INSTITUTIONAL FINANCE FOR THE

DEVELOPMENT OF SMALL-SCALE INDUSTRIES

IN KARNATAKA

D.G. RUDRA MURTHY

A thesis submitted to the Bangalore University Injulmllment

oJ the requlrementsJor the award oJ the degree oj
DOCTOR OF PHlWSOPHY
In
ECONOMICS

Submitted through the

Department oj Economics
Gnanabhamthl, Bangalore UniversIty
BANGALORE
1994
 DECLARATION

I hereby declare that the thesis entitled

-Institutional Finance for the Development of Small-Scale

Industries in Karnataka" is a result of research work

carried out by me under the guidance of Dr.Hemlata Rao M.A.,

Ph.D., Prof. of Economics, Institute for Social & Economic

Change, Bangalore.

I further delcare that this thesis has not been

submitted previously for the award of any degree in this

university or any other university.

Place: Bangalore 1~fY1U'~

Date : 23rd May 1994 [ D • G . RUDRA MURTHY 1
 CERTIFICATE

Certified that this thesis entitled -Institutional

Finance for the Development of Small-Scale Industries in

Karnataka" is a bonafide research work carried out by
Sri D.G. Rudra Murthy independently under my guidance and

supervision.

AI J - f)
C.-!~;-AL~ t<a..o
(Dr. Hemlata Rao)
Professor of Economics
Place: Bangalore Institute for Social & Economic Change
Date : 23rd May 1994 Nagarabhavi, Bangalore - 560 072.
 ACKNOWLEDGEMENTS

I place on record my heartfelt gratitude to my guide

Dr. Hemlata Rao, Professor of Economics, Institute for

socio-Economic Change, Bangalore. She extended a very able

guidance, constant encouragement, helplful criticisms and

above all the moral support. But for her, the thesis would

not have seen the light of the day. I am very much indebted
to her.

I am grateful to Dr.D.M.Nanjundappa, Former Vice-

Chancellor, Karnataka and Bangalore University, and Deputy

Chairman, Planning Board, Government of Karnataka, for

enabling me to complete this assignment. But for his support

and guidance, I would not have completed this work. I am

indebted to Sri B.S.Patil, I.A.S., Former Secretary &

Commissioner, Department of Industries & Commerce,

Government of Karnataka and Chairman & Managing Director,

KSIIDC, Bangalore, and to Sri Y.K.Puttasome Gowda, I.A.S.

Member, Karnataka Public Service Commission, for their
constant encouragement.
 I will be failing in my duty, if I do not mention the

name of Sri H.G.Devaraj, Reader in Economics, Post Graduate

Department of Economics, Manasa Gangotri, Mysore. It was

his consistent encouragement that I ventured to do this

work.

I would also like to thank the Chairman of the

Department of Economics, Jnanabharathi, Bangalore

University, and the Chairman of P.G.Department of Economics,

Manasa Gangotri, Mysore, and also the Chairman of the P.G.

Department of Economics, University of Bombay (Kalina

Campus) for their kind co-operation in completing this work.

I acknowledge the help of the Librarian and Staff of

the ISEC Library - Bangalore, University Library - Mysore,

University Library (Kalina Campus) - Bombay, RBI Library-

Bombay, American Consulate Library - Madras, Library of the

National Institute for Bank Management - Poona, University

Libraries of Karnataka & Gulbarga University, Administrative

Training Institute Library - Mysore, Library of the

Directorate of Economis & Statistics - Bangalore and Public

Library - Cubbon Park - Bangalore.
 The Officers and officials of Syndicate Bank-

Manipal, Canara Bank - Bangalore, State Bank of Mysore-

Bangalore, KSFC Head Office - Bangalore and Zonal Office-

Mysore and also the General Managers of Districts Industries

Centre of Mysore, Bangalore and Dharwad Districts as well as

Small-Scale Industrialists of Mysore, Bangalore and Dharwad

have been very helpful in accepting many interviews and

providing useful information.

In addition, I would like to thank many individual

Researchers from whose insights, criticisms and intellectual

stimulation, I have been greately benefitted.

My thanks are also due to Sri Pavman and Sri Arif of

M/s.Symbiotic Ventures Mysore for helping me in

computerising the analysis of data and also to Sri

N.Venkataram and V.Prasanna Kumar of Sri Raghavendra

Enterprises & Mis. Surabhi Desktop Publishers,

Saraswathipuram, Mysore, for word processing and printing

and my special thanks to Sri H.S.Sadanand for helping in

administrative matters.

Good number of people made this work possible, but I

am solely responsible for its analysis and conclusions.

Place Bangalore
Date 23rd May 1994 ,~D. G. RUDRAMURTHY'
 INSTITUTIONAL FINANCE FOR THE DEVELOPMENT OF SMALL-SCALE
INDUS'11UES IN KARNATAXA

Page No.

CHA.PTER I 01- 29

INTRODUCTION

(1) Importance of the Study

(2) Industrial Finance in India

(3) Review of Literature

(4) Objectives and Hypotheses of the study

(5) Scope & Methodology for the Study

CHAPTER II 30-107

THE ROLE OF SMALL-SCALE INDUSTRIES IN DEVELOPMENT &

SSIs DEVELOPMENT DURING FIVE YEAR PLANS

(1) Concept of Small-Scale Industry

(2) Development of SSIs during First Five Year to

Eighth Five Year Plan - India and Karnataka

(3) An Evaluation of the Development of SSIs during

the Plan Periods

CHAPTER III 108-135

FINANCIAL STRUCTURE: CAPITAL AND CREDIT NEEDS OF

THE SSIs.

(1) Structural Features of SSI Units

(2) Sources of Finance for SSI Units

(3) Financial Structure of SSIs

CHAPTER IV 136-203

PATTERN, TRENDS AND MAGNITUDE OF INSTITUTIONAL

FINANCE TO SSIs IN KARNATAKA.
(1) Industrial Finance before Nationalisation

(2) Commercial Banks Finance to SSIs - Pattern,

Trends and Magnitude

(3) KSFC and SSIs

(4) A Comprehensive Analysis of Institutional

for the Development of SSIs in Karnataka

CHAP'I'ER. V 204-280

AN EVALUATION OF THE FINANCIAL ASSISTANCE BY THE

FINANCIAL INSTITUTIONS TO SMALL-SCALE INDUSTRIES -
BASED ON SAMPLE STUDY

(1) Objectives of the Field Survey

(2) Profile of the Field Survey

(3) Analysis of the Survey Data

CIIAP'l'HR VI 281-291

SUMMARY AND CONCLUSIONS

Summary - Recommendations.

BIBUOGRAPHY 292-303
 UST OF TABLES

Table Particulars Page

No. No.

1.01 Growth of Small-Scale Industries 05

2.01 Actual Expenditure in the Third Plan 53

2.02 Annual Plan Outlay for Village and Small Industries 54

During Three Annual Plan Periods

2.03 Physical Progress of VSIs during 1973-74 to 1979-80 60

2.04 Growth of Small Scale Industries in India 67

2.05 Plan Expenditure for VSIs (I Plan to VII Plan) 73

2.06 Outlay in Fourth Plan of Karnataka 81

2.07 Financial Assistance to Backward Districts under State 83

Aid to Industries Act.

2.08 Sectoral Outlay for the Sixth Five Year Plan of 87

Karnataka

2.09 Sixth Plan Outlay by Major Heads of Development for 88

Industries

2.10 Growth of SSIs During Seventh Plan and 1990-92 Period 90

2.11 Plan Expenditure on VSIs in Karnataka 95

2.12 Yearwise Growth of SSIs in Karnataka in terms of 97

Numbers, Investment & Empoloyment (1969-70 to 1991-92)

2.13 Distrlctwise Growth of SSIs in Karnataka 98

3.01 Sources of Funds 123

3.02 Interest Rate Structure of Commercial Banks 131

3.03 Interest Rate Structure Of KSFC 132

3.04 Revised Interest Rate Structure of KSFC 134

4.01 Sectorwise Bank Advances as on 31.3.1968 140

4.02 Bank Branches, Deposits and Advances before 143

Nationalisation

4.03 Classification of Loans and Advances according to size 144

of Accounts (Outstanding as on 31.3.68)

4.04 Public Sector Banks' Advances to priority sector (1969 150

to 1990)

4.05 Yearwise Financial Assistance to SSIs in Karnataka by 158

Commercial Banks (1969-1992)
4.06 District wise Financial Assistance to SSIs in Karnataka 161
by Commercial Banks as on 31.3.1992

4.07 Bank Assistance to SSIs in Karnataka as on 31.3.192 164

4.08 Performance of Major SFCs during 1990-91 172

4.09 Sanction to SSIs by Major SFCs 173

4.10 Sanction to Backward Areas by Major SFCs 174

4.11 Performance of KSFC since inception to 31.3.92 176

4.12 Decadewise Performance of KSFC 180

4.13 Assistance to SSIs by KSFC during 1987-88 to 1991-92 and 181

as on 31.3.92

4.14 Districtwise Analysis of loans sanctioned to SSIs by KSFC 183

(as on 31.3.92)

4.15 Industrywise sanctions to SSIs by KSFC (as on 31.3.92) 187

4.16 Constitutionwise Classification of Loans Sanctioned by 190

KSFC

4.17 Sizewise Analysis of term loans sanctioned by KSFC during 191

1990-91 to 1991-92 and as on 31.3.92

4.18 Disbursement Performance of KSFC 192

4.19 Recovery Performance of KSFC during 1987-88 to 1991-92 194

4.20 Trends in Recovery during 1987-88 to 1991-92 195

4.21 Default Ratio of the Loans Sanctioned by KSFC 196

4.22 Institutional Finance to 55 Is in Karnataka 198

4.23 55 Is and their Contribution to the State's Economy 200

 •

5.01 Value-wise and Industry-wise Production Profile 207

5.02 Implementation of Micro Report 212

5.03 Source of Raw Material 218

5.04 Industry-wise Raw Material Problems 219

5.05 Industry-wise Production Trends 223

5.06 Profile of the Distribution of the Working Cost 225

5.07 Ratio of Employment 227

5.08 Pattern of Financial Assistance 229

5.09 Financial Assistance Profile (for Term Loans) 231

5.10 Financial Assistance Profile (for Working Capital) 232

5.11 Industry-wise Profile of time taken for Sanction 233

(Macro Report)

5.12 Industry-wise Profile of time taken for Sanction 234

(Micro Report)

5.13 Profile of Interest Rates 241

5.14 Profile of Repayment 242

5.15 Profile of Unit-wise Position of Amount Sanctioned, 244

Recovered, Outstanding and Amount in Default

5.16 Profile of the Problems faced while obtaining Loan 249

5.17 Profile of Overall Experience with the Financial 251

Institutions

5.18 Analysis of the Promoters' Education 253

5.19 Industry-wise Analysis of Implementation 254

5.20 Constitution-wise Analysis of Implementation 255

5.21 Industry-wise Analysis of Source of Raw Materials 256

;.22 Industry-wise Break Even Analysis 257

5.23 Constitution-wise Break Even Analysis 258

5.24 Analysis of Promoters' Contribution 258
I

5.25 Institution-wise Disbursement Analysis 261

5.26 Institution-wise Financial Assistance Analysis 261

5.27 Analysis of Constitutionwise Source of Funds 263

5.28 Analysis of Industry-wise Source of Funds 264

5.29 Analysis of Institution-wise Rate of Interest Charged 265

5.30 Industry-wise Default Analysis 266

5.31 Constitution-wise Default Analysis 267

5.32 Analysis of Institution-wise Problem faced while 268

obtaining Loan

5.33 Analysis of Overall Experience (Institution-wise) 270

 LIST OF IU.lJSl1lA1'IONS

lA. Growth of SSI units in India

2B. Growth of Investment on SSIs in India

2C. Growth of Employment in SSIs in India

2D. Production from the SSI Sector in India (1960 - 1990)

2E. Share of SSI Expenditure during First Five Year Plan to Seventh
Five Year Plan of Karnataka

2F. Trends in the Development of SSIs in Karnataka (1969-70 to

1991-92) - Number of Units

2G. Trends in the Development of SSIs in Karnataka (1969-70 to

1991-92) - Investment

2H. Trends in the Development of SSIs in Karnataka (1969-70 to

1991-92) - Employment

21. Dispersal of Industries in Karnataka - in terms of number of

Units

2J. Dispersal of Industries in Karnataka - in terms of investment

2K. Dispersal of Industries in Karnataka - in terms of employment

4A. Spread of Bank Advances before Nationalisation

4B. Commercial Banks' Advances to Priority Sector (1969, 1980 and

1990)

4C. Trends in Financing of SSIs by Commercial Banks

4D. Districtwise Spread of the Assistance by Commercial Banks to

SSIs

4E. Bankwise Assistance to SSIs in Karnataka

4F. Trends in KSFC's Assistance (Number)

4G. Trends in KSFC's Assistance (Amount)

4H. KSFC's Sanction to SSIs

41. Pattern of KSFC's Assistance to SSIs

4J. Industry-wise Sanctions of KSFC

4K. Flow of Institutional Finance to SSIs in Karnataka.

 CHAPTER - I

INTRODUCTION

1.1 Importance· of the Study:

I The prominance for Small-Scale Sector emanates from

two basic premises of economic development policies viz.,

the 'balanced' development and 'sustainable' growth of the

economy which calls for certain minimum level of

diversification of the economy. In an economy with a

predominant primary sector and agriculture depending on the

monsoon, such a diversification has to be in the direction

of industrial sector in general and small-scale sector in

particular. Although agriculture is the backbone of our

economy and the largest contributor to GDP, too much

dependence on this sector is unwise. Inspite of the fact

that millions of people depend on agriculture, this sector

is unable to absorb all and provide productive employment.

There is a widespread disguised unemployment in this sector.

In view of this, there is a need to diversify economic

activities and shift the disguised unemployed from

agriculture to other sectors where they can be poroductively

employed. SSI sector is one such sector which is labour

intensive and hence provides scope to absorb such labours.

/
The Nurksean proposal of transforming the surplus labour
 2

from Agriculture to the allied activities like - the

development of infrastructure and employing them in less

technical jobs finds its relevance here. Due to the lack of

technical training, agrarian labour force cannot be employed

in capital intensive industries, hence providing employment

and encouraging them to seek their own jobs becomes a

crucial concern for a country like ours. It is apropos to

mention here Fredrick. List's comments - "a country devoted

to mere raw agriculture resembles dullness of mind,

awkwardness of body, customs, methods and processes for want

of culture. This condition of things can change entirely by

establishing a manufacturing power and the mental, moral and

physical stagnation of the people is broken and prosperity

and liberty prevai1.,,1 Therefore unlike other sectors of the

economy manufacturing is the only sector which has large

number of productive, backward and forward linkage effects.

Hence a balanced approach will give a fillip to the economy

and thus help in achieving the sustained overall growth of

the economy.

1. List FredricK - National System of Political Economy.

Translated by Sampson S. Lloyd.
(London, Longman's Green & Co. 1928) p.
167.
 Modern Small-Scale Industries (SSIs) in India were

almost non-existant prior to the II World War. It was during

the war period that a number of SSIs were established to

relieve pressures (like - poverty, unemployment, depression,

trade deficit and etc.,) and to counteract inflationery

trends in the economy and also the post-war desire to become

economically independent.

After independence, organised efforts were made for

the development of SSIs on the basis of the report submitted

by a team of Ford Foundation experts. In view of the need to

step up production and counter inf1ationery tendencies, it

was essential to announce an industrial policy which could

create conditions of economic security. Hence, Industrial

Policy Resolution of 1948 was framed, which was the basis

for the First Five- Year Plan. Since then depending on the

need of the hour several Industrial Policy Resolutions were

framed in the years 1956, 1977, 1980 and 1991.

Industrialisation in India since independence has been

predominantly based on the development of large scale

industries. The policy of the government during the early

planning era was to develop import substituting heavy

industries as the 'key stone' with traditional SSI as an

 4

'adjunct' to meet day to day demands. Gandhiji was among the

earliest advocates of small industry. But the focus of

Gandhiji was on the expansion of traditional and rural

manufacturing and not on the creation of a modern, small,

urban factory sector. It was Prof. Mahalanobis, who set the

pattern of the Second Five-Year Plan which conceived small-

scale sector as a supplier of consumer goods to support

workers in the large scale sector of heavy industry.

Industrial development becomes incomplete without

the development of SSIs, since this sector provides

opportunity to utilize the abundant manpower and unexploited

resources. Accordingly in the process of reshaping and

developing the Indian economy under the aegis of Five Year

Plans, SSI Sector is rapidly coming into' prominance.

Importance of the small scale sector can be gauged by the

account given by Small Industries Development Bank of India

(SIDBI). According to SIDBI, there were 19 lakh small-scale

units in the country where about 438 lakh persons were

employed in SSls where as just 45 lakh persons were engaged

in the large and medium scale industries 2 . It has also been

2. Press Notification issued by SIDBI vide Reference Indian

Express dt.II.IO.1992.
 5

estimated that the SSIs constitute around 49 to 51 percent

of manufacturing sector, 58 percent of total exports and 36

percent to the GDP. Nearly 7500 types of products are being

3
produced in this sector . The Table below traces the growth

achieved by the SSI sector during the past three decades.

TABLE - 1.1

GROWTH OF SMALL-SCALE INDUSTRIES

Sl. Particulars Unit 1960 1970 1980 1992

No.

1. Investment Amt.Rs.in 279.58 697.00 5850.00 18196.00

crores

2. Production " 1426.50 4860.00 21635.00 143170.00

3. Number in lakhs 0.36 2.82 8.74 19.40

4. Employment " 21.59 36.70 71.00 126.26

Source: CMIE - Basic Statistics Relating to Indian Economy.

Volume I, August 1992.

3. Patel. K. V . "Implementation of SSIs in the National

Economy" Financial Express, April 4th, 1990.
 6

It can be observed from Table-l.l that during the

course of planned era SSIs have shown an extremely healthy

growth. The investment in this sector which was Rs.280

crores by the end of 1960 and Rs.700 crores duting 1970 had

risen to Rs.5,850 crores by 1980 and by 1990 (March) it

touched the peak at Rs.18,200 crores. In terms of production

also the performance of this sector was appreciable, as the

production increased from Rs.l,426 crores during 1960 to

Rs.4,860 crores by 1970, it shot up to Rs.2l,635 crores by

1980. It was in the range of Rs.l,43,170 crores by March

1992. There has been an impressive performance even on

account of number of units and employment. There were hardly

24,000 SSI units during 1950 and 36,000 during 1960, about 3

lakh during 1970 and 9 lakh during 1980 and the number of
units increased to 19 lakh during March 1990. In the fifty's

hardly 9 lakh people were employed in the SSIs. This had

increased to 22 lakh during sixty's, to 37 lakh during

seventy's to 70 lakh during eighty's and to 125 lakh during

early ninety's. Development of SSI sector very much depends

on industrial finance available to this sector.

1.2 INDUSTRIAL FINANCE IN INDIA:

Industrial finance in its broad connotation means, the

provision of funds needed by industry irrespective of the
 7

period for which they are made available. A finely tuned

economy has certain bare necessities if it has to remain so.

