigms are
continuously changing. These changes are driving firms to
compete,
simultaneously along several different dimensions such as
design and development of product, manufacturing,
distribution, communication and marketing.

:Barriers for Indian SMEs:

:Managerial barriers:

As the man behind the machine is the most important, I will


take up the managerial barriers to innovation in the context
of Indian SMEs, first. India, as you know, was a protected
market economy before liberalization.The Indian industrial
environment was traditionally identified by its regulative and
protective characteristics. Till, 1990, the Indian economy
was inward looking and protected from internal and external
competition. In the absence of competition, firms did not
develop the technological capability needed for penetrating
the global market. This decades long protective
environment also reduced the risk taking capacity of the SME

60
manager and made him complacent and averse to risk. He
chose to avoid risky situations.
Earlier, Indian firms had quite often followed an opportunistic
approach to growth, as opposed to capability driven
approach that seeks to strengthen key aspects of
manufacturing. Consequently, firms have paid very little
strategic attention to their shop floors in the last few
decades. Today Indian industry is facing tough competition
from imports in the domestic markets also. This competition
is in terms of new designs, new usages, reduced cost,
improved quality, products with higher performance and
variety, better services, all delivered simultaneously to
enhance values to the customers.

:Financial barriers:

The non-availability of institutional finance on affordable and


easy terms is hindering access to new technologies. In India
the situation is further complicated by the fact that the
preferred mode of finance is either self or other sources

:Technological barriers:

Technology is the key to enhancing a company's competitive


advantage in today's dynamic information age. SMEs need to
develop and implement a technology strategy in addition to
financial, marketing and operational strategies, and adopt
the one that helps integrate their operations with their
environment, customers and suppliers

61
:Assistances and promotions to SMEs by Government:

Institutional Support Structure for SMEs in India

(1) At Federal Level:

 Ministry of SSI
 Ministry of ARI
 Small Industries Development Organisation (SIDO)
 National Small Industries Corporation(NSIC)
 Khadi & Village Industries Commission(KVIC)
 Coir Board
 Entrepreneurship Development Institutions (EDIs)

(2) At State Level

 Directorate of Industries
 District Industries Centres
 State Finance Corporation

62
 State Industrial Development Corporation
 Technical Consultancy Organisations
 Entrepreneurship Development Institutions (EDIs)

(3) Others

 Industry Associations
 NGOs
 Banks/Financial Institutions

ABOUT NATIONAL SMALL INDUSTRIES CORPORATION

The Government of India through its Ministry of Commerce &


Industry in Collaboration & deliberation with the National
Planning Commission and International planning team (Ford
Foundation) decided to set up NSIC in 1955 with mandate:
“To aid, counsel , assist, finance, protect and promote the
interest of Small Industries in India”

VISION:
To be a premier organisation in the country
fostering the growth of small enterprises including Tiny and
Service Enterprises

MISSION:
To enhance the competitiveness of Small
Enterprises by providing integrated support services under
Marketing, Technology and Finance.

 The Corporation is a fully owned entity of the


Government of India.

63
:INTEGRATED SUPPORT PROVIDES BY NSIC:

Marketing Support:

 Single Point Registration Scheme under Govt. Stores


Purchase
 Programme.
 Consortia & Tender Marketing
 Raw material Distribution
 Exhibitions & Buyer Seller Meets
 Export Facilitation

Technology Support:

 Advise on application of new techniques


 Material testing facilities through accredited
laboratories
 Product design including CAD
 Common facility support in machining, EDM, CNC, DNC
etc.
 Energy and environment services at selected centres
 Classroom and practical training for skill upgradation

Credit Support:

 Finance for procurement of Raw Materials


 Finance for Marketing
 Credit facilitation through linkage with banks
 Limited Financing for Equipments

SUPPORT SERVICES:

 Performance and Credit Rating Scheme

64
 Information Support
 Mentoring and Advisory Services
 Software Technology Park
 Technology Business Incubator
 International Consultancies & International Cooperation
 Display Centre & Exhibition Complex
 Marketing Development cum Business Park(Proposed)
Enables small enterprises to ascertain their strengths
and weaknesses of their existing operations and take
corrective measures to enhance their organizational
strength.
 An independent, trusted third party opinion on
capabilities and credit worthiness of SSI units is taken.
 Good rating enhances the acceptability of the SSI units
with Banks, FIs, SSI’s customers and buyers.
 Facilitate prompter credit decisions from Banks on
proposals of SSI units.
 Empanelled agencies: ICRA, ONICRA, Dun & Bradstreet,
CRISIL, FITCH and CARE, SMERA
 Performance and Credit Rating Scheme
:Conceptual Frame-work for Development of a
Cluster:

Definition of a cluster :

A cluster may be defined as a local agglomeration of


enterprises (mainly SMEs, but often also including some
large enterprises), which are producing and selling a range
of related and complementary products and services. An
example can be a localized leather industry which includes
leather tanning units, leather finishing units, leather goods
producers, leather garment manufacturers, designers, sub-
contractors, merchant buyers and exporters etc. It must be,
however, highlighted that a cluster is not merely a
hardware, consisting of a group of industries located in a
particular area .Its success and dynamism are highly
dependent on the software i.e. the linkages and relationships
that get established or are consciously established over a

65
period of time. The precise definition of a cluster based on
quantitative parameters may vary from country to country.

Typology reflects only a static view :

Clusters can be categorized in different ways. But before


developing the typology, it is important to realize that such
classifications may help to provide useful first static insight
into the structure of a cluster, but need not present a
dynamic picture of that. Therefore typology should not be
used to generalize any policy prescriptions. Secondly, the
categorization of a cluster into a specific type during the
course of its evolution or later due to changes in the
international scenario may change.This typology presented
as under is therefore a first cut at taking stock and
organizing the information on clusters in India and any
further understanding of how the specific clusters function
would require detailed analysis of each cluster.A total of 138
clusters have been chosen as a sample to understand the
current scenario of clusters in India. These clusters have
been chosen and categorized based upon the judgment of
informed persons, available write-ups and studies, each one
cross checked & reconfirmed from several possible sources
to improve the reliability of information. Due to the scarcity
of research studies available for most of these clusters, this
improvised method of data collection is entirely the
responsibility of the researcher with a few possible
limitations or differences in view point. Typology based on
stage of development : An important way of categorization
has been developed by the researchers of this study which is
based upon the stage of development of a cluster at a static
period of time. Development of a cluster could conceptually
be divided into four distinct phases : namely the 'Initial
phase', 'Growth phase', 'Maturity phase' and 'Extinction
phase'.

Initial Phase :

66
In this stage of cluster formation, only a handful of units
establish themselves and based on their success, several
other units come up in the subsequent stages. The formation
of cluster may be natural, based upon high demand potential
and private initiative or may be induced due to policy
incentives, infrastructure availability or a large buying public
sector unit. The reason may also be the availability of critical
raw material or specific skills, as in case of most traditional
clusters. The example of natural cluster based on raw
material resources would be 'marble cutting' cluster at
Kishangarh in Rajasthan while a demand based cluster would
be 'ready-made garments' at Indore and Mumbai. The
examples of induced clusters would be automobile
component industry at Gurgaon due to the setting up of the
public sector car manufacturing unit of 'Maruti Udyog
limited' and another example may be cited as of petro-
chemical based industry at Vadodra due to setting up of
'Indian Petrochemical Industries Ltd', another public sector
undertaking.
The firms, in the initial stage, develop the man power and
help setting up of ancillary or subcontracting firms. They also
contribute to the development of support institutions and
other enterprises with the rise of demand for them. The
initial phase is likely to be characterized by slow growth and
high costs. There are a few competitors in the cluster at this
stage, so it is possible to pass on the cost to the consumer
by charging higher than that in the later stages of
development. An example of a cluster in the initial stage is
floriculture industry at Bangalore, Pune and Gurgaon.