A well developed capital market is one such pre-requisite.

The availability of finance in respect of both quantum and

time does have tremendous impact on industrial development.

until the nationa1isation of Banks in 1969, the

portfolio of commercial bank advances was largely geared to

finance trade and commerce. Starting essentially as an urban

based (and biased) financial service, real efforts were

begun only in 1956 through a'Pi10t' project scheme by S.B.I.

to look into the credit needs of SSIs. Further, since 1985,

as per the directives of the Government, Commercial Banks

begun to provide 40 per cent of their total credit to

priority sector at concessional interest rates. This was

mandatory because the commercial banks had neglected the SS!

sector hitherto.

In 1951, the State Finanical Corporations (SFCs) Act

was passed in the Parliament empowering state governments to

set up financial institutions to cater to the needs of SSIs.

Then in 1969 and in 1980, 20 major commercial banks were

nationalised thereby opening up new horizons for the

financial operations of SSIs in particular. Clearly

 8

financial support holds the key to entrepreneurship

development vis-a-vis the development of industries.

Saraiya Committee notes that - "during the pre-

nationalisation period, the SSI sector had to rely on the

resources of the disorganised money market for its credit

requirement partly because of the rapidly increasing demands

for credit from the large and medium scale industry and

partly because of lack of experience on the part of both

4
banks and borrowers" . The committee therefore recommended

following measures.

(i) Establishing Credit Guarantee Scheme

(ii) RBI to provide additional rights to borrow from it at

concessional rates in case commercial banks increased
their quantum of lending to SSIs.

One of the Universal problems that hinders and

unhinges the SSIs is the paucity and non-availability of

adequate finance at right time. In India, SSI sector

4. Saraiya.R.G. - Report of the Banking Commission Finance

Department, Govt. of India, 1972.
 9

encompasses a diverse range of industries ranging from

handicrafts to ancilliaries and their financial requirements

also differ and hence their needs are to be met differently.

Though many other elements such as - technology, management

market etc., are important, adequate and timely finance is a

necessary pre condition for the promotion & development of

SSIs. Credit is the lubricant of production. In fact

financial assistance is more important than just the

Government incentives.

The Draft Fifth Five Year Plan also notes that "the

financial institutions are supposed to provide the mechanism

by which the savings generated in one sector or region could

be made available for investment in other sectors or

regions. The purposeful policies of the financial

institutions can playa leading role in the development of

an economy by controlling the allocation 0f finance,,5.

Commercial banks are very important for the promotion of

SSIs in the country. However, the distribution and regional

spread of banks were not even and satisfactory.

5. Government of India - Draft Fifth Five Year Plan.

Planning Commission, New Delhi. P. 238.
 10

The Wanchoo Committee observed that "82 per cent of all

branches of the banks are in the public sector and their
share in the aggregate deposits held by the organised banks

amounts to 84 per cent. Further 62 Per cent of their total

credit has gone to urban centres. The distribution system

was faulty." 6

The picture of Indian Banking changed rather

drastically after the establishment of State Bank of India

(SBI) and nationalisation of major commercial banks. There
were some regions which had a fairly developed banking
structure and at the same time there were regions where
banking was underdeveloped. Further bank offices were
concentrated in the metropolitan and urban centres. The

establishment of SBI and nationalisation of Commercial Banks

was felt necessary to expediate the spread of bank networks
to areas where banking services were woefully inadequate and

thus lay a foundation on which the superstructure of

Institutional credit could be erected. Inspite of the
establishment of SBI and nationalisation of twenty major
commercial banks, there remained a wide gap between the

6. Government of India - Fiscal & Financial Incentives for

Starting an Industry in Backward Areas. Ministry of
Finance, New Delhi. P. 123.
 11

demand for and the supply of credit for the development of

SIs. This gap in the demand and supply of institutional

redit led to the realisation that the incentives and

:oncessions provided by the government are not adequate for

'urther expansion & development of SS1s and these should be

:omp1imented by Institutional Finance. Accordingly various

:teps were initiated to provide institutional finance to SSI

:ector.

The initial attempt in financing SSIs was under the

itate Aid to Industries Act which provides State governments 1

:0 help SSIs in the form of development loan. The next

,mportant attempt was the enactment of the State Financial

:orporations (SFCs) Act in September 28, 1951, to facilitate

:he State Governments to set up SFCs with the object of

)roviding medium and long term loans to SS1s. The S81, the

:irst major public sector commercial bank, which introduced

i 1iberalised scheme of financial assistance to SSIs in 1956

cor the first time. The credit guarantee scheme introduced

)y the Reserve 8ank of India constituted another milestone

Ln the history of financing of SS1s. The National Small

[ndustries Corporation (NSIC) introduced a credit guarantee

scheme in 1966 to ensure 100 per cent finance to SS1s

~xecuting Government orders. The introduction of the social

 12

control on commercial banks by the Central Government in

1967 was another important measure to activate commercial

banks in lending to SSIs in an active manner. The

nationalisation of 14 major commercial banks in 1969 and 6

more major commercial banks in 1980 ushered in a new era of

financing SSIs in the Country. RBI had stipulated that

commercial banks should provide atleast 40 per cent of their

advances to priority sector, which included SSIs also, and

this was another significant step in financing of SSIs.

The refinance assistance scheme introduced by

Industrial Development Bank of India (lOBI) together with

the credit guarantee scheme provided a favourable climate

for the flow of finance to SSIs. In May 1988, lOBI

established the Small Industries Development Fund (SIDF).

The main objective of SIDF is to augment the flow of

financial assistance to SSIs and to provide a focal point to

co-ordinate at the apex level and availability of both

financial and non-financial assistance from different

agencies for orderly and healthy gorwth of Small-Scale

Sector. In August 1987, the Central Government introduced

National Equity Fund (NEF) Scheme with the objective of

providing support in the form of equity assistance to SSIs

which are engaged in manufacturing activities. The latest

addition is the establishment of an exclusive Apex Bank for

 13

Small-Scale Sector known as Small Industries Development

Bank of India (SIOBI). SIOBI now administers SIOF, NEF and

other schemes of finance for SSIs which were hitherto being

administered by lOBI.

Further, to review the flow of institutional finance

to Small Scale Sector and to suggest measures for improving

the performance of the credit delivery system in securing
adequate financial assistance to the Small- Scale Sector, a

Standing Advisory Committee has been set up by RBI.

With the above backdrop, the institutional network for

financing SSIs can be drawn as follows.

(1) RBI Apex body controlling, monitoring and

regulating the flow of finance to this
sector.

(2) IOBI/SIOBI Providing support to major financial

institutions like SFCs & Banks thro'
refinance.

(3) Banks 20 Nationalised Commercial Banks,

Scheduled Banks, Co-operative Banks &
RRBs mainly providing working capital.

(4) SFC's KSFC in case of Karnataka.

(5) State Small KSSIOC in case of Karnataka - provides
Industries industrial sheds & supplies raw material.
Development
Corporation

(6) National Provides Plant and Machinery to SSIs on

Small Indus- Hire Purchase basis.
tries
Corporation
(NSIC)
 14

The cumulative effect of the aforesaid measures

resulted in an increase in the flow of institutional sources

of finance to SSIs of the country. The financial institu-

tions provide financial assistance to SSIs under various
schemes. Some of the important schemes are outlined below.

The broad schemes under which the above Financial

Institutions operate are:

(1) Normally Financial Institutions grant credit

facilities against pledge/hypothecation of stocks

depending upon the nature of manufacturing operations
and other factors relating to the units. Generally

75 per cent of the value of the goods are financed.

25 per cent will be a margin to the promoter.

(2) Differential Rate of Interest (DRI) Scheme The

finance provided to SSIs by the commercial banks are
covered under the RBIs 'Differential Interest Rate
Scheme.' The RBI provides concessional credit to

commercial banks to be passed on to the SSIs.

 15

(3) Credit Guarantee Scheme - The RBI has introduced CGS

to stimulate the finance to this sector. Under the
scheme if any financial institution becomes the member
of the scheme, the loan given to SSIs is guaranteed by
the RBI. The scheme helps the financial institutions

to recoup the losses if any.

(4) Apart from these other major schemes of Financial

Institutions to the SSIs are special scheme for
Technocrat Entrepreneurs - Seed Capital assistance to

entrepreneurs who are otherwise unable to obtain

necessary equity capital -Foreign Currency Loan for

the purchase of imported Plant and Machinery and/or
technical know-how.

Inspite of the important role played by the financial

institutions in promoting the development and growth of
SSIs, very few studies are available both at the national
and state level, which examine the link between
institutional finance and small industries. However,
plethora of literature is available on SSIs and their

problems. Some of the studies in this area are outlined in

the following section.

 16

1.3 REVIEW OF LITERATURE:

The available literature on SSIs can be grouped under

three categories.

1. Studies relating to the importance of SSIs and its

advantage over large scale industries,

2. Studies concerned with institutional support to SSIs

and

3. Studies relating to finance to SSIs.

'
Hose l 1tz 7 deals mainly with the factors

differentiating between Large Scale Industries and SSIs like

employment, investment or power required. Further, by

analysing the formal structure of Indian Planning Process,

his study emphasises the need for greater importance for

8
SSls in the Five Year Plans. Trivedi , stresses on the

7. Hoselitz Bert F.The Role of Small Industries in the

Process of Economic Growth, Vol. 7 (The
Hague, Monton. 1968).

8. Dr.Trivedi.M.L. Government & Business (Bombay, Multitec

Publishing Co., 1980J.
 17
Industrial Policy Resolution and the priority accorded to

SSIs in the various policy resolutions. Shetty9, Basu 10 ,

ll 12
Dhar and Lydall and Inoue also analyses the various

measures undertaken by the Goverment for the promotion of

SSIs.

The studies mentioned above highlight only the

structural and policy aspects of SSI and do not deal with

the requirement of finance vis-a-vis the institutional

network available.

Sandesara 13 analyses the industrial policies of the

Government and the measures taken by the Government to

protect and promote SSIs from 1948 Industrial Policy

9. Shetty.M.C. Small Scale & House Hold industries in

a Developing Economy (Bombay. Asia
Publishing, 1963).
10. Basu.S.K. Place & Problems of Small Industries
(Calcutta, Mukherjee & Company, 1959).

11. Dhar.P.N. &

Lydall.H.F. The Role of Small Enterprises in Indian
Economic Development (Bombay, Asia,
1961).
12.Inoue Kyoko Industrial development Policy of India.
(Tokyo, Institute of Developing
Economies, 1992).

13. Sandesara.J.C. Efficacy of Incentives for Small

Industries (Bombay, Asia, 1978).
 18

Resolution to 1977 statement. The author also briefly

analyses the investments made during the plan periods (upto

Fifth Five Year Plan). The studies which have dealt with

finance to SSIs are very few. Some of the studies are

mentioned here .

Desa1. 14 , d ea 1 s Wlt
. h t h e sources 0 f f·lnance for S5Is

and defines the assessee and the requirement of working

capital for SSIs. There is also a cursory glance on the

commercial Banks Finance to SSIs. Further Desai

traces the history of commercial banks' finance to this

sector from 1956 when SBI introduced the Pilot Project

Scheme. Desai also deals in detail the security approach of

banks and the terms and conditions of the banks to provide

finance. Ramakrishna 15 , explains the capital and credit

needs of SSI by keeping the number of people employed as the

basis and analyses the role played by State Bank of India in

financing SSIs. Perhaps the effort of Ramakrishna is one of

the first in its attempt to assess the capital requirement

14. Desai.V. Organisation and Management of SSIs (New

Delhi, Himalaya, 1979).

15. Ramakrishna.K.T. Finance for Small Scale Industries in

India (London, Asia Publishing House,
1962) •
 19

of SSIs. This study is entirely devoted itself on the

financial problems faced by the SSIs. Sinha 16 deals only

with the role of SFCs in financing the SSIs.

17
Upadhyaya gives the financial spectrum for the

industrial sector as a whole. This study gives information

on the source of finance for both large and medium sectors

as well as the SSIs.

18
Pareek illustrate the need for finance for SSIs,
problem of finance and the present institutional net-work to

provide finance. The study is devoted more towards the

operations of commercial banks and their schemes to provide

finance to SSIs.

There are many more studies which are listed in the

Bibliography, however, none of the studies examines the role

of financial institutions in promoting industrial develop-

ment or the problems faced by the entrepreneurs. Most of the

16. Sinha.S.L.N. Reforms of the Indian Banking Systems

(Madras, Orient Longman, 1973).

17. Upadhyaya.K.K. Financing of Industrial Growth in a

Developing Region. (Allahabad, Chugh
Publishers, 1980).
18. Pareek.H.S. Financing of Small Scale Industries in
a Developing Economy (New Delhi,
National Publishers, 1978).
 20

studies are national level studies. An indepth study of the

problems pertaining to industrial finance as perceived by

the entrepreneurs and by the financial institutions at the

state level are very much lacking.

There are however some studies at the regional level

19 . 20
on SSIs like the one by Dhar and by Sandesara . These are

based on surveys and deal with the problems of SSIs with

regard to location, finance and raw material. Various other

studies which have dealt with financial aspects or
industrial finance are by Ramakrishna, Pareek and Upadhya.
These studies deal at the macro problems and are at national

level. An exclusive study of the role of the financial

institution has not been done. The above studies relate to

areas like Delhi and Bombay. There is no comprehensive study

covering the State of Karnataka about these aspects of SSIs.

19. Dhar.P.N. Some Aspects of Technological Progress in

Small Scale Industries (Bombay, Asia,
1970).

20. Sandesara.J.C. Small Industries in Big City (Bombay,

University of Bombay, 1969).
 21

There are very few studies pertaining to Karnataka such as

22
Balakrishna 21 (1940) or by Lakshman (1966). These studies
do not focus on the financial aspects or on the role of

institutional finance for the development of SSI sector.

It is therefore necessary to undertake an independent

enquiry at the State level. The present study is an attempt

at analysing the financial problems of SSIs in Karnataka and

the role played by financial institutions in promoting

industrialisation in the state.

As brought out earlier, though a number of studies

have been undertaken regarding SSIs in general and

promotional activities undertaken by the Government and by

various developmental agencies in particular, much has not

been highlighted on financial problems.

21. Balakrishna.R. Industrial Development of Mysore

(Bangalore, Bangalore Press, 1940).

22. Lakshman.T.K. Cottage & Small Scale Industries in

Mysore: Case study of their pattern and
role in the context of a developing
economy (Mysore, Rao & Raghavan, 1966).
 22

Hence, the present study is an attempt to fill the gap

that exists in the literature on SSIs in India and with

special reference to Karnataka.

1.4 OBJECTIVES OF THE STUDY:

Following are the objectives of the present study:

1. To analyse the pattern, trends and magnitude of

financial assitance given to the SSI sector in

Karnataka.

2. To analyse the change in attitude of the financial

institutions since 1969.

3. To evaluate the impact of institutional finance on

industrial development.

4. To assess the financial problems of the

entrepreneur and the nature of' dependency on the

financial institutions.

1.5 HYPOTHESES OF THE STUDY:

Following are the hypotheses of this study

1. The share of institutional finance and the

Financial allocation by the Government in various

 23

plans is not commensurate with the contribution

of the small-scale industries to the economy.

2. Institutional finance in the distribution of credit

facilities to SSIs in Karnataka display regional

disparities which has led to concentration of

industries in certain parts of the state.

3. The approach of the financial institutions towards

SSIs is not conducive to rapid industrialisation as

the approach is very rigid and procedure oriented

with emphasis on security.

1 .6 SCOPE AND METHODOLOGY OF THE STUDY

The present study is a regional study covering the

State of Karnataka. The State has been one of the

industrially forward States in the country and also the

growth of SSIs is rapid compared to other States. Karnataka

with an area of 1.92 lakh square kilometers, geographically

occupies the sixth place in India. Nature has blessed

Karnataka with bountiful resources of mineral wealth, forest

wealth and water-falls. These have been ingeniously

exploited for a long time to bring about economic

prosperity. For centuries the area has been well known for

its trade with its neighbouring areas and even in export and

import, well supported by its cottage and medium industries.

 24

The recent economic history of Karnataka also reveals

that the State has in many ways been the pioneer in economic

planning and development. This State has set up planning

system even before any state in India had thought of

industrialisation, communication, electricification and

banking in rural areas, Karnataka was already ahead of other

states under the enlightened leadership of Sir

M.Vivsvesvaraya. Besides introducing planned development,

he had established the State Bank of Mysore at the beginning

of the century to cater the financial needs of the State.

The profile of Karnataka State is annexed to this chapter as

Annexure-I.

The study aims at covering the following major

financial institutions engaged in financing SSIs in

Karnataka Karnataka State Financial Corporation,

Nationalised commercial banks, Industrial Co-operative banks

and Regional Rural Banks.

The study intends to cover only those SSIs which are

in the organised sector and are registered.

The present study has both micro and macro approaches.

At the macro level the study highlights the role of
 25

financial institutions in the promotion of SSIs. Besides its

limitations and other related problems will be dealt.

Further at the micro level, the study analyses the

impact of financial assistance, the problems faced by the

entrepreneurs. In this connection, to collect the first-hand

information a field survey is conducted with the help of

a questionnaire and personal interviews.

The present study makes use of both the primary and

the secondary source of data collected from published books,

reports, journals and periodicals.

In order to assess the impact of financial assistance

on SSIs, data has been collected from sample SSIs. The

enterpreneurs are selected on the basis of a purposive

sampling method. 100 SSI entrepreneurs are selected for this

purpose. Questionnaire method is adopted to collect

information.

1.7 CHAPTER SCHEME:

The study comprises of 6 chapters. This chapter is

followed by 5 chapters. In the second chapter, after

examining the changes in the definition and scope of SSIs,

 26

the role assigned to this sector in various Five Year Plans

both in the national and state i.e., Karnataka Plans are

examined.

Further, the aspects like structural features of 5SI

units, transition of capital and credit needs, what are the

various sources of finance available to the 5S1 sector, what

are the stipulations/regulations and conditions of the

financial institutions while providing financial assistance

to SSI sector and interest rate structure are discussed in

Chapter III 'Financial Structure, Capital and Credit Needs

of SSI'.

Chapter IV is the core chapter of the thesis, based on

the secondary sources of data like RBI and IDBI/SIDBI

publications, publication of Government of Karnataka,

publications of State Level Banker Committee and Annual

Reports of the nationalised commercial banks and KSFC. This

chapter covers the approach of commercial banks towards 5SI

sector before nationalisation and after nationalisation. The

pattern, trends and magnitude of assistance of commercial

banks since nationalisation (1969) are also analysed in this

chapter. Karnataka State Financial Corporation is a premier

term lending institution in the country. Its contribution

 27

towards the growth and development of 55Is in Karnataka is

significant. The operations of K5FC are also analysed in

this chapter. In the end of this chapter a comprehensive

picture of institutional finance to 55Is in Karnataka has

been presented.

Chapter V entitled 'An Evaluation of the Financial

Assistance by Financial Institutions' is structured based on

.he field survey and deals with the impact of assistance and
:he problems of 551 entrepreneurs. 100 small scale

lndustrial units are carefully selected based on parameters

Like location, industry type, type of unit and quantum of

financial assistance. An effort has been made in this
:hapter to assess the impact of financial assistance while

running an 551 concern, the role of background of the

entrepreneur in running the 551 unit and aspects like

problems faced by small-scale units while obtaining loan
from financial institutions, reception and the approach of

financial institutions towards small scale entrepreneurs are

also discussed.

The last chapter provides summary and conclusions.

~ere the high-lights of the study and the policy
recommendations with regard to the institutional finance to
small-scale industries are spelt out.
 ANNEXURE - I

PROFILE OF KARNATAKA STATE

GENERAL :

Districts 20

Sub Divisions 49

Talukas .. 175

Hoblies 745

MandaI Panchayats 2532

Villages 27024

Towns and Cities 427

POPULATION (1991) :

Total Population 4.48 Crores

Rural 3.41 Crores

Urban 1.07 Crores

Density per sq.km. 234

INFRASTRUCTURE :

Electricity generated 12131 mm

Electricity imported 2509 mm

Villages electrified 26363 (98% of

the
total)

Railway route length 2090 kms

Road length 130923 kms

Telephones 3.75 1akhs

Motor vehicle population 14.32 lakhs

Literacy rate 47 per cent

•

29
INDUSTRIES :
Large Scale Industries 217

Small Scale Industries 126000

Number of Registered Factories 7768

Employment in Regd. Factories .• 777000

Empoloyment in Organised Sector 14.56 lakhs

Industrial Estates 104

Industrial Sheds 4286

MAJOR MINERAL RESOURCES :

Iron Ore, Manganese, Limestone, Dolomite

SOURCE 1. Karnataka at a Glance - Directorate of Economics

and Statistics, Government of Karnataka,
Bangalore, 1992.

2. CMIE, Bombay Basic Statistics Relating to

Indian Economy, Vol.II - States, 1992.
 CHAPTER - II

THE ROLE OF SMALL-SCALE INDUSTRIES IN DEVELOPMENT •

SMALL-SCALE INDUSTRIES DEVELOPMENT
DURING FIVE YEAR PLAN PERIODS

2.1 SMALL-SCALE INDUSTRY : A CONCEPT

In India, there was no Official definition of SSI

units, until the Fiscal Commission (1949-50) made a

reference to them. According to this Commission,

"A small-Scale Industry is one which is operated

mainly with hired labour normally 10 to 50 hands -
_ _ _ II

This definition was not comprehensive as it excluded

those industries which were operating by using family

members as the workers.

According to the Committee on Finance for the private

.ector - "Small-Scale Industries are those which are not

integrated with rural economy and in which the investment of

capital and labour are relatively small, i.e., units with

assets between Rs.10,000 and Rs.5 1akhs engaged largely in

the production of articles that are ancillary to or

compititive with the products of the so-called large-scale

industries".2

1. "Report of the committee on finance for the private

sector". Reserve Bank of India. 1954 PP 80-81.

2. Virendra Kumar. Committees & Commissions in India

(1947-73) (New Delhi DK Publishers 1979) P.109.
 31

In 1953-54, the Ministry of Commerce and Industry

invited an international planning team through the courtesy

of the Ford Foundation to report on the measures that could

be adopted to develop small-scale sector. Accepting the

recommendations of the team, the Government of India in 1954

set up - Central Small Industries Organisation and the Small·

Scale Industries Board. While realising the need for

providing Governmental assistance for the development of
SSIs, the Board was initially be-set with the problem of

evaluating a definition of SSIs for the country as a whole

for administering various programmes. The small-scale

Industries Board, at its first meeting held on 5th and 6th

January 1955 adopted the first working definition for

overall planning, coordination and promotion of SSIs in

India. According to this definition an industrial unit

employing less than 50 persons using power and less than 100
persons without use of power and with capital assets not
3
exceeding Rs.5.00 lakhs was considered as small-scale.

As the tempo of the development of SSIs gathered

momentum the definition has been modified. In the year 1960,

the ceiling on labour was completely withdrawn, retaining

the ceiling on capital investment, thereby permitting a unit

irrespective of the number of persons employed to remain as
an S5I.

3. Development Commissioner, Small-Scale Industries,

Government of India, "SSIs in India". 1968. P. 53.
 32

This change was the turning point in the development

programme of SSIs. Due to this, number of SSIs could employ

a large number of workers and undertake a greater volume of

production with the same resources in equipment and capital

outlay. Further the period between January 1960 to December

1977 was marked with the introduction of a new concept of

'ancillary units'. The units which were engaged in

manufacturing components for specified industries needed a

seperate treatment in terms of higher ceiling of investment.

The need for introducing the latest technology in

small-scale sector to improve its competitive strength and

the growing increase in the cost of imported machinery

necessitated a change in the definition of SSIs which was

consequently adopted in 1966. Accordingly, an industrial

unit with a capital investment of not more than Rs. 7.5

Lakhs in plant and machinery is considered a small-scale

unit. For ancillaries, the maximum limit for investment in

plant and machinery has been fixed at Rs. 10 lakhs. In May

1974, the ceiling of investment was raised to Rs. 10 1akhs
for the SSI unit & Rs. 15 lakhs to the ancillary unit.

However, to make the definition as simple as possible

for operational purposes, the Small-Scale Industries Board

 33

appointed a sub-committee to review the definit

and make recommendations. The committee rec

enlargement of the definition to cover small units with

capital assets ranging from Rs.5 lakhs to Rs. 10 lakhs.

Government of India again revised the definition in

1980, with respect to the capital investment on plant &

machinery. It has been increased to Rs.20 lakhs for SSIs and

Rs. 25 lakhs for ancillary units. The ancillary industries

has been defined as follows:

"A unit which produces parts, components sub-

assemblies and tooling for supply against known or

anticipated demand of one or more large units

manufacturing/ assembling complete products and which
is not a subsidiary to or controlled by any large unit
in regard to the negotiation of contracts for the

supply of its goods to any large unit."4

The government in view of the increase in the cost

again (during 1985) revised the definition of SSIs. The

limit on the investment in plant and machinery has been

increased from Rs.20 lakhs to Rs.35 lakhs and for ancillary

units to RS.40 lakhs from Rs.25 lakhs.

4. Ojha.P.D. "Finance for small industries in India,"

Reserve Bank of India Bulletin. November 1982, Vol.3
No.ll, P.934.
 34

Further owing to the persistent demand from the Samll-

Scale Industrialists and also due to increase in the costs

of the machinery, the definition has been further revised.
(in the year 1990). Now, the limit on investment in plant

and machinery has been increased to Rs. 60 lakhs and for

ancillary unit it is Rs. 75 lakhs. Further, another

classification has been made in respect of Export Oriented

Units (EOU). These units (undertake export to at least 30

per cent of the annual production by the end of third year

from the date of commencing production) will be in the SSI

sector if the investment on plant and machinery is Rs. 75

lakhs. 5

With the intention of emphasising how small industries

might differ from large sized undertakings, Bert. F.

Hoselitz lists the following functions of small industires. 6

1. Relatively little specilisation in management.

2. Close personal contact of top management with production
workers.

5. Gazette Notification vide No.S.O. 232 (t) dt. 2-4-91

Dept. of Industrial Development Ministry of Industry
Govt. of India, New Delhi.
6. Hoselitz.B.F. The Role of Small Industry in the Process
of Economic growth, Opcit. P.127.
 R "632. (042 O£)S ~g"1
MUt:.
3S

3. No special bargaining strength in buying and selling.

4. Often a relatively close integration with the local

community and

S. Lack of access to capital.

One of the drawbacks of the 1990 definition is that it

!bnly takes into consideration the .original value of plant

~nd
I
machinery. As a result rich people and members of big

houses and even the monopoly houses are in a

osition to form small-scale industrial units and get all

oncessions. Again the definition is not making any

~istinction between units manufacturing products which are

an keeping with the social and economic priority and the

~roducts which are luxury goods or harmful to health.

In the course of forty years (since the begining

~f planned era), the definition of small-scale industry has

been modified many times. First, it deleted the employment

factor from the point of view of promoting the official

programme under successive plan periods. Secondly, it

joubled the fixed capital by redefining it to include

machinery only in a phased manner. This change has

necessitated the need to off-set the higher cost of

machinery arising out of the rising prices and to a greater

extent the opportunities to small-scale enterprises.

IS [C lI8RARY B&NG&lORE
Aa:. N ~.9_~ Q ~ . __
:J.'1·6 95"
 36

In the light of the above a SSI can be identified with

the following features:

(1) A SSI is one which is labour oriented.

(2) SSIs are those which are not integrated with the

rural economy and are producing normally those

products which are ancilliary to large-scale

industries and generally a non-competitor to the

LSIs.

(3) The major factor differentiating between LSI and

SSIs is the quantum of investment on fixed assets

like land, building and plant and machinery.

(4) The atmosphere in the SSI sector is informal,

close and personal.

(5) Normally the market for SSIs is limited to certain

geographical locations except for export oriented

SSIs.

(6) SSIs generally do not have bargaining strength in

the market and their share in the market and the

prices for their product are determined by the

forces of the market.

 37

(7) Majority of the small-scale entrepreneurs are

first generation entrepreneurs.

(8) SSIs generally depend on external sources for

their financial requirements like financial

institutions and private money-lenders.

2.2 IMPORTANCE, NEED AND PLACE OF SSIs:

The balanced and sustainable growth of the economy

calls for certain minimum level of diversification of the

economy in the direction of the industrial sector. Hence,

SSIs have an important place in the economic life of a

developing country like India. Even in the most industrially

advanced countries like USA, Germany and Japan, these

industries occupy a significant position in their respective

economies. In France about 90 percent of the industrial

establishments employ less than 100 workers each and again

even of these more than 50 percent employ less than 60

7
workers each. In Japan, 'the industrial hub of eastern

world', over 80 percent of the total number of

7. Buchanan.N.S.: International Investment & Domestic

Welfare (New York, Hal! Publishers, 1980) p.84.
 38

establishments employ less than 30 workers.Even in U.S.A.,

small business makes up 92 percent of the total business
establishment. These industries account for 54 percent of

workers and 34 percent of business volume. 8 In England 19

percent of the total out put is from the small-scale sector.

The importance and need of SSIs is all the more great

in a developing economy like India, wherein nearly three-

fourth of the population is depending upon agriculture which

is seasonal one and results in a large-scale unemployment

and underemployment. The best way of dealing with this is to

provide the cultivators with work through the development

of SSIs, so that seasonal unemployment and underemployment

could be minimised.

Along with this, small size of the farms keep the

villagers who own lands idle for about half the year. This

has largely contributed to the low standrard of living

among rural population. SSIs properly organised and

developed will provide profitable employment for the

8. Rastogi.K.M. "Employment Generation through Small Scale

and Village and Cottage Industries," in Planning for
Employment. Ed. by Narayan. D.L. and others (Bangalore,
Sterling, 1980) P.308.
 39

agriculturists during the periods of their enforced idleness

and also make a vital contribution in maintaining their
standard of living. Prolonged and continuous employment of
the massess is the biggest crime against society. Even after

four decades of planned development efforts and massive

investment, there is wide imbalance in the development of

. 9
rural an d urban economles.

It has also been said that when work cannot be

provided through agriculture and migration to urban areas to

be discouraged, the only alternative is to seek avenues of

employment by way of encouraging and promoting village and

small industries on a viable basis. The importance of these

industries has been recognised by the Government of India in

the strategy for growth. Till the end of the Fifth Plan,
these industries were largely looked upon as suppliers of

wage goods. As such these were accorded a less Important

role in the heavy industry based strategy of development

adopted since Second Plan. Their placing in national economy

was further upgraded when it was realised that these

industries could help in solving the problems of poverty,

9. Ibid., P.310.
 40

unemployment and acute shortage of basic necessities as also

in promoting exports.

Industrial policy Resolution of 1956 said - "the

(samll-scale and cottage industries) provide immediate

large-scale employment: they offer a method of

ensuring a more equitable distribution of the national

income and they facilitate an effective mobilisation

of resources of capital and skill which might

otherwise remain unutilised. Some of the problems that

unplanned urbanisation tends to create will be avoided

by the establishment of small centres of industrial

production allover the countryn lO

The significance of small-scale sector is one of the

keys to economic development hardly needs to be emphasised,

where motivation to development is present among the people,

the small sector acts as a stimulant. where motivation is

lacking, it acts as a lubricant.

10. INOUE.K. Industrial Development Policy of India Opcit,

P.47.
 41

Small-scale industries in India accounted for more

than 40 per cent of the country's exports which reflects the
significant position they occupy in the economy of the
~ountry. The Value of production in small and medium

.nterprises was of the order of Rs.143170 crores by

~mploying 438 lakh of people,ll Small industries

hanufactured wide spectrum of consumer and industrial

products numbering more than 7500 Small-scale industrial

i .
lun1ts have contributed substantially to industrial

production. They have contributed about 45 percent of the

~ountry
, s 1n . 1 pro d uct1on.
. d ustr1a . 12

The promotion of small-scale industries has been

'widely recommended as one of the most appropriate means of

developing industry in over populated backward countries.

iJapan is usually held up as the great example of what can be
done in this way.

Hence for a backward region endowed with a typical

pattern of factor endowment. adoption of labour-intensive

11. SIDBI Annual Report. 1991-92, Lucknow.

12. Government of Karnataka. Department of Industries &
Commerce. Kaigarika Varthe. September 1992, Bangalore.
 42

techniques involving low capital cost can only increase

.employment opportunities, reduce regional imbalances and

check migration to urban areas. SSIs no doubt play all the

roles ascribed to it in a developing country, but there is

something more to it. In economies starved of capital and

echnical know how, naturally turn to small industries

hould not be looked upon as an economic compulsion of

ackwardness, but it should be an economic necessity.

Hence, there is no denying of the fact that SSIs play

vital role in activating the resources of the backward

lreas. There is urgent need for fostering the growth of

5mall industries which supplements the income of the

farmers, which is important in an over populated

agricultural economy with disguised unemployment.

l.3 SMALL-SCALE INDUSTRIES AND THE FIVE YEAR PLANS OF

INDIA

It has been demonstrated that the SSIs have

received a step motherly treatment at the hands of British

rulers and have been made to disintegerate. But the national

movement, ever since its inception, strove to protect and

organize them. It was only natural that after independence

the 'paternalistic' and 'protectionist', outlook nurtured by

the national movement with regard to these industries was

 43

~ade the core of the policy of the national government. The

~overnment considered the small-scale sector as an important

~ccessory instrument for attaining the economic and social

pbjectives and evolved a programme for the development of

~hese industries as an integral part of the development of

~he other sectors of the economy.

This approach was first laid down in the Industrial

POliCY Resolution (IPR) of 1948 and was later adopted as the

I
basis of policy in the First Five Year Plan. The same was

~eiterated and further elaborated in the IPR of 1956. It

Isubsequently became a part of the strategy for economic

Idevelopment in the consecutive plan periods.

2.3.1 SMALL-SCALE INDUSTRIES DURING PRE-PLAN ERA:

Moderen SSIs in India were almost non-existent prior

to the Second World War. It was during the war years that a

number of SSIs were established to augment and sustain the

war effort, to relieve pressure and to counteract

inflationary trends in the economy. A number of small-scale

units, especially light engineering job workshops were

established to supply manufactured goods for indigenous

consumption as well as for the allied forces.

 44

After independence, organised efforts were made and a

aomprehensive programme for the development of SSIs was

conceived on the basis of the report submitted by a team of

Ford Foundation experts who were invited to the country.

In the first phase of development of SSIs the accent

.as laid on providing favourable climate conducive to the

.etting up of new units as well as the modernisation and

aationalisation of existing small-scale units. Manufacturing

units in this sector have been protected from competition by

~he better organised large-scale units by providing

ubsidies and preferential excise duties as well as by

Jmposing restriction on the production pattern in large-

~cale units.

Industrial Policy Resolution 1948 and the Ford

toundation Team Recommendations are the other major events

~ith regard to SSIs during the pre plan era. IPR 1948 was
~he basis to frame the First Five Year Plan. It recommended

~ 'Common Production Programme' to ensure both LSI and SSI

bector make their contributions to the total requirement of

~he community. The Ford Foundation International Planning

ITeam on SSIs was invited to formulate plans for the
 45

development of SSIs. It recommended for setting up of 4

regional institutions at Gauhati, Faridabad, Poona and

Madura.

2.3.2 SMALL-SCALE INDUSTRIES DURING FIRST FIVE YEAR PLAN:

During the First Plan, out of a total outlay of

Rs.2356 crores only Rs.33.57 crores (1.4 per cent) was

allocated to VSIs. Out of the total allocations to this

,ector the share of small-scale industires was only Rs.4.4
~r0res (13.10 per cent). A major share was given to khadi

136.63 per cent) and Handloom (36.4 per cent) industries,

village industries got only 8.63 per cent of the total

~.utlay to this sector.

The First Five Year Plan had two fold objective.

-Firstly, it aimed at correcting the disequilibrium in the
economy caused by the war and the partition of the country.
Secondly, it proposed to initiate simultaneously a process
of all-round balanced development which would ensure a
taising national income and steady improvement in living
~~tandards over a period.
 46

2.3.3 SMALL-SCALE INDUSTRIES DURING SECOND FIVE YEAR PLAN:

The principle objective of the Second Five Year Plan

was to increase national income by about 25 per cent over

~he plan period and creation of employment opportunities for

about 10 to 12 million persons. And the emphasis placed on

heavy and captial-goods industries in this plan inevitably

raises the important question of the place of small-scale

sector. It was necessary to economise the capital

requirements of other types of industries and capital

investments in the consumer goods industries would have to

be severely restricted. Large investments in heavy

industries would cause an increased demand for consumer

goods by creating additional income (Mahalanobis Model of

Growth)13
~

The consumer demand from the increased expenditure in

these sectors of the national economy is to be met

substantially by the development of Village and Small

Industries which will not at all make any heavy demand on

the scarce capital resources available within the country

and on the other hand will provide increasing employment

opportunity.

13. Basu. S. K. Place & Problems of Small Industries

(Calcutta/A.Mukherjee & Company, 1957). P.180.
 47

The Planning Commission in its Resolution No. Fy/llCDI

'3/55 dated 25th June 1955, constituted a committee with

.rof.D.G. Karve as Chairman. The Committee was asked to

IIrepare a scheme, industrywise and wherever possible state-

lise for the utilisation of the resources to be earmarked

lIor the purpose of development of VSls. The major

. 14
YJecommendations of the Karve Comm1ttee are to provide

~eans of non agricultural productive employment- to avoid

lechnological unemployment.

1NDUSTRIAL POLICY RESOLUTION - 1956 (OR AN APPROACH TO THE

SECOND FIVE YEAR PLAN):
In the thinking and the formulation of the Second Five

tear Plan also the village and small industries assumed a

-~rominent role. Industrial Policy Resolution (1956) based on

the recommendations of the Karve Committee stated that lack

of technical and financial assistance and suitable working

accommodation, are among the serious handicaps of small

producers.

14. Government of India: D.G.Karve Committee Report, 1955,

p. 25
 48

The two paragraphs of the resolution dealing with this

~ector says that :

In relation to some of the problems that need

~rgent solutions, they offer a method of ensuring a more

.vinsable distribution of national income and they

~acilitate an effective mobilisation of resources of
capital and skill which might otherwise remain unutilised.