Growth Phase :

The second phase characterizes rapid development of the


industry, intervention by support institutions including
government institutions and consolidation of other raw
material and service providers. New firms enter the market

67
and thus the competition increases. This increased
competition encourages technology development and
expansion into new markets. The growth is usually fueled by
the widening of national or international markets that the
cluster caters to. Both in the spheres of marketing and
management, innovative means are likely to be developed
thus reducing the overall decline in the prices. Since the
industries go through their cycles of recession
and growth, a cluster that is not currently in the growth
stage may reach that stage later. An example of the industry
currently in the growth stage is “automotive components
industry” that was pushed back from maturity stage because
of the industry for new cars and other automotive vehicles
had been allowed to be set up first during the early 1980s in
India and subsequently with the onset of liberalization
several MNCs set up their base in India. From the sample of
138 clusters under study it was observed that 38 of them are
in the Growth Phase.

Maturity Phase :

The third phase is characterized by the growth of the cluster


slowing down due to over capacity generally created in the
cluster and resultant very high competition amongst the
units. The data seems to suggest that in the Indian context
so far, the stage of maturity lasts longer than the previous
two stages. During the maturity phase strong input of
research & development may be needed to reduce costs,
increase productivity and add new product features to stay
ahead of the competition. As a natural outcome, weak units
begin to wither away creating space for the healthier units to
continue to survive. Several studies have shown how
'mature' clusters that were overwhelmed by technological
change at one point of time, regenerated themselves back
into the growth stage as a
result of choices made by local actors and groups. This
represents the transformation and re-invention. The

68
examples of the matured clusters would be “ the electric
fans cluster ” in Calcutta, “sewing machines cluster “ in
Ludhiana and 'stationery diesel engines cluster ' in Rajkot.
Out of the 138 clusters, 100 of them seem to be in the
category of mature clusters which represent 72.5 % of the
clusters, reflecting the prevalence of a lengthy duration of
this phase among the clusters.

.
Extinction Phase :

If due to wide ranging technological changes that the cluster


is unable to cope with or due to change in the life styles, a
product is no longer in demand, the cluster may go to face
extinction. Another reason may be the erosion of
competitiveness because of increase in the labor costs in the
cluster. However the same industry may find itself viable in a
different location where favorable conditions exist for the
survival and growth of the cluster. One example of such a
cluster is related to shoddy yarn made from recycled wool
which shifted itself from Prato in Italy to Panipat in India
where not only the skills existed due to the presence of
textile industry and the cheap labor but also the
favorable market for the shoddy yarn existed. During the last
decade, Panipat has grown to be a cluster of 700 carding
machines each on an investment of Rs. 7 million (USD
200,000). Now there is hardly any such unit in Prato in Italy.
In the Indian case , tile industry cluster based in Mangalore
with a history of 175 years has now gone into oblivion due to
the stated reasons of scarcity of raw material and fire wood
and accentuated with increased competition from China in
the export market.

Exceptions may occur :

There may be exceptions to the above stages of


development in some of the clusters. The growth and
maturity phases may in certain cases be inseparable thus
making it difficult to assign one of the two stages to such

69
specific clusters. Secondly, the transition from one stage to
another may not be smooth as reflected in the ‘S’ curve but
could be quite jerky due to certain internal or external
changes that may crop up.

Micro, Small & Medium Enterprises Development (MSMED)


Act 2006

Central Govt. decided to bring into India, the concept of


Small and Medium Enterprises in the place of small-scale
sector, as per the suggestions by the western giants through
WTO. The MNCs who had invested in India also favoured
such a move, since the small scale of the foreign land would
not fit into the small-scale definition in India and that they
can not come into India and claim concessions from Govt.
This pressure from outside made Govt, of India propose SME
Bill in 2003. When the draft bill came into the knowledge of
the small scale NGOs, there was wide-spread denouncement
of the same from the Associations all over India. The Govt.
then constituted a Parliamentary Committee to travel
through India and meet SSI stalwarts to know their views and
to submit a report with remedial suggestions.
The MPs were all unanimous in accepting the objection of the
SSI sector on the total neglect of the welfare of the Tiny
sector in the proposed Bill, in which the sector was treated at
par with Medium Scale Units with investment of Rs. 10
Crores. All clamoured that the Tiny sector should find a
separate place in the Act with special benefits.
Based on the recommendations of the Parliamentary
Committee, the old SME bill had been rechristened as
MSMED Act. The first letter “M” here stands for “Micro”,
which is same as the old “Tiny”.
The MSMED Act was passed in the Parliament in May 2006
and gazetted in July. The date of effectuation is yet to be
notified

70
:The important clauses of the Act are renderd hereunder:

 The maximum credit period permissible under


agreement between the supplier and the buyer is 45
days (Sec 15)
 For default beyond the permissible credit period or in
the absence of any credit agreement, from the date of
delivery of goods, a penal interest at 3 times the bank
rate notified by RBI, shall be payable at compound rate
calculated on monthly rests. (Sec 16)
 One or more Micro and Small Enterprises Facilitation
Councils will be constituted by the State Govts.,
comprising of minimum 3 members and maximum 5
members consisting of Director of Industries, MSE
Associations, Banks and Persons with special knowledge
in Industry, Finance etc. (Sec 20 & 21)
 The Council will first conciliate for amicable settlement.
On failure, it shall arbitrate and give Award. [Sec 18 (2)
& (3)]
 The Council will have jurisdiction to act in a dispute
between the supplier within its jurisdiction and a buyer
located anywhere in India. [Sec 18(4)]
 The petition filed shall be decided within 90 days by the
Council. [Sec18(5)]
 For appeal against the Award of the Council, appeal will
lie before appropriate judicial Courts. It is mandatory to
deposit 75% of the Award amount in the Court for
preferring the appeal. Pending disposal of the appeal,
the Court has discretion to release suitable part of the
deposit to the supplier, depending on the dire financial
need of the supplier. (Sec 19)
 In the audited accounts of the buyer, details of
defaulted amounts, penal interest paid or payable etc
have to be furnished. Further under IT Act, the default-
interest amounts shall not be allowed as deduction.
(Sec 22)

71
 The delayed payment provisions in the Act shall apply
notwithstanding any contrary provisions existing under
any other Law. (Sec 24)

:Conclusions:

Today organizations are knowledge based and their success


and survival depend on creativity, innovation, discovery and
inventiveness. An effective reaction to these demands lead
to innovative change in the organization, to ensure their
existence. The rate of changes is accelerating rapidly, as
new knowledge idea generation and global diffusion are
increasing. Creativity and innovation have a bigger role in
this change process for survival.

SMEs have to learn and imbibe the process of innovation, in


their day to day working, to remain competitive. Instead of
looking for support from other agencies, they have to find
their own ways of overcoming barriers. Despite all the
barriers and gaps which I have stated before, Indian SMEs
have continued on their path of progress. In fact,
their rate of growth is higher than the rate of growth
of the industry sector as a whole, their contribution to
our GDP is almost 7%. In the past also, our SMEs have
shown enough strength, vigour and resilience and in
current situation they will not only survive but win
also. By contributing higher than industrial sector for

72
our economy , Smes have proved that they are
growth engines for Indian economy.

BIBLIOGRAPHY

Sr. No. Details


Magazines & Reports
01. Business World
02. The Economic Times

Books Author
01. Accounting for Management D.R. Patel
02. Financial Management Prasanna Chandra

Web-sites
01. www.bankofbaroda.co.in
02. www.chickmagalur.nic.in
03. www.thehindubusinessline.com
04. www.annualmeeting2005.insme.o
rg
05. www.mcciapune.com
06. www.indcom.tn.gov.in
07. www.unido.org
08. www.wardha.nic.in

73
09. www.maharastra.gov.in
10. www.domainb.com
11. www.ficci.com
12. www.banknetindia.com
13. www.smera.com
14. www.expresstextile.com
15. www.iiaonline.in
16. www.partnershipsummit.com
17. www.businessworldindia.com
18. www.laghu-udhyog.com
19. www.coirboard.nic.in
20. www.sidbi.com

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