Some of the problems that unplanned urbanisation tends to

create will be avoided by the establishment of small centres

of industrial production allover the country. The State has

been following a policy of supporting SSIs by restricting

the volume of production in the large-scale sector by

iifferential taxation. The aim of the state policy will be

to ensure that the decentralised sector acquires

sufficient vitality to be self-supporting and its

development is integrated with that of large-scale industry.

A start has been made with the establishment of industrial

estates to make good these deficiences".15

15. Second Five Year Plan. Opcit. P.443.

 49

OUTLAY :
During the Second Five Year Plan, out of the total
lIutlay of Rs. 4,800 crores, Rs.200 crores was earmarked for

Ihe development of VSIs (4.16 per cent). Out of Rs.200

.rores of targeted outlay, major share was given to Handloom

Industries of Rs. 59.5 crores (29.7 per cent) closely

loilowed by Small-Scale Industries on which Rs. 55 crores
(27.50 per cent) was allotted. The rest was towards Khadi

and Village Industries.

PROGRESS
The progress during the first and second plans of
village and small industries were reviewed in the middle of
the second plan by a number of working groups and
committees. A Special Study Team assessed the working of 25

industrial pilot projects, which were taken up in Community

development blocks. The programme evaluation organisation

also made a study of rural industries in selected community

development blocks. Data collected in the course of these

'tudies and the findings and conclusions reached have been

of considerable value in formulating programmes for the
third plan.
 so

It can be seen from the foregoing paras that adequate

importance was not given for SSI sector in terms of

financial allocation etc. This is mainly because, during

the First Five Year Plan, agriculture got all the importance

and during the Second Five Year Plan large-scale industries

received the prominence. The thinking of the policy makers

at that time was to consider SSI as a supporter to LSIs.

The Planning Commission adopted the 'Mahalanobis Model of

Growth' which envisaged greater role to LSIs by providing

employment and through mass production contributing to the

GOP. SSIs were to play the supportive role by providing the

requirements of the employees of the large-scale sector

i.e., to say SSIs role was limited only to the production of

consumer goods.

2.3.4 SMALL-SCALE INDUSTRIES DURING THIRD FIVE YEAR PLAN

A total provision of Rs. 264 crores is being made in

the public sector for the programmes for village and small

industries as against Rs. 175 crores. It is also proposed

to offer government guarantees for bank loans to small

industries.

Of the total outlay of Rs. 264 crores, Rs. 141 crores

for schemes of the states and union territories and about

 51

ks. 123 crores for the central and centrally sponsored

~chemes was made.

:REDIT AND FINANCE:

Credit facilities which are an essential requirement

)f all village and small industries have to be organised on

a larger scale. A substantial provision has been made for

loans under State Aid to Industries Act to meet the need

~or long and medium term capital as well as working capital.

lowever, the provision which can be made for loans in the

~lan is necessarily limited in relation to the requirements,

~nd the aim to be kept in view is that in increasing measure

~he credit required for village and small industries should

be available from normal banking and financial institution.

Under a pilot Scheme operated by the S8I for

coordinated provision of credit to these industries, the

credit limit sanctioned and in force by the end of March

1961, was nearly Rs.9 crores. A pilot credit Guarantee

Scheme under which government shares with certain specified

banks and other financial institutions risks on loans

granted by them to small industries was introduced in July

1960 and guarantees for loans amounting to Rs. 2 Crores were

issued by the end of 1960-61. To ensure that the credit

 52

~eeds of artisans in rural areas are not overlooked while

~roviding loans under State Aid to Industries Act, it has

been agreed that a portion of the funds to be disbursed

~nder these Act should be earmarked for artisans in rural

lreas and an equal amount for the same purpose should be

~ade available from the budget of Community Development

Blocks.

pROGRESS:

Considerable progress was also made in providing

credit facilities to Small industries from institutional
~gencies. The credit limits sanctioned by the State Bank
increased from Rs. 8.85 Crores at the end of March 1961 to

Rs.70.33 crores by March 1966. Under the credit Gurantee

Scheme of the RBI guarantees for loans amounting to about
Rs.97.42 crores were issued by January 1966 as against about
Rs.2 crores in April 1961. In pursuance of the
recommendations of the Rural Industries Planning Committee
which was constituted in April 1962. 45 Rural Industries

projects have been taken up in selected rural areas. Actual

Expenditure spent in the third plan has been depicted in
Table.2.1.
 53

TABLE - 2.1

ACTUAL EXPENDITURE IN THIRD PLAN

(All India)
(Amount Rs. in crores)

~ctor Planned Actual Percentage of

Expenditure Expenditure Actual Expendi-
ture to Planned
Expenditure

•• Agriculture
Industries
1068
1520
1089
1726
1.96
13.55
I·
J. Village & Small
Industries 264 240 ( -) 9.09

4. Total 7500 8577 14.36

Source: Commerce Annual Number on Industries, 1968, P.306.

It is evident from the above table that the actual

expenditure crossed the planned expenditure in both

agriculture and industrial sectors, but in case of a small

industrial sector actual expenditure is less than the

flanned expenditure.

~.3.5 SMALL-SCALE INDUSTRIES DURING ANNUAL PLANS 1966-69:

During this interim period from 1966-69, Rs.131 crores

~as provided for the development of village and small

~ndustries out of the total outlay of Rs.6800 crores. But

~he actual expenditure was Rs.126.1 crores only which is

 54

l.9 per cent of the total expenditure. The annual plan

~utlay for village and small industries during the Three

~nual Plan Periods can be seen in Table - 2.2.

TABLE - 2.2

ANNUAL PLAN OUTLAY FOR VILLAGE AND SMALL INDUSTRIES

DURING THREE ANNUAL PLAN PERIOD
(Rs. in crores)

Year Total public Outlay for % to

sector outlay VSIs total

966-67 2221 45 2.0

967-68 2242 45 2.07

968-69 2337 41 1.8

I

lTotal 6800 131 1.90

I;ource Mimiographed from the book. "Efficiency of

incentives for Small Industries" (ed) J.C.
Sundesara, lOBI, Bombay, P.6.

~REDIT AND FINANCE :

Under the State Aid to Industries Act the State

Governments disbursed loans amounting to about Rs. 7.56

crores by the end of 1968. The total loans sanctioned by the

SPCs to small scale unts as at the end of March 1968 stood

 55

.t
~urantees
Rs.33.74 crores to 3806 applicants. The RBI issued 36,055

for loans amounting to Rs. crores154.02 during

16
~he same period under its credit gurantee scheme.

To increase the flow of institutional credit to the

~mall secotr, the RBI introduced in Feburary 1968, refinance

'facility to scheduled commercial banks and SFCs at

concessional rates. But after the establishment of lOBI

~nd SIDBI recently, the refinance facility to SFCs and

commercial banks is taken over by these institutions from

,

~BI. To boost exports Small Industries Service Institutes

I(SISIs) supplied information relating to overseas buyers and

~oreign markets to small units. The SSIs engaged in export

~ecause of their size are not in a position to independently

Jndertake overseas market survey. Hence SIS I was

=stablished in all the states with regional offices in

important cities of the state. The major task of the SSI was

to provide necessary information with regard to the

establishment of SSI like - source of machinery. technical

know-how etc .• and also to help SSI units after their

establishment by providing information on potential buyers,

source of raw-material etc.

16. Government of India - Annual Plan Progress Report

Planning Commission, New Delhi. P.55.
 56

2.3.6 SMALL-SCALE INDUSTRIES DURING FOURTH PLAN PERIOD:

The objectives and appoarch in the fourth plan were

drafted by keeping in view the wide range of industries that

are covered by village and small industries. This sector has

been designed to achieve the objectives of widening

employment opportunities, mobilising of resources of capital

and skill particularly in the country side and providing

more equitable distribution of national income.

OUTLAY:

A total outlay of Rs.370 crores in the public sector

has been suggested for the development of village and small

industries. This proposed provision of Rs.370 crores is

exclusive of the outlays made for the development of these

industries in the programmes for community development,

rehabilitation of displaced persons and development of

special areas. Further about Rs.400 crores are expected to

Ibe invested from Private Sources including banking

institutions. Thus, a total outlay of about Rs.800 crores

would be available for small-scale sector under the fourth

plan (of this Rs.120 crores was for SSIs and Rs.25 crores
for the development of industrial estates).

The allocation of Rs.370 crores allocated in the

Fourth Plan was revised to Rs.251.0l crores subsequently.

Finally, out of the total expenditure of Rs.15,779 crores

 57

the amount spent towards the village and small industries

sector was Rs.243 crores (1.54 per cent to total)17.

CREDIT FACILITIES:
In the fourth plan a total outlay of over Rs.290

crores had been made in the public sector for the

development of this sector. Against this, the expenditure is

estimated at about Rs.25C crores. In addition to the outlay

in the public sector, about Rs.560 crores were expected to

be invested from private sources including banking and other

financial institutions. The credit extended by the

commercial banks to small industries (including term loans
""I
.nd advances made to craftsmen and qualified entrepreneurs)
11
rose from Rs.286 crores by June 1969 to Rs.597 cores by June
(~
1972 and to Rs.64 crores by December 1972. It is estimated
that about 18 per cent of the credit advanced by the
1
commercial banks consisted of term loans. The advances by
the SFCs also increased from Rs.7 crores in 1969 70 to

Rs.20 crores in 1971-72. The National Small Industries

Corporation supplied machines on hire purchase terms valued

et Rs.20.8 crores, including Rs.I0.7 crores in 1971-72.

17. Government of India: Draft Fourth Five Year Plan:

1969-74,Planning Commission, New Delhi, P.22S.
 58

The number of units (SSIs) registered on voluntary

basis with the industries directorates of the state and

union territories increased from nearly 2 lakhs in 1969 to

about 3.18 lakhs in 1972 and the total employment in these

units was estimated to be at 41.4 lakh persons. A further

list of 77 items was added to those reserved for exclusive

aevelopment of the small-scale sector bringing the total to

124.

And there was a substantial increase in the flow of

institutional credit for these industries. The Credit

Guarantee Scheme administered by the Reserve Bank was

further extended and liberlised. A total fo 183 credit

institutions including all the major commercial and co-

operative banks and the SFC's have joined the scheme.

2.3.7 DEVELOPMENT OF SMALL-SCALE INDUSTRIES DURING FIFTH

FIVE YEAR PLAN:

The Fifth Plan emphasised that small industries had an

important role to play in the removal of poverty,

disparities in income and wealth and removal of regional

imbalances. The sector had definite potential for providing

increasingly large employment opportunities with relatively

J
smaller capital investment. During the Fifth Five Year Plan,
~
 59

the emphasis was on the development of SSI and their role as

ancilliaries to large undertakings. The combined development

programmes of the Centre, States and union territories were

expected to create additional jobs for 15-16 lakh persons.

For the purpose Rs.611 crores was earmarked. In addition to

this about Rs.I050 crores was expected to have been invested

from private sources including banking and financial

institutions. Thus, an amount of Rs.166 crores was provided

for the development of small-scale sector during the Fifth

Plan. The Fifth Plan emphasised that small industries have

an important role to play in the removal of poverty,

disparities in income and wealth and removal of regional

imbalances. The sector has definite potential for providing

increasingly large employment opportunities with relatively

.maller capital investment. The progress made during this

~lan period was not encouraging due to various facters

aainly due to inflation and political disturbances. But the

progress made in the field of providing infrastructural

facilities to SSI sector was satisfactory.

The Fifth Plan could not continue its full term due to

the changes that took place at the Union Government in

January 1977. The plan was scrapped by the Janata Government

in 1977 and in its place the Rolling Plan was introduced.

 60

In the six years period 1974-80, the estimated value

of production registered a growth rate of 6.8 per cent p.a.

The gross value added at factor cost rose from around

Rs.2800 crores in 1973-74 to Rs.4100 crores in (at 1979-80

18
1979-71 prices) registering a growth rate of 6.6 per cent.

Table - 2.3 below shows the physical progress of VSIs

during 1973-74 to 1979-80.

TABLE - 2.3

PHYSICAL PROGRESS OF VSIs DURING 1973-74 TO 1979-80

Output Employment Export

(Value in Rs. (Lakh Persons) (Rs.in
Crores) Crores)
1973-74 1979-80 1973-74 79-80 1973-74 79-80

1.Modern SSIs 7200 19060 39.65 64.60 538 1050

2.Traditioa1
Village
Industries 2183 4419 102.21 132.84 362 1175

Source: Yojana. 31st July 1982 Vo1.23/13.8. P 17.

18. Basic Statistics Relating to the Indian Economy, Opcit.

P.149.
 61

It can be seen from the Table 2.3 that modern

~xercise during the plan period increased from 7200 to

L9060 and the employment in this sector rose from about 40

lakhs to 65 lakhs and the contribution to export doubled

from Rs.538 crores to Rs.l050 crores.

CREDIT AND FINANCE:

Inspite of the credit expansion (from about Rs. 250

crores in 1973-74 to about Rs. 600 crores in 1979-80), the

share of the 'tiny' units with investment of up to Rs. 1

lakh has been very little. According to a survey conducted

by the Reserve Bank of India, of the units financially

~ssited by the commercial banks up to June 1976, about 69

~er cent of the total credit flow was availed by 11 per cent

~f the bigger units in the small industries sector which

accounted for 55 per cent of the production. Taking into

account the units which could not have access to
~nstitutional credit the disproportionate supply of credit
~ecomes more pronounced.

Another important development during this period has

been the establishment of District Industries Centre (DICs)

~s an umbrella for the development of SSIs.

 62

DISTRICT INDUSTRIES CENTRE (DIC):

The District Industries Centre programme was launched

~n first May 1978 by the Government of India as a focul

~oint for promotion of small, cottage and village industries

to provide all services and support to the decentralised

.ector under a single roof at pre-investment, investment and
lost-investment stages.

The District Industries Centre Programme as a

entrall Y sponsored scheme in contrast to the previous

l
, ttempts made in the field of rural industrialisation and
lural employment envisaged providing to the SSIs and to the

prospective entrepreneurs, all the asistance required for

developing existig industries or supporting the new one

under one roof at the district level itself so that the

delays and difficulties faced by the industrialists and

entrepreneurs were solved locally. Under this scheme of DIC,

the entrepreneurs were to get all special assistance from

one agency, suitable power was to be delegated by the

several departments of the State Government to the District

Industries Centre so that entrepreneur got all the

assistance from the DIC. Of the 420 districts in the country

380 were covered by DIC scheme during 1981-82.

 63

~.3.8 SMALL-SCALE INDUSTRIES IN THE SIXTH FIVE YEAR PLAN:

Promotion of SSIs continued to be an important element

In the development strategy because of its favourable

capital out put ratio and the high employment intensity.

Loans advanced by commercial banks during the plan period

increased-from about Rs.686 crores in March 1973 to about

Rs.2633 crores by December 1979. The assistance from co-

operatives increased from Rs.14 crores in 1973-74 to Rs.58
~rores in 1979-80. The RRBs granted loans to the extent of

Rs.45 crores. The SFCs had sanctioned term loans to the

tune of about Rs.702 crores by March 1989. The RBI continues
to operate the credit guarantee scheme for SSIs. The target
,__.J-or priority sector for lending the commercial banks was

increased from 33 per cent to 40 per cent.'

A public sector outlay of Rs.1780.45 crores has been

provided for the development of VSIs during the Sixth Five

~ear Plan. The total outlay of the Sixth Five Year Plan was

Rs.97,500 crores. The outlay on VSIs constituted about 1.82

;per cent of the total outlay.

The production from the SSI sector increased from

Rs.33,538 crores in 1979-80 to Rs.63,790 crores in 1984-85

and exports from Rs.2,280.62 crores in 1979-80 to

 64

Rs.4,557.56 crores in 1984-85 at current prices. With

regards to employment, it has increased from 233.72 lakh

19
persons in 1979-80 to 315 lakh persons in 1984-85. Within

the manufacturing sector this represents about 80 per cent

of the total industrial employment. However, some of the

long-term objectives set for the VSI sector are still to be

achieved. The growth and development of this sector has been

constrained by several factors like technology obslescene,

inadequate ~nd irregular supply of raw materials, lack of

organised marketing channels, inadequate availability of

credit and defficient managerial technical skills, etc.

2.3.9 DEVELOPMENT OF SMALL-SCALE INDUSTRIES DURING THE

SEVENTH FIVE YEAR PLAN:

The SSI sector has played a vital role in the

jevelopment of the economy and still there is scope for

increase in production and productivity in this sector. To

facilitate modernisation and achieve rapid growth in this

~ector, the upper limit on the investment on plant and

machinery has been raised in respect of small scale units

;19. Government of India: Draft Seventh Five Year Plan.

Planning Commission, New Delhi. P 98.
 65

from Rs. 20 lakhs to Rs. 35 lakhs and in the case of

auxilliary units from Rs. 25 lakhs to Rs. 45 lakhs.

Promotion of industries in this dispersed sector primarily

falls within the responsibility of the State Governments.

The centre, however, supplements their efforts.

Within the overall objectives of food", work and

productivity laid down in the Seventh Five Year Plan, this

sector would contribute towards improving the economic and

occupational profile of rural, semi-urban and weaker

sections of urban communities through promotion of VSls.

2.3.10 SMALL-SCALE INDUSTRIES IN THE EIGHTH FIVE YEAR PLAN:

The plan proposes a growth rate of 5.6 per cent p.a.

on an average during the plan period. The level of national

investment is proposed at Rs. 798 crores and Public Sector

outlay is proposed to be at Rs. 4,34,100 crores.

Acceptance of significance of Industialisation has

been a basic tenet of policy in India during all these years

since the Second Five Year Plan. But for this we would not
have had the capital goods base that we have, the highly

diversified nature of our industrial sector that we see and

the skills and the technical know-how that we possess to

day.
 66

The outlay on VSls will be Rs.4778 crores (Rs.34,075

crores for large and medium industries) The significant

departure in 8th plan is in respect of the distribution of

investment in both the public and private sectors in view of

the shift in economic policy, placing greater reliance in

the market. The private sector is expected to shoulder a

greater responsiblity in investment.

After going through the approach paper on Eighth Plan

it appears that the Eighth Five Year Plan is less fussy

about targets and more about such industrial restructuring

as could automatically make for better use and enlargement

of resources in industrial sector through the spurt of

private enterprises and initiative including foreign

•investment.
 67

2.3.11 AN OVERVIEW OF THE PROGRES S AND GROWTH OF SMALL-SCALE

INDUSTRIES SINCE THE FIRST FIVE YEAR PLAN:

(1) Growth of SSIs:

The following table traces the growth of Small-Scale

!

lndustries since 1960.

TABLE - 2.4

GROWTH OF SMALL-SCALE INDUSTRIAL UNITS IN INDIA

1960 1970 1980 1985 1990

1. Number of
units (lakhs) 0.36 2.82 8.74 13.55 19.40

2. Investment
(Rs. crores) 279.58 697.00 5850.00 9585.00 18196.00

3. Employment
(lakh persons) 21.59 36.70 71.00 96.00 126.26

4. Gross output
(Rs.crores) 1426.50 4860.00 21635.00 501520.00 143170.00

5. Exports
(Rs.crores) NA* 393.00 1050.00 2350.00 9100.00

Source: CMIE. Basic Statitics Relating to Indian Economy

Vol.I. All India. Aug.1992.

* NA Not available.

It is clear from the Table - 2.4 that there is a

phenominal increase in the number of registered units. The

number increased from 0.36 lakhs in 1960 to 2.82 lakhs in

1971 and to 8.74 lakhs in 1980 and 19.40 lakhs in 1990.

 68

Similarly there has been an increase in respect of

~mp1oyees in this sector. In the year 1960 only 22 1akh

people were working in the Small-Scale Industrial units.

~his has increased to 36.70 lakhs in 1970 and 71 1akhs in

J980 and 126 lakhs in 1990. In case of investment there is a

~ompound average annual growth rate of 13.8 per cent. On

.ccount of increase in employment and investment the

production also went up. The production increased at a
I
~ompound average annual growth rate of 20 per cent. The

~xport from SSIs also have shown an remarkable increase from

pust Rs.393 crores in 1970 to Rs.9lOO crores in 1990 with an

~verage annual compound rate of increase of 4 per cent.

A complete position of small industry's development

~dnnot be easily portrayed because registration with the

State Directorate of Industries and Commerce or with any

~ther authorities is not compulsory in the case of small

-Lndustries. It becomes obligatory only when the small

~ndustries sought some assistance or facility from the

~overnment. There are according to some estimates at least

~alf the number of registered small industries in the state

kunctioning without seeking any assistance from the

;overnment.
 69

Illustration - 2A

Growth of 55I Units in India

Numbsl'll (in lalchl)

25~-------------------------------------------------,

20 ............................................................................................................................................... .

15 .....................................................................................................................

10

5 ............................................................. .

o L--________
1960 19)'0 1QBO 1985 1GG0
Years
 70

Illustration - 2B
Growth of Investment on SSIs in India

A.mount (Rs. in 'Thousand Crores)

20r---------------------------------------------~

15 ..................................................................................................................... .

10

5 ........................................................... .

1960 19)10 1980 19a5 1990

Years
 71

Illustration - 2C

Growth of Employment in SSIs in India

Penon. (in lakb.)

140r-------------------------------------------------

120

100

BO

60 ............................................................. .

40

20

o
1960 uno 1980 1985 1990
Years
 72

Illustration - 2D

Production from the SSI Sector in India

Amount (RII. in Thoulland Crorall)

200.------------------------------------------------------.

150 .................................................................................................................................................

100 .....................................................................................................................

50 .........................................................................................

oL-------~. . . .--
1980 Hno 1gaO 1985 1990

Years
 TABLE - 2.5

PLAN EXPENDITURE FOR VILLAGE AND SMALL SCALE SECTOR

(Rs. in Crores)

I II III 3 Annual IV V VI VII

Plan Plan Plan Plans Plan plan plan plan

1. Plan Expenditure
a) Village & Small
Industries 31.2 180 241 132.55 292.53 535.98 1945.00 3249.00
....,
b) of this SSIs 5.2 44.4 86.12 39.35 104.25 221.74 616.10 1137.15 w

2 • Total Plan
Expenditure 1960.00 4672.00 8577.00 6625.00 15779.00 39426.00 109292.00 218730.00

3.l(a) as % of 2 1.59 3.85 2.80 2.00 1.85 1.35 1.77 1.48

4.l(b) as % of 2 0.26 0.95 1.00 0.59 0.66 0.56 0.56 0.51

SOURCE: The Second, Third,Fourth and the Sixth Five Year Draft Plan and also The Economic
 74

(2) Financial Outlay in different Plan Period:

Table - 2.5 shows the actual expenditure towards SSIs

in different plan periods.

The table above shows, the share of plan

expenditure of village and small-scale sector for the entire

plan period. Eventhough t.here is gradual increase in the

total allocations to this sector over the period in absolute

figures from Rs.5.2 crores in the First plan to Rs.616

crores in the Sixth plan and Rs.1137 crores in the Seventh

plan, the percentage share of this sector to the total

expenditure is always less than I per cent (except during

the Third plan). This shows the difference in the ojectives

and principles spelt out and the actual expenditure.

2.4. CONCLUSION
All the plan documents express similar feelings and

specify the measures taken or intended for the small-scale

sector. These feelings, however, do not appear to be matched

~y the relative allocations for this sector. It may be

~oticed that the Second and the Fifth Five Year Plans in
terms of public sector outlay, were nearly 2.5 times each

Ithe size of their respective predecessors. The other plans

~ere each 1.8 times the size of their respective

 75

Fredecessors. Of the plans for which the data on actual

expenditure on village and small industries are presented,

\he expenditure of 1.59 per cent is the lowest and 3.85 per
cent is the highest. The importance of public sector as

judged by the relative allocation of public sector outlay

and total outlay, including primary investment is, thus,

actually less in the draft plans than every earlier plans.

Eventhough the financial allocation were meagre, the

development of small sector gained momentum during these

period. Between 1956 and 1979 a number of committees were

formed to study various aspects of this sector. Based on

their recommendations several measures were taken for
improving the sector. The definition of a small unit was

revised from time to time to get more number of units into

fOld. There is a considerable increase in the number of

rmall units, the investment and employment opportunities in

this sector from plan to plan.
 76

2.5 DEVELOPMENT OF SMALL-SCALE INDUSTRIES DURING VARIOUS

PLAN PERIODS OF KARNATAKA (FIRST FIVE YEAR PLAN TO
EIGHTH FIVE YEAR PLAN):

Small-Scale Industries During First Five Year Plan of

Karnataka:
In Karnataka First Plan was adopted only to old Mysore

and Bellary. During the plan period Heavy and Medium

Irrigation Projects were given first priority. Of the total

outlay of Rs.196.89 lakhsh only Rs.122.96 lakhs was spent

accounting to 60.2 per cent of the total outlay. The fund

provided for industries was 4.1 per cent of the total First

Plan outlay of which only 3 per cent was spent. 20 During the

plan period importanc was given for the development of

sericulture. Since the First plan was modest beginning and

"\s there was no complete reorganisation of the State,

industrial investment was very much restricted during the

period.

2.5.1 SMALL-SCALE INDUSTRIES DURING SECOND FIVE YEAR PLAN OF

KARNATAKA :

The number of units with authorised capital of less

than Rs. 5.00 lakhs increased during 1957-61 by about 1160

20. Puttaswamaiah.K. Economic Development of Karnataka (New

Delhi, Oxford and IBH, 1980), p.558.
 77

in Karnataka. The programme for Small-Scale Industries as a

whole is estimated to have provided full-time employment to

about 3 lakh persons.

In Karnataka the Second Plan was inagurated on 1st

April 1956. The new state of Mysore was formed 7 months

later. It therefore, became necessary to draw the plan

afresh after integration. It could not fully integrate the

various development programmes in line with the needs and

potentialities of the State. The total outlay planned was

Rs.145.l3 crocres (reduced to Rs. 136 crores because of the

~duction of the National Plan size itself).

The plan outlay for the development of industries was

Rs. 10.39 crores and actual expenditure incurred was Rs.

7.36 crores. An amount of Rs. 12.25 lakhs has been provided

to Cottage and Small-Scale Industries under the State Aid to

Industries Act. 2l There were unavoidable delays

administrative difficulties and shortages of technical

personal and equipment owing to the reorganisation of State.

21. Government of Mysore: Finance and Accounts 1956-57,

P.74.
 78

2.5.2 SMALL-SCALE INDUSTRIES IN THE THIRD FIVE YEAR PLAN

OF KARNATAKA:
The Small-Scale industries were provided Rs. 213.80

Lakhs during the Second Plan and this provision is raised to

Rs. 442 Lakhs for the Third Plan. The continuing scheme

involve an outlay of Rs. 297 Lakhs. They include the

aetting up of Industrial Estates with a provision of Rs. 135

!
Lakhs. It is expected that there will be 8 to 10 Industrial

~tate established during the period.

The total outlay on VSIs is Rs.13l5.20 Lakhs as

22
c,pmpared with the Second Plan provision of Rs. 680 Lakhs.

On the basis of total expenditure incurred during the

third Plan Period on development of small industries

~cluding the investment from private sources, it is

~timated that part time and fuller employment was provided

for about 8 million persons and additional whole time

23
~ployment for about 6.3 lakh persons. By March 1965, 154

Industrial Estates have started functioning providing

22. Government of Mysore: Third Five Year Plan, Planning

Department. Bangalore, P. 43.

23. Government of Mysore: Fourth Five Year Plan. Planning

Department, Bangalore, P. 228.
 79

~commodation to about 2585 units with an annual turnover of

~out Rs. 60 Crores worth of products and providing

24
employment to nearly 46,000 persons.

2.5.3 SMALL-SCALE INDUSTRIES DURING ANNUAL PLAN (1966-69) OF

KJ\RNATAKA:

In Karnataka during the Annual Plan period, Industrial

Area Development Board (KIADB) was constituted and this was

with a view to overcome the procedural difficulties in the

lifquisition of lands.During the Three Annual Plan periods,

thdustrial Estate Programme was taken up vigorously. The

Gbvernment announced number of incentives like relief from

Octroi, reservation of Government purchases for products of

-tw industries.

2.5.4 INDUSTRIAL POLICY IN THE FOURTH PLAN OF KARNATAKA:

• There is a feeling that the industrial development in

the State has lost momentum. This was partially due to the

shortage of power in the State. The shortage of power in the

,4
8tate being one of the reasons as to why Karnataka lagging

behind other States, and the other being the absence of the

clearly spelt out scheme of incentives to new industries.

I
".~

24. Ibid.
 80

Keeping these things in view the State Government

Innouced important concession and incentives which would be

.vailable to new industries.

I. Sales tax - A cash remission will be allowed on sales

tax paid by a new industry on rawmaterials purchased

by it for the first five years from the date the

industry goes into production.

II. Octroi - Government will urge all municiplities and

city corporations to exempt raw materials, building
materials and capital equipment needed by new

industries from payment of Octoroi for a period of

five years from the date industry goes into

production.

II. Power - All new industries will be exempted from the

payment of electricity tax.

II. Land - The fine leviable by the Revenue Department for

converting agricultural land to non-agricultural

purpose will be waived off. Land will be made

available by the Mysore Industrial Area Development

Board on Hire Purchase terms with the total value

being recovered in ten years time.

 81

PLANNED DEVELOPMENT IN NEW MYSORE:

In pursuance of policy guidelines, the state

t.i
Iovernment drew up various promotional schemes within five

~ar plan frame work for improving the competitive strength

of small-scale sector in Karnataka. Table 2.6 shows the

total outlay for the Fourth Plan.

TABLE - 2.6
OUT-LAY IN FOURTH PLAN
(Amount in Rs. Lakhs)

Third Plan Fourth Plan outlay

fctor expenditure
(actuals) Approved Expenditure
outlay anticipated

ricultural
ogramme 6668.80 1394.00 1431.14

dustry and
ning 1547.67 181.00 189.00
of which VSIs 409.00 70.00 71.00
Total 26413.25 5071.29 5546.97

Source: Fourth Five Year Plan; Government of Mysore. P.86

CREDIT AND FINANCE:

The credit facilities available to SSIs have increased

considerably during the past few years and it is the

declared policy of the State Bank of India and other

 82

commercial banks with the support of the Reserve Bank to see

.rat no productive activity in this sector is handicapped

~r want of finance. As the need for organising and

developing VSIs on co-operative basis was emphasised by the

&Dvernment of India in Industrial policy resolution of 1948

Ihd 1956, the State Governments have accepted the three
major sources of financing viz., the co-operative banks the

commercial banks - the state financial corporatations.

Commercial banks after the State Bank of India's pilot

scheme have already started financing village and small

industries. The State Apex bodies like Small Industries

Development Organisation (SIDO) , National Small Industries

CQrporation (NSIC), and State Financial Corporations are

providing long-term finance to the small-scale industries.

The provision for village and small-scale ·industries

for the fourth five year plan underwent a revision and the

outlay which was initially at Rs.14 crores was brought down

to Rs.8.25 crores as the entire plan outlay was scaled down

to Rs.350 crores. 25

25. Government of Mysore: Draft Fifth Five Year Plan

(1974-79) Planning Departm~e~n~t~,~-B~a~n~g~a~1-0-r~e~.~p~.-4~1~1~.~~~~
 83

Under the State Aid to industries Act, financial

aSslstance by way of loans to these 11 backward districts

for 1970-73 is shown in Table below:

TABLE - 2.7

FINANCIAL ASSISTANCE TO BACKWARD DISTRICTS UNDER

STATE AID TO INDUSTRIES ACT

laar No. of Cases Amount

•
~70-71 149 17,81,727

a71-72 131 8,80,487

.72-73 42 3,42,199
I
322 30,04,413

Furce: JC Sandesara-Efficiency of Incentives for Small

Industries, lOBI, Bombay.1983. P.71

15.5 SMALL-SCALE SECTOR IN KARNATAKA' S FIFTH FIVE YEAR PLAN:

It has been stated in the strategy of the Fifth Plan

)r village and small industries that "these industries are

of considerable importance for expanding the opportunities

of productive employment to the underemployed, the very

 84

1ly employed and unemployed, both in urban and rural

. .
is ~nclud~ng b ac k war d areas.
" 26

The total outlay proposed for the village and small

~ndustries sector is Rs.21.S crores during the Fifth Plan.

tf this Rs.12S0. lakhs was towards SSIs and Rs. 100 lakhs

~owards the development of industrial corporations.

The main objectives of the programme for the

,evelopment of these industries during the preceeding plans

~ere to create large-scale employment opportunities, promote

lecentralisation and dispersal of industries, development of

Igro-based and ancillary industries, development of

Infrastructure facilities like credit and finance,

Improvement of the skills of artisans and the quality of

Iheir products and step up the production of consumer goods

Ind essential articles to the mass and those have large

lotential for export.

The main thrust of the programmes has been the

Ireation of infra structural and promotional facilities for

.he development of these industries.

~. Draft Fifth Five Year Plan, Opcit, P.4l4.

 85

Inadequacy of complete up-to-date statistics for these

Industries particularly the traditional rural industries

1IuCh as Food products, Beverages, Tobacco and Tobacco

'roducts, Furniture and Fixtures, Wood products and Leather

Ind Coir products is a handicap for assessing physical

.rogress of the development programmes undertaken so far in

~chieving the objectives and strategy envisaged in the

Ireceeding plans. However, the progress of promotional

Itctivities of these industries in Karnataka during the plan

Iteriod was impressive.

1.5.6 SMALL-SCALE INDUSTRIES IN KARNATAKA'S SIXTH PLAN:

Karnataka's Sixth Plan has difficulties towards the

luller utilisation of the potential resources ~d

lapabilities, removal of regional imbalances and elimination

of unemployment.

The industrial progress in the state has been

adversely affected by the power and energy cuts as well as
by problems connected with raw-material and labour.
larnataka's performance in the industrial field does not

compare well with industrial states like Maharashtra, West

Bengal, Gujarath and Tamil Nadu. There is also a tendency in

the state to adopt highly capital and power intensive

industrial units.
 86

Karnataka has the potential to grow at a faster rate

~ringing equitable income distribution. The magnitude of

;he addi tion to the labour force each year, the resource

fonstraints and the rate of inflation seems to prevent

letting our sights at much higher level. Against this

aackground and in order to achieve the above said

Ibjectives, it is estimated that the jtotal investment of

~s. 4545 crores would be necessary in the plan period of

~980-85. Of this Rs. 2500 crores will be the state public

~ector investment. The table below lindicates the sectoral

,utlay for the Sixth Five Year Plan of Karnataka.

 87

TABLE - 2.8

SECTORAL OUTLAY FOR THE SIXTH FIVE YEAR PLAN OF KARNATAKA

51. Sector Amount

R(> •
, Rs.in Crores

01. Agriculture and Alliied services 366.50

(14.66)

02. Co-operation 50.00

(2.00)

03. Irrigation & Power 1149.55

(45.98)
04. Industry and Minerals 164.00
(6.56)
Social and Community Services 612.00
(24.48)
Others (Transport & Communication,
General & economic Services) 157.95
(6.32)

Total 2500.00

NOTE: Figures in bracket are the percentage share of the

sector to the total.

It can be observed from the above that the top

priority has been given to power, irrigation and
agriculture.

The Table - 2.9 presents the outlay by major heads of

development with regard to industries and minerals.
 88

TABLE - 2.9

SIXTH PLAN OUTLAY BY MAJOR HEADS OF DEVELOPMENT FOR

INDUSTRIES

Sl. Head of development State Plan Outlay

No. (Amt. Rs. in lakhs)

01. Industries 8000.00

02. VSIs 3300.00

a) Industries Development 3300.00
b) Sericulture Development 4800.00

Sub Total VSIs 8100.00

03. Mining 300.00

04. Total (Industries minerals) 16400.00

Of the above, the outlay for SSIs is Rs.lOS.OO lakhs

and the outlay for the development of industrial estates is

Rs. 400.00 lakhs.

2.5.7 SMALL-SCALE INDUSTRIES AND SEVENTH FIVE YEAR PLAN OF

KARNATAKA

The state had started with a weak industrial base at

the time of re-organisation of states. But the state has

achieved significant industrial development over the years.

The long-term growth achieved in the industrial production

in the state is marginally higher than that of all India.

The industrial production (manufacturing) contributed nearly

 89

one fifth of the state income in the state and the share of
Karnataka in the total income from the manufacturing sector

of all states stood at 6.7 per cent in 1988-89. There are

about 650 large and medium industries in the state with an

investment of Rs 4500 crores, and providing employment to

about 3.5 lakhs persons. In the Small-Scale Sector there are
more than a lakh of small-scale units in a wide array of
manufacturing activities with an investment of about Rs 858

crores and employing more than 7.5 lakhs persons. As per the
annual survey of industries, the share of the state in

registered factories in the country was 5.6 per cent in

1987-88, share in employment 5 per cent and the share in the

value of out put 4.3 per cent. The real percapitastate

domestic product in manufacturing sector in Karnataka in

1988-89 was Rs. 401.5 compared to Rs.325.2 for all the

states at 1980-81 price. 27 The major thrust in the 7th plan

for industrial development aims at the creation of
productive employment opportunities Government support for
this will focus on promotional measures, subsidies and
infra structural support.

Government of Karnataka : Draft Seventh Five Year Plan ,

Planning Department, Bangalore. P.37
 90

A total outlay for this sector is Rs.268.26 crores

comprising Rs.147.l8 crores for VSIs and Rs.12l.08 crores

for Sericulture. This is against the total outlay of Rs.5500

crores.(6th plan outlay was Rs. 2265 crores and expenditure

was Rs 2678.14 crores).

In the small-scale sector more than 10,000 units were

set-up on an average per yer during the 7th plan period and

the same level is anticipated to be maintained during the

coming years. Table - 2.10 indicates the growth of Small-

Scale Industries in terms of number of units and employment

' 1uring the Seventh Plan period and during 1990-92.

TABLE - 2.10

GROWTH OF SSIs DURING SEVENTH PLAN AND 1990-92 PERIOD

~l. Item Unit 7th Plan 1985-90 Annual plan 90-92

~o.
Target
Achieve- Target Achieve-
ment ment
-----------------------------------------------------------

~. Units setup Thousands 56.00 52.85 20.00 10.88

~. Employment Lakh
persons 3.24 2.72 1.08 1.08

Source: Draft Eighth Five Year Plan 1992-97. Annual

Plan 1992 93 vol.l Planning Department,
Government of Karnataka. December 1991 P.I-18.
 91

2.5.8 SMALL-SCALE INDUSTRIES IN KARNATAKA'S EIGHTH PLAN

(1992-1997)
The approach of the Government of Karnataka towards

SSIs in the Eighth Plan is broadly based on the Industrial

Policy announced by the Government during September 1990.

The Policy has stressed the importance of curbing the

imbalance that have arisen and to exploit the strengths, the

state offers for industrial development. The policy

highlights the development of growth centre with

comprehensive infrastructure facilities. The policy has

further indicated that in order to achieve the desire goals,

package of incentives and concessions also will be

restructured suitably to ensure that the entrepreneurs of

the state are well placed and also oriented towards the

development of backward areas in the state. Accordingly, the

state has been divided into 4 zones (with taluk as a unit-

earlier for this purpose the district was considered as a

~,:;
unit) viz. , Zone I-Industrially most forward taluks
':i\
.Bangalore Urban, Mysore City Corporation limits). Zone II
_~Industrially forward taluks (380 taluks of the state). Zone

III-Industrially backward taluks (128 taluks) Zone IV-

Industrially most backward taluks (9 taluks including 3

c<'rowth centres at Raichur, Dharwar and Hassan) 28 .

28. Vide G.O.No.C&I.138.S0C-90 Dated 12.9.1990.

 92

The special features of the new package of incentives

and concessions are:

a) Investment subsidy

b) Sales Tax exemption

c) Exemption of stamp duty

d) Concession to Special category of entrepreneurs.

This policy of the Government and the incentives

package adopted in the year 1990 were to have been valid for

a period of 5 years i.e. till 30.9.1995. But major

structural reforms have been brought about in the economic

industrial and trade policies by theGovernment of India. As

a fall-out of this, there is a necessity of revised

Industrial Policy. The major highlights of this policy are:

1. Reclassification of developed and developing areas

which are industrially developed and have concentrated

industrial activities have been classified as Zone I

developed areas (Bangalore South land North Talukas

and Bangalore Urban and Agglomeration area)29, all

other remaining parts of the state, will be treated as

Zone II developing areas, then 3 growth centres being

setup in the state viz., Hassan, Dharwad and Raichur

and has been classified as Zone III.

29. Vide G.O.No. C&I 140 SPC 93, Dated 12.7.1993.

 93

2. Tiny and Small Units establilshed in the Zone II,

developing areas will get 25 per cent of investment
subsidy 30 and the value fixed assets with a ceiling

of Rs. 25.00 lakhs. Tiny and Small-scale industries

being established in the Zone III centres will get 30

per cent investment subsidy with a ceiling of

Rs. 30.00 lakhs.

3. The thrust sector industries like Electronics,

Telecommunication, Informatics, Readymade Garments and

Sericulture based industry will get an additional 5

per cent investment subsidy subject to a ceiling of

Rs. 5.00 lakhs.

4. An additional investment subsidy of 5 per cent (a
ceiling of Rs. 1.00 lakhs) of the value of fixed

assets is offered to SC and ST, Minority community,

physically handicapped and ex-servicemen.

The total investment of Rs.18826 lakhs is envisaged

for the VSI Sector during the Eighth Plan Period.

30. Ibid.
 94

2.6 AN EVALUATION OF THE DEVELOPMENT OF SMALL-SCALE

INDUSTRIES IN KARNATAKA DURING THE PLAN PERIODS:

In the paragraphs below an effort has been made to

trace the financial allocations made towards VSI sector

compare to the growth in SSIs in the state in terms of

number of units, investment and employment.

(1) Financial Allocations:

Table - 2.11 depicts the financial allocations made to

VSls compared to other sectors like industry and agriculture

and also to the total expenditure.

One of the disheartening factor one can feel after

looking into the table above is that rarely the estimated

outlay towards SSIs has been completely spent and the

expenditure towards SSI is very negligible compared to other

sectors of the economy.

(2) Growth of SSIs in Karnataka:

The Table-2.12_ vividly presents the yearwise growth

of small scale industries since 1969-70.

The Table - 2.12 provides the trends in the growth of

SSI sector in the state in terms of number of units,

 PLAN EXPENDITURE on VSIs IN KARNATAKA

(With comparison to other Sectors)

(Amount Rs.in Crores)

I II III 3 Annual IV V VI VII VIII +

Plan Plan Plan Plans Plan Plan Plan Plan Plan

1. VSIs 0.63 5.01 4.11 7.29 5.70 8.16 26.00 26.80 188.26

2. Industry 1.23 12.10 15.28 8.41 16.95 51.50 281.91 340.58 544.33
\D
VI

3. Agriculture 4.28 7.39 8.77 4.17 10.17 129.33 345.66 353.68 799.32

4. Total 40.54 145.13 264.14 179.78 287.94 SS4.69 2652.73 2922.84 11000.00

S. (l)As , of(4) 1.55 3.45 1.55 4.00 1.97 1.47 0.98 0.91 1.71

SOURCE: 1. Karnataka State Gezetteer 1980 P. I. P 833

2. Karnataka State Draft Fifth FYP p. 6

3. Basic statistics relating to Indian Economy. 19S0-51 To 1980-81 Vol. 2 States

p. 148-9.

NOTE: Figures in brackets indicate the outlay.

+ Outlay
 PLAN EXPENDITURE on VSIs IN KARNATAKA

(With comparison to other Sectors)

(Amount Rs.in Crores)

I II III 3 Annual IV V VI VII VIII +

Plan Plan Plan Plans Plan Plan Plan Plan Plan

1. VSIs 0.63 5.01 4.11 7.29 5.70 8.16 26.00 26.80 188.26

2. Industry 1.23 12.10 15.28 8.41 16.95 51.50 281.91 340.58 544.33
\0
VI

3. Agriculture 4.28 7.39 8.77 4.17 10.17 129.33 345.66 353.68 799.32

4. Total 40.54 145.13 264.14 179.78 287.94 554.69 2652.73 2922.84 11000.00

5. (l}As % of(4) 1.55 3.45 1.55 4.00 1.97 1.47 0.98 0.91 1.71

SOURCE: 1. Karnataka State Gezetteer 1980 P. I. P 833

2. Karnataka State Draft Fifth FYP p. 6

3. Basic statistics relating to Indian Economy. 1950-51 To 1980-81 Vol. 2 States

p. 148-9.

NOTE: Figures in brackets indicate the outlay.

+ Outlay
 96

Illustration - 2K

Plan expenditure on VSls in Karnataka

800 .............................................................................................. .

600 e .................................................................. w •••••••••••••••••• •••••••••

400 ............................................................................................

200 ...................................................................

I Plan II Plan III PlanlV Plan V Plan VI PlanVIl PlaN1l1 Plan

~ VSls 0 Industry [SSS] Agriculture

 NUMBER OF SMALL SCALE INDUSTRIAL UNITS REGISTERED, INVESTMENT AND PERSONS EMPLOYED
DURING THE YEAR 1991-1992 IN KARNATAKA.

% Increase! % Increase! % increase!

Year Number of units Decrease Investment Decrease Persons Decrease
(During) (Registred) over the (Rs.Lakhs) over the employed over the
previous previous previous
year year year

1969-70 3900 3456.70 47960

1970-71 1896 - 51.38 2199.30 - 36.37 42818 - 10.72
1971-72 2331 22.94 1302.96 - 40.75 21492 - 49.80
1972-73 2294 1.58 1375.88 5.60 22911 6.60
1973-74 3036 32.34 1628.66 18.37 22315 2.60
1974-75 1903 - 37.31 3517.56 115.97 46440 108.11
1975-76 1565 - 17.76 1581.19 - 55.04 12782 - 72.47
1976-77 1442 7.85 1495~70 5.40 15355 20.12
1977-78 1640 13.73 1531.74 2.40 25096 63.43
1978-79 1840 12.19 1603.08 4.65 17088 - 31.90 ...,
\0

1979-80 2910 58.15 3255.10 103.05 34366 101.11

1980-81 2776 4.60 3041.83 6.55 26164 - 23.86
1981-82 3396 22.33 4955.16 62.90 41375 58.13
1982-83 6096 79.50 6255.29 26.23 46420 12.19
1983-84 7479 22.68 6396.51 2.25 44282 4.60
1984-85 11962 59.94 632.31 - 90.11 55849 26.12
1985-86 11634 2.74 8787.09 1289.64 60796 8.85
1986-87 11179 3.91 9408.47 7.07 56888 6.42
1987-88 10530 5.80 10165.19 8.04 52498 7.71
1988-89 9811 6.82 10532.77 3.61 50448 3.90
1989-90 9700 1.13 11243.02 6.74 51521 2.12
1990-91 9884 1.89 11843.00 5.33 54000 4.81
1991-92 10588 7.12 18623.00 57.24 62000 14.81
As on
3l.3.92 126039 127490.51 870065

Source: 1. Karnataka State Gazetteer, Part I Government of Karnataka, Banga10re

1982,
p.828
2. Director of Industries & Commerce, Government of Karnataka, Banga1ore.
 TABLE - 2.13

CUMULATIVE PRESENT POSTION OF SSIs IN KARRATAKA AS ON 31.3.1992

(DISTRICT-WISE)

5l. Name of the Number % to Investment % to Employment % to

No. District of SSIs Total (Rs.in lakhs) Total in SSIs total
Units

1. Banga10re (R) 4622 3.67 2851.11 2.24 23596 2.71

2. Banga10re (U) 23069 18.30 34251.74 26.87 219272 25.20
3. Be1gaum 11080 8.79 9172.65 7.19 51078 5.87
4. Be11ary 5257 4.17 2589.05 2.03· 25522 2.93
5. Bidar 2826 2.24 3674.88 2.88 17864 2.05
6. Bijapur 4688 3.72 2814.06 2.21 28967 3.33
7. Chitradurga 4860 3.86 5516.86 4.43 27451 3.16
8. Chickmaga1ur 2293 1.82 1581.79 1.24 11555 1.33
9. Dakshina Kannada 8955 7.10 13458.51 10.56 59414 6.83
10. Dharwad 10506 8.34 10134.64 7.95 106242 12.21 \0
11. Gulbarga 4979 3.32 3064.89 2.40 23470 2.70 (»

12. Hassan 2791 2.21 1977.74 1.57 14778 1.70

13. Kolar 4709 3.74 4740.34 3.72 31262 3.59
14. Kodagu 1444 1.15 1441.89 1.13 14649 1.68
15. Mandya 2851 2.26 2275.39 1.78 16154 1.86
16. Mysore 11374 9.02 7550.83 5.92 67326 7.74
17. Raichur 4287 3.40 5144.87 4.04 35191 4.04
18. Shimoga 6410 5.09 5769.07 4.53 30711 3.53
19. Tumkur 7437 5.90 7784.95 6.11 48202 5.54
20. Uttara Kannada 2401 1.90 1675.25 1.31 17361 2.00

Total 126039 100 127490.51 100 870065 100

 99

Illustration - 2F

Trends in the Development of SSIs in Karnataka (1969-70 to

1-9" - No. of Units

'

Thouiland.
1.~~~~------------------------------------~-.
12 .................................................................................................................................................

10 ..............................................................................................................................:..:~___

, .................................................................................................................................................

e .................................................................................................................................................

OLL-L-L-L-L-L-L-L-L-L-L-L-L-L-L-L-L~~~~~~
ea '10 71 7Z 73 74 75 78 77 78 'nI 80 81

Years
- - No. of Untb
 100

Illustration - 2G

Trends in the Devellopment of SSIs in Karnataka

(1969-70 to 1991-92) Investment

- ThoUIiADd.
~r----------------------------------------------

20 .................................................................................................................................................. .

16 ................................................................................................................................................ .

10 ..................................................................................................................

6 ............................................................................. .

O~~~~~~-L-L-L-L-L-L-L-L-L~-L-L-L-L-L-L-LJ
'72 73 7-' 75 78 77 78 7'a eo 81 82 83 M 85 88 87 88 8V ao VI

Years
 101

Illustration - 20

Trends in the Development of SSIs in Karnataka

(1969-70 to 1991-92) Employment

Thoulilandlil
80,----------------------------------------------------,
00 ............................................................................................................................................ .

40

M 70 71 72 73 7~ 7& 7e 77 78 7V 80 81 82 83 ~ 85 8e 87 88 8i ~ it

Years
-4- EmplQ]1lM1nt
 102

Illustration - 21

Dispersal of Industries in Karnataka - No. of Units

Fwd. Dir;te.
66.3%

Other Diste.
33.7%
NO. OF UNITS
 103
Illustration - 2J

Dispersal of Industries in Karnataka - Investment

Fwd. Di8tl'.
65.4%

.................. ,
-: :-:-: : /
. -: -: -: -: -: -: -: . -: -: .:- -: -:
//
... :.:::::::::::::::::::::::.:.: ...
,/

--~Other Diflt.8.
34.6%
IN'lESTMENT
 104

Illustration - 2K

Dispersal of Industries in Karnataka - Employment

F~td. DiBtB.
69.6%

-......-~ Other DiBtB.

30.4%
EMPLO):'MENT
 105

investment and employment are analysed for 23 years from

1969-70 to 1991-92. It can be seen from the above that there
is a negative growth rate in terms of number of units over
the previous year for 11 years. However, from the year
1977-78, there is consistency in the growth of SSI units

except for the period 1985-86 to 1989-90. In terms of

investment there is a negative growth rate over the previous

year for 6 years only. Compared to the number of units the

investment is increasing consistently from the year 1981-82
to 1991-92 except during the year 1984-85. There is also
considerable increase over the previous year in terms of

number of persons employed in SSI sector. During the last 3

years there is an average growth rate of 7.2 per cent in

terms of employment.

The Table - 2.13 provides the cumulative districtwise

present position with regard to the SSIs in Karnataka.

It can be analysed from the Table - 2.13 that

industrially most forward districts of the state like

Bangalore, Belgaum, Dharwad, Dakshina Kannada, Mysore,

Tumkur and Shimoga constitute 66.21 per cent of the total

SSI units situated in the state. Remaining 34 per cent of

SSI units are situated in the rest of the 12 districts of

 106

the state. In terms of investment also these industrially

forwrd district consitute 65.45 per cent of the total

investment in the State. Even in terms of employment 69.63%
of the total employment in the state is concentrated in

these forward districts. It can also be observed from the

above table that more than 25 per cent of the investment and

employment in SSI in the state is in Bangalore (Urban)

District only.

Thus there is a greater need to reduce the regional

disparities. The major reason for this is the non uniform

distribution of resources. It is evident from the data above

that financial institutions have tread a path of safety to

finance more units in the developed areas only. It is also a

case of a region already developed and the disparities

developed get accentuated due to the obvious advantages of

natural attraction.

Minimization of disparities does not mean " a

straight transfer of the fruits of proeperity from the

developed area or establishing new industrial units in those

areas where there is no adequate resource base which may

jeopardise the economic efficiency necessary for the

 107

progress of the country"31. Regional disparities can be

brought down in the real sense when all regions are

encouraged to exploit their own development potentials and

formulate development plans suitable to the region. For this

the present policy of differential interest rate policy of

the financial. institutions and the incentives of the

Government should be vigorously implemented.

31. Dr.Hemlata Rao. Regional Disparities and Development in

India (New Delhi. Ashish, 1984).
 CHAPTER - III

FINANCIAL STRUCTURE : CAPITAL AND CREDIT NEEDS OF THE

SMALL-SCALE INDUSTRIES

Finance is the life-blood of business in any

productive sphere and its vital need is more realised where

it is lacking as in small industry. The importance of

finance in this field is as fundamental as elsewhere. Every

problem of the small producer concerning production or

materials, quality or marketing is in the ultimate analysis

a financial one.

Adequate finance is a pre-requisite to proper

organization of production and the purchase of raw-materials.

Producer can convert his own profits into capital for

further investment after meeting his personal requirements.

The business if made remunerative can create itself the

means for its future sustenance in the way of capital

derived from profits. The producer will be self reliant up

to a degree in regard to capital, when capital is found,

credit will come. Capital is the basis for borrowing. In

case of small enterprises, entrepreneur himself has to

provide capital (in medium and large-scale industry capital

is provided by share holders).

 109

capital is the amount of money or money's worth

required to run a manufacturing concern. Capital can be

divided as long term or fixed capital and short term or
working capital based on the purpose for which it is used.

Long-term capital is used to 'put the unit on the

ground'. In other words, this amount· is used to acquire

fixed assets like land, building, plant and machinery,

patents, designs, trade marks, etc. Generally, a major
portion of the total investment is used for this purpose.

Amounts needed to 'make the unit to run' are called

working capital. This is required to acquire the day-to-day

needs of a unit viz., raw materials, payment of wages or
salaries, maintenance of machinery, etc. Thus, working
capital is used to run the business put on the ground by
fixed capital.

3.2 Structural Features of Small-Scale Industrial Units:

Small-scale industries may be classified based on the

capital needs under three categories.

1. Some industries, started on a small scale, but are

likely to develop into medium sized units. Like

medium-scale industries; these are capital intensive
and relatively large investment in block assets and
 110

are generally in the corporate sector. These units

will be organised as public or private limited

companies or as co-operative societies. In these

concerns borrowed capital is higher than owned

capital. The concerns in this group are comparatively

well-managed and have a good sales turnover; they can

be generally considered credit worthy for

institutional financing. The industries that come

under this group are - pens, paints, biscuits, oil

engines, automobile spares, etc.

2. Under the second category those units started on a

small scale and are likely to remain so for a long

time in view of the specialised nature of demand for
their products. Generally these are organised as non-
corporate concerns, partnerships, proprietory

concerns. Their principal requirement is working

capital. Units producing Agarbattis, bolts, oil

stoves, wire nails, etc., come under this category.

3. The third category includes those concerns which began

as cottage industries but latter developed into small-

scale industries or as feeder units to large~scale

industries. This group, however, forms the smallest

segment among the SSIs. Such concerns are mostly
 III

organised as proprietory or partnership concerns.

Being more labour intensive, the tangible assets of

these units are limited-units producing Toys,

Confectionary, Coil springs etc., corne under this

category.

3.3 Capital and Capital Structure of Small-scale Units:

According to the latest definition (1990) -"a small-

scale unit is one whose fixed capital investment is at or

below Rs.60 lakhs, and for ancillary units it is Rs.75

lakhs. Thus, a small unit can have a maximum fixed capital

of Rs.60 lakhs or Rs.75 lakhs. "1

The working capital requirements vary according to the

production schedules and turn-over of each unit. While

determining their capital needs 'small entrepreneurs must

allow for a reasonable period of time to elapse (usually,

six to eighteen months) before income from the business will

cover regular monthly expenses. They must include in their

estimates a minimum salary sufficient to provide for their

living expenses.

,
•. Vide Gazette Notification No. S.0.232, Department of
Industrial Development, Ministry of Industries,
Government of India, New Delhi, dated 2.4.1991.
 112

The capital structure of small-scale industrial units

is built on the feeble capacity of resource mobilisation of

the entrepreneurs which is inherently weak. 'The malady of

weakness is reflected in the entrepreneur's perpetual worry

to meet the day-to-day obligations of the factory and in

devoting most of his time and energy in manoeuvoring and

adjusting to find ways and means to meet the day's bill,.2

The degree of severity of d weak capital structure is also

felt more by smaller among the small units.

Industrial finance in its broad cannotation, means the

provision of funds needed by industry irrespective of the

period for which they are made available. The more the

process of production becomes complex, greater the need for

finance becomes pressing and larger are the opportunities

for banks and other financial institutions to render

assistance to them. Industries require block or long-term

capital to finance fixed assets like land, building, plant

and machinery, furniture and fixtures and for expansion,

modernisation and replacements. Working in short-term

capital is needed to finance floating assets i.e., for the

purchase of stores, payment of wages, purchase of

rawmaterials and the provision of funds to meet day-to-day

expenses.

2. Pareek. H.S. Financing of small-scale industries in a

Developing Economy (New Delhi : National Publishers
1978) p. 54.
 113

A finely tuned economy has certain bare necessities if

it has to remain so. A well-developed capital market is one

such pre-requisite.

The availability of finance in respect of both quantum

and time does have tremendous impact on industrial

development. Industries in developed countries have been

more fortunate in this respect than those in their less

developed counterparts. Their capital markets have been

successful to a large extent in meeting the medium and long-
term financial requirements of industry.

The major-term lending institutions restricted their

attention to the developmet of large scale enterprises.

Medium and longterm financial requirements of the small

3
industries were sadly neglected.

In 1951, the State Financial corporations Act was

Passed empowering state goverments to set up financial

institutions to cater to the needs of small units. SFCs were

meant to decentralise the activities of the major term

lending institutions. The development of the small scale

3. Government of India Report on small industries in

India. International Planning Team. Ford Foundation.
 114

sector was defined as a national objective. Disbursal of

assistance to numerous small units could be performed more

efficiently on a decentralised basis.

3.4 Capital and Credit Needs Before Economic Transition

In the days before independence, India was a land of

self-sufficient, tiny village communities. Every village had

its band of artisans which supplied the needs of the
community. The market did not extend beyond the confines of

the village. Demand was consequently limited. Little risk or

uncertainly was involved in production as it was based on

known needs of customers who were in close and personal. As
such, no problems of marketing as they exist now troubled
the sellers. The modest demand for capital and credit for

the production of goods was easily met by the local money

lender. The raw materials needed were provided by consumers

and with simple tools and native skill, the artisans

fashioned useful commodities for the use of his patrons-

often payment for articles sold was in kind-l ike-rent free

land or proportion of agricultural produce given as the

price of the purchase. Under such a simple economic

organisation, no accute problem of finance could exist for

small-scale units.
 115

Even in towns with larger populations and bigger

markets, the supply of industrial produces had of necessity

to be more and the need for credit and capital was greater.
But artisans and craftsmen depended for their credit on
guilds which could raise enough finance from their members
and if necessary they borrowed from money lenders. Thus,

both rural and urban industrialists were sufficiently

supplied with necessary resources to pursue their productive

4
activities without any hindrance.

The economic transition has, however, completely

altered the situation and has brought in its wake a

different economic organisation chanracterised by economic

dependance of each other, extention of markets, production

in anticipation of demand, separation of the buyer and the

seller by space and time, fierce competition of the factory

industry pushing out the small producer and the diverse
problems concerning him which hinge ultimately on finance

for his survival and prosperity. While organised large scale

industry has solved the problem of finance through corporate
business organisation, such a source is not open to small
scale sector.

4. Choudhuri. M.R. Indian Industries Development and

Location. (Bombay, Oxford and IBH Publishing Company
1970) P.B.
 116

In this context the problems of SSIs relating to

finance and how the necessities of finance arise for them

are discussed below.

The credit requirements of SSIs may be classified

according to their needs

a) for meeting the expenses incurred on account of-

i) the installation of Plant and machinery and

acquisition of land and buildings and

ii) a proper maintenance of machinery against depreciation,

obsolescence, renovation, modernisation and expansion

and

b) for the purchase and stocking of raw materials,

inventories of goods and goods in the process of

manufacture. 5

5. Baumback C.M. & Kenneth Lawer: How to organise and

operate a small Business. (1979) p.~1~9l~.~~~~~~~=
 117

The credit requirements of small scale sector is

represented with the help of a following chart.

CREDIT REQUIREMENTS OF SMALL-SCALE SECTOR

FIXED CAPITAL WORKING CAPITAL

,
Preliminary
r
Purchase
I
Establish-
\.
Working or
Expenses of Fixed ment short-term
like patents Assets Expenses Capital
trade mark like land like
etc. building furniture &
P &M fixtures

Raw- Invent- Goods in Interest Others

Material ories Process on loans like stock
in trade
sundry
debtors etc

3.5 Fixed Capital and Small-Scale Units:

Small manufacturers can usually borrow short term

money at a price. But long term loans are hard to get and

public stock floatation is almost impossible.

Fixed capital or long term loans are taken for the

purchase of fixed assets like land, building, Plant and

Machinery or to finance the expansion and modernisation

schemes. Initially, investment should necessarily be

provided by the proprietor of the small business since a
 118

reasonable amount of venture or equity capital is always a

primary condition before requesting for credit. Mentioning

the financial position of small industry in India, the

International Team of Experts (1985) observed that in most

of the workshops visited, real finance did not seem to exist

at all. There was a severe lack of capital as well as credit.

They have little money for adopting independent business

methods of their own. They are compelled to sell every day's

or week's production to buy raw material in small quantities

at retail price and to work to the orders of the dealers

because of shortage of capital.

3.6 Working Capital and Small Scale Units:

It is the amount of funds which an S5! must have to

finance its day-to-day operations. It may also be regarded

that portion of an industry's total capital which is

employed in short term operations. Included in these

operations are such items as stock of raw materials and

supplies needed for manufacture of finished goods, semi-

processed items or components that will soon merge as final

products and short term investments.

Current assets, inventories, raw materials, etc., work

in progress, finished goods, loans and advances and other

debtor balances are integral and constituent parts of

 119

working capital. The success of a SSI depends on the

availability of adequate working capital, which ensures the

purchase of raw materials at competitive prices and payments

for labour.

The working capital requirement of an SSI vary from

one unit to another and from one type of unit to another

type. Small scale units which are located in rented premtses

and are engaged in processing works, need a larger amount of

working capital than other units.

The size of the unit, process of production,

proportion of raw material to total cost, terms of purchase

and sales, the turnover of inventories will largely

determine the amount of working capital required.

The amount of working capital depends directly upon

the volume of business. The bigger the size of a unit, the

larger the amount of the working capital and vice versa. And

in the same way simple, short period process of production

require·a smaller amount of working capital. And if the

inventories are large and their turnover is low, an SSI will

need a bigger amount of working capital.

 120

3.7 Estimation of the Total Investment Requirements:

A number of limitations arise in the estimation of

fixed and working capital requirments of small scale units.

Along with the problem of defining a SSI, there is a
difficulty in differentiating SSI with village and cottage
industries. Then, not all the small units are registered

with the State Directorate of Industries, and on the other

hand, amongst the units registered with the State

directorates, quite a large do not appear to be functioning.

It is understood that about 12 per cent of the schedules

sent by the Reserve Bank of India to SSI units for its

survey came back with the remark that the addressees were

not traceable. 6 Moreover, many of the small units do not

maintain proper books of account. As a result, it is

difficult to estimate the credit requirements for fixed

and/or working capital purposes.

Nevertheless, attempts have been made by the

Administrative Reforms Commission (ARC) and the office of
the Development Commissioner for Small Scale Industries
(DCSSI) to give estimates of credit requirements of SSI

sector for the Fourth Five Year Plan. The ARC felt that the

6. Reserve Bank of India. "Report of the Procedings of the

Seminar on Financing of Small-Scale Industries in India".
p.66.
 121

sector would need by way of additional fixed investment not

less than Rs.425-480 crores and by way of working capital

requirements Rs.700 crores by the end of Fourth Plan. But

this is conservative in view of the role and importance of

this sector. The DCSSI estimated additional fixed capital

requirements by the end of Fourth Five Year Plan at Rs.425

crores. On the basis of this estimate, additional working

capital requirements were estimated between Rs.700 crores

and Rs.lOOO crores by the end of the Fourth Five Year Plan
. d.7
perlo

3.8 Sources of Finance :

In India, there are now several channels through which
small firms can obtain financial help. First, there is the

State aid to industries act, which enpower State Directorate

of Industries to give medium term loans to any small firm

which they judge to be worthy. The loans may be secured on

assets, or for small loans they may be covered only by bonds

or sureties.

The second source of finance for small firm is the

State Finance Corporation, which gives Term loans (5-8 years)

on the security of fixed assets (generally in the form of

7. Ibid, p.67
 122

first mortgage) up to about 75 per cent to 90 per cent of

the net value of the assets (depending on the background of

the promoter). The loans are intended primarily for

financing fixed capital.

The third major source of Government sponsored credit

to small firms is the State Bank of India, its subsidiaries

and other commercial banks. State Bank of India has been

given a special responsibility of lending working capital

to small firms. Most of its loans are secured against raw

materials or finished goods, either on the lock and key

system or against hypothecation. The State Bank is also

acting as an agent for the 'Pilot' scheme for co-ordinating

the provisions of credit from different sources.

The fourth major source of finance is the facility of

buying machinery through the National Small Industries

corporation which was set up in 1955. SSIs can obtain

machinery through the Corporation on payment of 20 per cent

of the price as 'earnest money'. The period of repayment is

now standardised at seven years. Hire purchase finance is a

simple, self-securing and flexible method of giving
financial assistance. It would be useful if any firm could
obtain a hire purchase loan on any machine, irrespective of

whether it was bought through the National Small Industries

Corporation or not.
 123

Another major source of institutional financial

assistance is the provision of factory buildings in

industrial estates. This is of great and growing importance.

At the State level Small-Scale Industries Development

Corporations (SSIDCs) have been set up for this purpose.

Another form of financial assistance which has been

used only to a small degree is the provision of equity. It

persuades local people to go into industry and had offered

to subscribe upto 90 per cent of the equity. The various

sources of funds of SSIs vis-a-vis MS & LSI is given below.

TABLE - 3.1

SOURCES OF FUNDS
(in per cent)

Small Medium and Large

Sources Scale Public Limited
Units Companies

1. Internal Sources 32.7 42.6

a) Capital and Reserves 14.2 10.2
b) Provisions 18.5 32.4
2. External Sources 67.3 57.4
a) Capital issues and
Premiums on shares 2.5
b) Borrowings
(including deposits) 36.8 33.3
c) Trade and other current
liabilities 29.7 21.6
d) Miscellaneous non-current
liabilities 0.8
-----------------------
Total 100.0 100.0

Source: RBI Bulletins.

 124

It can be observed from the Table 3.1 that SSI

concerns are dependent more on external sources (to the

extent of 67.3 per cent) than on internal sources which is

only 32.7 per cent. Inter alia medium and large scale

concerns source of funds constitute as much as 42.6 per cent

through internal sources. This shows the internal weakness

of SSIs and its greater dependence on institutional finance.

3.9 FINANCIAL STRUCTURE FOR SMALL-SCALE UNITS:

The nature of financial assistance required and the
appex agency providing it is drafted in the following chart.

1. State Directorate of Provides loans under

Industries State Aid to Industries Act.

2. State Financial Provide long term credit for

C9rporations (SFCs) the purchase of fixed assets.
3. National Small Indus- Provide Hire Purchase
tries Corporation (NSIC) finance

4. State Bank of India and Sanction medium term and

and its subsidiaries
5. Commercial Banks
6. Small Industries
Service Institute (SISI)
7. Industrial Development
Bank of India/Small
Industries Oeveloplment
Bank of India (IOBI/SIOBI)
instalment credit loans for
the purchase of machinery and
the construction of factory
buildings. They also provide
working capital.
Sanction loans mainly for
working capital needs.
Furnish technical reports to
the State Bank / SPCs on the
applicant units.
Indirectly through SFCs.
 125

8. Federation of Associa- Presents the problems faced

tions of Small Industries by the small industries to
of India the Government.

9. Chamber of Commerce and Discusses the problems and

Industry represent them to the
appropriate authorities.

3.10 MAKING THE LOAN APPLICATION:

The application for loan to a bank/financial insti-

tution should be made in the bank's/financial institution's

standard loan application form. And after scrutanizing the

application, if the banker is satisfied that the form is

properly completed and that the application deserves

consideration, will then forwarded for further processing.

An enterpreneur at the first stage has to submit the

following to the Financial Institutions:

1. Application in a prescribed format (priced)

normally in duplicate.

2. Project Report-in duplicate.

3. Details of promoters with regard to movable,

immovable properties and liabilities.

4. Relative records of rights pertaining to the firm.

 126

5. A certificate of dues or no dues from other

financial institutions.

6. A proforma invoice showing the cost of the

machinery items along with the competitive

Quotations.

7. A confirmation by ~he applicant to the effect that

the machinery items against which loan may be
sanctioned will remain pledged to the financial
institution till all the installments of the loan

are repaid during the currency of the loan and the

applicant will insure it against theft, fire and

damages at his own cost.

8. A certificate from the approved dealer that he has

satisfied himself to the effect that if the loan is

sanctioned, he would install the machinery item,

provide required after sales service and look after

the maintennace of the machinery item regularly.8

8. Assistance to industry - A short guide to know how to

obtain loan from financial institution (KSFC 1992) p.23.
 127

3.11 SECURITY, MARGIN AND REPAYMENT:

Pledge/hypothecation of the stocks or the documents of

title to goods forms the primary security. The stocks or

documents offered to the bank/financial institution should

be free from encumbrances. Margin on working capital

advances varies from 25 per cent to 50 per cent. This is

however, relaxable to a reasonable extent where considered

necessary. In the case of unsecured advances, suitable

third party guarantee/collateral security is also

stipulated. Whereever considered appropriate. typical

margins for different type of loans (Term and working

capital loan) to small-scale units are given below:

TERM LOAN :

It can be defined as "the loan which has a final

maturity beyond one year from the date made for purpose of

providing the borrowers with long term capital and which is

dependent upon future earnings to provide funds for its

liquidation"9

A term loan is normally sanctioned for acquisition of

fixed assets such as land, factory buildings and machinery

to an industrial undertaking. Term loans differ conceptually

and functionally from working capital loans and they call

for different type of approach for assessment for the

following reasons:

9. Pareek. H.S. Opcit. p. 95

 128

1. The role of banker is that of development banker

collaborator, guide, philosopher, friend and not

just commercial banker.

2. The finance is projected from the totality of the

project itself. Therefore, the total assets that

are going to be created has to be studied.

3. Realisation is not easy and poses problems since

much depends on the happening/not happening of

certain projections. Hence, there is ample need for

far-sighted approach.

Of all the ratios the Debt service coverage ratio is

very important in the context of Term loan finance. It is

arrived at as below.

Profit after tax + Depreciation + Interest on term loans

Instalments + Interest on Term loans

This indicates the capacity of the unit for repayment

of Term loan.

IOBI/SIOBI provides refinance facility on term finance

to specified industrial activities under its ARS (Automatic

 129

Refinance Scheme) and NRS (Normal Refinance Scheme). Under

ARS, refinance of Term loans up to Rs.lO.OO lakhs are

covered. The percentage of refinance is 75 in case of

commercial banks and 90 in case of SFCs. But for loans

granted under composite loan scheme and loan granted to

persons belonging to SC/ST and physically handicapped,

refinance will be to the extent of 100 per cent.

WORKING CAPITAL LOAN

1. Cash credit against pledge or hypothecation or raw

Materials finished goods, work in progress, etc., 25%

2. Letters of credit for import of raw materials 10%

3. Letter of guarantee in lieu of security deposits,

earnest money, etc., favouring Govt. Departments 10%

4. Purchase/discounting of bills arising out of sale Nil

of products to 10%

5. Deferred payment Guarantees for purchase of

machineries 10%

Credit limits granted for working capital purposes are

continuing advances, renewable annually, but repayable on

demand.

In case of the instalment credit, the margins retained

vary between 20 per cent to 30 per cent. Hypothecation of

machinery and equipment proposed to be acquired under the

 130

loans may be considered as adequate security. The loanee is

required to make a down payment of 20 per cent to 33 per

cent of the cost of the equipment to be purchased while the

rest is financed out of the loans. These laons are repayable

over a period not exceeding five years in suitable monthly,

quarterly or half yearly instalments with convenient 'start

up' period where necessary.

3.12 INTEREST RATES :

Rate of interest charged by financial

insitution/banks are not fixed, but change from time to time.

Rate of interest also depend upon the amount of loan taken,

the location of unit (backward or rural area), type of

entrepreneur (skilled or unskilled), purpose for which the

loan is taken and such other factors. Rate of interest

charged by banks are regulated in accordance with the

parameters of interest structure laid down by the Reserve

Bank of India and or lOBI/SlOB!. The present interest rate

structure of Commercial Banks and SFC's is presented in

Table - 3.2 and 3.3 respectively. Further, as the Government

of Karnataka dispensed with the zone system for incentives

during its recent Industrial Policy, the KSFC also modified

its interest structure in tune with the Govenment's Policy

which presented in Table 3.4.

 131

TABLE - 3.2

IN"fFR.EST RATE Sl'RUC'l'lJR.E OF COMMERCIAL BANKS

1- Particulars Rate of interest Rate of interest

10. for Working Capital for term loan to
S.S.I.

1- Up to Rs. 7,500/- 11. 5 (12) 11.5 (12)

2. Above Rs. 7,500/-

up to Rs. 25,000/- 13.5 (14) 13.5 (14)

3. Above 25,000/- up to
2.00 lakhs 16.5 (17.25) 16.5 (17.25)

4. Aggregate limits *
over Rs. 2.00 lakhs
up to Rs. 25.00 lakhs

a) All working capital

(like OCC:KCC:PL:BOOK:
DEBTS:CDBS:SDBS:& Supply
Bills except BEs 19.5 (20.25)

b) BEs 18.5 (19.25)

c) Clean DDs/DPN 22.5 (23.25)

d) Term loans ** 19.5 (20.25)

5. For aggregate limits

over Rs. 25.00 lakhs

a) all working capital

like (OCC:KCC:PL:BOOK
DEBTS:CDBs:SDBs: & Supply 19.5-20.4-21. 5
Bills except BEs (20.25-21.25-22.25)

b) BEs 18.5-19.5-20.5
(19.25-20.25-21.25)

c) Clean ODs/DPN 22.5 (23.25)

d) Term loan 19.5 (20.25)

Figures in bracket indicates the interest rate inclusive of

interest tax

:* Wherever SIDBI Refinance is available.

 132
TABLE - 3.3

INTEREST RATE S11tUCTORE OF SFC' s

KSFC REVISED INTEREST RATE (EFFECT FROM MAY 1992)

51- Type of unit/ Zone I Zone II Zone III Zone IV

No. Quantum of loans

I. PROJECTS ELIGIBLE FOR

REFINANCE FROM IDBI

a) Hotels/Restaurant/Small
Hospitals/Nursing homes/
Tourism related projects
where cost of project
exceeds Rs. 45 lakhs 20 19.5 19 18.5

b) Loans sanctioned under RSR

(Refinance for Rehabilita-
tion scheme) excluding sanc-
tions towards principal
overdues to units at (a)
above 17.5 17 .5 17 .5 17.5

c) for modernisation, expansion

and diversification to units
at (a) above 20 20 .20 20

d) Loan sanctioned under ERS

(Equipment refinance scheme) 18.5 18.5 18.5 18.5

II. PROJECTS ELIGIBLE FOR. REFINANCE FROM SIDBI

i) All term loans including composite loan scheme and term loans
under Single Window Scheme and SRTOs owning up to 2 vehicles.

a) Up to and inclusive of Rs. 7,500 12.0 12.0 12.0 11.5

b) Over Rs. 7,500 & up to Rs. 25,000 14.0 14.0 14.0 13.5

c) Over Rs. 25,000 & up to Rs. 2,00,000 15.5 15.5 15.5 15.0
d) Loans exceeding Rs. 2,00,000 to
a) SSI Units 19.5 19.5 19.5 19.0
b) Road Transport Operators 20.5 20.5 20.5 20.5
ii) Loans above Rs. 2,00,000 sanctioned
under Equipment Refinance for SSI
units 18.0 18.0 18.0 18.0
 133

iii) All loans for following activities

Where the total cost of the project
is below Rs.45 lakhs

a) Hotels and Tourism related

activities

b) Electro Medical Equipments

c) Hospitals & Nursing Homes 19.5 19.5 19.5 19.0

iv) For working capiUll loans under Sing.le-W:1ndov Sche.e:

a) Up to and inclusive of Rs. 7,500 12.0 12.0 12.0 12.0

b) Over Rs. 7,500 and upto Rs. 25,000 14.0 14.0 14.0 13.5

c) Over Rs. 25,000 and upto Rs. 2,00,000 17.0 17.0 17.0 16.5
d) Loans exceeding Rs. 2,00,000 20.5 20.5 20.5 20.0

v) Bridge loans against subsidy and other

loans funded out of own fund of the
Corporation. 20.5 20.5 20.5 20.0

vi) Loans sanctioned for acquisition of

second hand machinery (Indigenous/
imported) 21.5 21.5 21.5 21.0
 134

TABLE 3.4

KARNATAXA STATE FINANCIAL CORPORATION

Revision of Interest rates in refinanced cases

KSFC lending rates

(including interest tax)

(w.e.f. 9.8.1993)
." per annum

IDBI REFINANCED CASES:

I. Medium Scale Industries and Non-SSI where
project cost exceeds Rs. 45 lakhs 18.5
II. Modernisation, expansion and diversification 18.5
III. Loans sanctioned under RSR 17.5
IV. Equipment Finance Scheme 18.0

SIDBI REFINANCED CASES: (w.e.f. 16.8.1993)

I. Term loans including composite loan shceme,
term loans under SWS and SRTOs owning
upto two vehicles
a. Upto Rs. 25,000 12.5
b. Above Rs. 25,000 to Rs. 50,000 15.5
c. Above Rs. 50,000 to Rs. 2,00,000 17.0
d. Above Rs. 2,00,000
i. SSI 18.5
ii. Road Transport Operators 19.5
iii. Loans under EFS 18.0

II. Non-5S1 where the project cost is below Rs.45

lakhs 18.5

III. Working Capital Loans under SWS (w.e.f. 2.9.93)

a. Upto Rs. 25,000 12.5
b. Above Rs. 25,000 to Rs. 50,000 15.5
c. Above Rs. 50,000 to Rs.2 Lakhs 17.5
d. Above Rs. 2 Lakhs 18.0

NOTE 1. For additional loans to hotels/restaurants/small

hospitals/nursing homes/tourism related projects, which are
already refinanced by IDBI, the revised rates of IDBI shall
apply even if the cost of the project is less than Rs.45.00
lakhs.
2. A concession of 1~ will be allowed in respect of SC/ST
etreprenurs for all loans from the rates of interest
indicated above.
3. In case of default of loans including soft loans 2.5%
penalty will be levied for the amount in default and for the
period of default.
4. Additional loans sanctioned under RSR which are eligible for
refinance from SIDBI will attract interest at 1~ lower than
the applicable rates of interest.
 135

The distribution of credit to SSIs shows that, 54.05

per cent of the total credit was given on ~n interest of 12

per cent to 15 per cent, while 30.6 per cent of the credit
was offered at above 15 per cent and only 1 per cent of the

credit was advanced at less than 9 per cent. 10 This

indicates that small scale sector was not shown any

consideration in so far as interest rates are concerned,

consequently production cost goes up and the margin of

profit may also fall.

10. RBI Report on Financing of SSIs Opcit. p.93.

 CHAPTER - IV

PATTERN, TRENDS AND MAGNITUDE OF INSTITUTIONAL FINANCE TO

SMALL-SCALE INDUSTRIES IN KARNATAKA

Poverty alleviation programmes are the major planks of

our planned development. During the four decades of planned

development these efforts have not yielded the desired

results. According to the latest estimates, the percentage

l
of population below the poverty line is 29.2 per cent. This

is due to the failure of our fancy models in the reduction

of three major gaps in our economy-employment Gap -Income

Gap -Wealth Gap, the solution lies in the development of

small scale industries. Adequate and timely supply

of institutional finance at a reasonable rates of interest

is one of the essential pre-requisites for the development

of small industries.

It is also however, a known phenomenon of economic

history that entrepreneurs are scarce in most developing

1. Government of India: Draft Eighth Five Year Plan

Planning Commission, New Delhi, P.3
 137

countries owing mainly to the usual concommittants of a

traditional value system, political instability, stagnant

social structure, illeteracy and orthodox relegious beliefs.

A remedy in such a situation is State action for changing

traditional institutions and provision of economic

incentives.

Developmental plans for SSIs have often floundered on

the rock of inadequate finance. The small scale sector is

usually unable to obtain its requirements of long term risk

capital or 'equity capital' through the organised security

market. In a country like India, where savings slowly

trickle to the organised capital market and the technique of

underwriting is not fully developed it is almost impossible

for small concerns to raise capital through the channels of

the new issue market. So they relied on friends, relatives,

local investors and money lenders for such funds.

The seventh Five Year Plan document also notes with

dismay that ------- the availability of institutional

finance to this sector has not been commensurate with their

needs nor in proportion to the volume of activity generated

by this sector. The studies conducted have revealed that

inadequate and delayed availability of bank finance has been

 138

one of the major causes for sickness among small scale

industries"2
4.2 Commercial Bankk' Finance for the Development of Small-
Scale Industriclr.
4.2.1 COMMERCIAL B~ BEFORE NATIONALISATION:
Till the early ¥ears of the planned era, the portfolio

of bank advances wa~~argely geared to finance trade and

commerce. In March 1951, the share of industry in the total

bank credit extended~y commercial banks was only 34 per

cent. This increased'to 37.2 per cent in 1956, 52 per cent

in 1961 and 67 per dent in 1968. 3 The banking industry

catered mainly to th~ needs of large scale. It offered

umbrella to those whdiwere already well protected. The big

650 accounts in the ~untry were roughly controlling two-

thirds of total advances of the banking system. The

financial assistance to small scale sector by commercial

banks was negligible\in early sixties.

Bank credit ava~lable to small scale units by the end

of 1965-66 was Rs.90.8 crores or 4 precent of the total bank

credit to industries (which was only 1 percent in 1961),

though the relative contribution to the National income of

2. Government of Tndia: Draft Seventh Five Year Plan

Planning Commission, New Delhi, P.lOl.

3. Simha SLN Reform of the Indian Banking System (Madras

orient longman 1973) P.345.
 139

4
the small sector was 7.6 per cent whereas the large scale

sector received 66 per cent.

This was largely due to the fact that the development

Df the commercial banking in this country has been lop-

sided. Starting essentially as an urban-based financeial

service, banking has by and large confined itself to the

urban centres or industrial towns.

Certain sectors of our economy, though they occupied

critical position in the scheme of economic development and

social changes in our country were neglected or ignored by

commercial banks in the past, either because they were not
able to offer adequate security acceptable to commercial

banks or such advances were found less remunerative

and difficult to supervise and control. The major contenders

of bank credit were large scale and medium private

industries, resulting in considerable sectoral imbalance.

4. Ibid.
 140

The following table will clearly depict the condition

Irevailing before nationalisation.

TABLE - 4.1

SECTOR-WISE BANK ADVANCES AS ON 31st MARCH 1968.

Sector Amount Percentage

(Rs. in crores) of Total·

Industry 2068 36.17

a) Large & Medium 1857 32.48

b) Small-Scale Sector 211 3.68

~. Agriculture 67 1.17

I. Internal Trade 588 10.27

a) Wholesale Trade 541 9.45

b) Retail Trade 47 0.82

~. Other Priority Sectors NEGLIGIBLE

I. All other including

Financial & Personal 341 5.96

Total 5720 100.00

;ource: Singh.S. - Performance Budgeting for Commercial Bank

in India. RBI Bulletin. March 1977. p.12.

The gravity of sectoral imbalance can be seen from

:his table. It shows the imbalances with over 80 percent of

:he bank advances swallowed by larger and medium industries,

~holesale and retail trade. About 6 per cent was shared by

 141

Illustration - 4A

Spread of Bank Advances Before Rationalisation

LSI & MSI 68.6%

Agricul t.ure 1.2%

SSIs 3.7%
PerBon.,l Loan 6.0%

Trade 20.6%
 142

influential persons for personal loans etc., only 3.7 per

cent was given to small-scale sector leaving hardly anything

for other sectors of the economy. Infact, security and

profit being the main considerations, purpose of credit,
economic and social benefits etc .• were not in the
dictionary of commercial banks at that time. As a result,

barring some advances allowed by State Bank Group to small

scale industries, commercial banks, by and large, extended

credit on commercial principles.

Development of banking in India came into its stride

in the sixties. Bank deposits began to increase much faster

than national income. The ratio of bank deposits to national

income rose from 14.7 in 1960 to 16.6 in 1969. Between 19S9
and 1968 the aggregate deposits of the first fourteen

largest commercial banks, which were later nationalised,

trebled from Rs.883 crores to Rs.2669 crores or at a

compound annual rate of 12 percentS. On the other hand, the

number of branches of these banks during this period doubled

from 1689 to 3708. The deposits per branch went up from

Rs.S2.3 lakhs to Rs.77 lakhs or by 38 per cent. Following

table illustrates these facts.

). The Banker. June 1979. p 47.

 143

TABLE - 4.2

BANK BRANCHES, DEPOSIT & ADVANCES BEFORE NATIONALISATION

Branches Deposits Advances

1959 1968 1959 1968 1959 1968
(Amount Rs.in Crores)

14 Largest Banks
except SBI 1689 ~708 883 2669 542 1739

SBI & Its

subsidiaries 831 2383 582 1236 167 936

Source: Compiled from Statistical tables relating to Banking

in India. RBI Bombay.

And then there was the maldistribution of bank credit

which was heavily weighed in favour of the industrial and

trade sectors. Bank deposits were mobilised from many but

credit needs of only a few were catered to. At the end of

March 1968, there were 18 million deposit accounts, but

hardly 1 million borrowal accounts. In other words, for

every 18 persons who provided resources to the banking

system there was only one user of credit.

This was so because historically, commercial banking

in this country was organised and managed by a few

industrial and business houses in port and impartant

commercial centres. Credit needs of their enterprises had

prior claims. Therefore, even within the industrial and

business sectors, it was only a few large and medium

 144

industrialists and/or businessmen whose credit needs were

promptly met by the banks. Even as late as in March 1968,

barely 474 loan accounts of over Rs. 1 crore each

appropriated Rs. 866.4 crores or 28.3 per cent of total bank

credit, while at the other end of the scale, there were 10

lakh loan accounts (88.9 per cent of the total) ~hich

received only Rs. 127.2 crores (4.2 per cent of the total

credit). The same can be seen from the table below.

TABLE - 4.3

CLASSIFICATION OF LOANS AND ADVANCES

ACCORDING TO SIZE OF ACCOUNTS
(Outstanding as on March 31,1968).

Accounts with Number of % to Amount % to

outstanding Accounts Total (Rs. in Total
Amounts of Crores)

Upto Rs. 10000 1001631 88.9 127.21 4.2

Rs. 10000 - SOOOO 79133 7.0 181.98 5.9

Rs.SOOOO - 1 lakh 18404 1.6 127.40 4.1

Rs. 1 1akh-S lakhs 19123 1.7 399.19 13.0

Rs.Slakh-l0 lakhs 3968 0.4 222.99 7.3

Rs 101akh-SOlakhs 3480 0.3 728.38 23.8

Rs SOlakh-l crore 613 0.05 410.77 13.4

Over 1 crore 474 0.04 866.44 28.3

Total 1126826 100.00 30S8.31 100.00

Source: RBI Purpose wise Survey of Bank Advances.

 145

In short paradoxically enough, those who could afford

to pay more were charged less; and those who could not were
charged more. Thus the banking system willingly or
unwillingly, consciously or unconsciously became
instrumental in widening the gulf of inequality among
different segments of the society.

The historical perversities needed a corrective. The

scheme of social control of banks experimented during the

short period of one and a half year ended on june 1969 which

was too inadequate to counteract the invisible forces of

vested interests. A more drastic measure to impart a sense

of egalitarianism to the banking system to reiterate the

point that banking is a public servant was called for.

Hence, 14 major commercial banks were nationalised in mid

July 1969.

4.2.2 NATIONALISATION OF BANKS:

On 19th July 1969, fourteen major commercial banks,

each with deposits of Rs.50 crores and more were

nationalised. This step had changed, almost overnight the

very complex of the financial structure of the economy. With

this, more than four-fifth of the banking sector came

directly under government control. And then again on 15th

April 1980, the President of India promulgated an ordinance

 146

for the nationalisation of 6 more banks. The ordinance

stated that - "to provide for the acqusition and transfer of

the undertakings of certain banking companies, having regard

to their size, resources, coverage and organisation, in

order further to control the heights of the economy and to

promote welfare of the poeple, in conformity with the policy

of the state towards securing the principles laid down in

clauses (b) and (c) of article 39 of the Constitution and

for matters connected therewith or incidental thereto".6

Even before this step to nationalise was taken, the

banking sector was brought under considerable government

supervision through, what was described as 'social control'.

This measure was calculated to make the administrative set

up of banks conform to certain norms specified by the

government and regulate the criterion by which banks

operation were to be governed. It was thought that the

distribution of credit has been largely in favour of

industry and what came to be regarded as priority sectors

such as agriculture, small-scale industry, export etc., had

been relatively neglected. The National Credity Council was

established in December 1967 to assess the credit needs of

the different sectors and to give directions to the banks'

6. Govt. of India: Gazetteer of India-1980 Vol.I. pp 75-76.

 147

about credit allocation. The Board of Directors of the banks

were reconstituted so that more than one half of their

members represented specialised fields such as agriculture,

accountancy, rural-economy, small industries, co-operation,

finance, banking, economics and law. A professional banker

was required to be the full time chairman and his

appointment was subject to the approval of the Reserve Bank

of India. Social control legally came into force on 1st

February 1969. It could hardly work for six months when the

fourteen leading commercial banks were nationalised.

4.2.3 ACCORDING PRIORITY STATUS FOR SMALL-SCALE INDUSTRIES:

In 1968, the Government of India set up a National

Credit Council with a view to assess the demand for credit

from the various sectors of the economy and determining

priorities for lending and investment of bank funds. It

accorded priority status to hitherto neglected sectors of

the economy consisting of borrowers in agriculture, small-

scale industries, small retail business, professionals and

self employed persons, education, road and water transport

operators. As a sequel, Reserve Bank of India, held

discussions with twenty major commercial banks (which

accounted for 86 per cent of total bank deposits) and set

targets for them. It was subsequently decided that all the

commercial banks' lending to priority sector should reach a

 148

level of 33.5 per cent of total advances by the end of

March 1979. The target has been subsequently raised to 40

per cent. With the recent policy emphasis on assisting the

'weaker' sections among the priority sectors, it has been

decided that advances to all small scale industrial units

with credit limits up to Rs. 25,000 should be treated as

advance to 'weaker sections' and the same should constitute

12.5 per cent of total advances to small scale industries. 7

The post-nationalisation decade has witnessed a

massive change in the entire spectrum of Indian Banking,

particularly in the Public sector. Security which was the

primary consideration is no more the sole basis of credit

appraisal. The most important aspect of this social
orientation has been to increase the supply of credit to
sectors which had been previously neglected by banks viz.,

the small-scale industries. One of the important

instruments through which banks can bring about

social change is lending to the priority sector.

Dr. H.S.Krishnaswamy, then chairman of the working group on

priority sector lending observed: "the concept of priority

sector lending is mainly intended to ensure that assistance

7. Reserve Bank of India. "Credit to Small Scale" Credit

Information Review Sept. 1988. p.12.
 149

from the banking system flows in an increasing measure to

those sectors of the economy which, though accounting for a

significant proportion of the national product, have not

received adequate support of the institutional finance in

8
the past" .

Now Commercial Banks are by far the largest

contributors of institutional finance in most of the

countries. In India also a place of pride can be assigned to

them in the extension of credit to various segments of the

economy. Commercial Banks in India comprise the State Bank

of India and its associate banks (8) other nationalised

banks (20) foreign banks (17) Private Sector Banks (38) and

Regional Rural Banks (102).

From a mere Rs. 441 Crores or about 15 percent of the

gross credit of Rs. 3013 crores just before nationalisation

in June 1969. the outstanding level of lending to the

priority sector by the public sector banks (excluding those

nationalised in 1980) rose to a height of Rs. 5233 crores or

32 percent of the gross bank credit at the end of June 1979.

This can be seen clearly from the following table.

8. Birla Institute of Scientific Research, Economic Research

Division - Banks since Nationalisation. (New Delhi Allied
1981) p 7.
 150

TABLE - 4.4

PUBLIC SECTOR BANK ADVANCES TO PRIORITY SECTORS

(Amount Rs. in Crores)

1969 1980 1990

1. Total Advances 3037 22396 97990

2. Priority Sector Advances 442 7906 39588

3. Percentage to total 14.45 35.30 40.40

Source: Compiled from:

1. RBI Bulletin 1991 October. Supplement: Annual
Report 1990-91
2. Centre for monitoring Indian Economy. Bombay
Basic statistics relating to Indian Economy,
Vol - I. 1991.

It goes to the credit of the commercial banks in

India, that they rose to meet the demands made on the

banking system by adopting themselves suitable to the

changed circumstances. Though the objective is laudable in

principle, it may produce some undesirable effects. In their

anxiety to reach the target, banks may resort to

indiscriminate lending which may result in a higher

percentage of bad advances. Added to this, it may also

reduce the quantum of credit available to other important

sectors of the economy. Hence steps must be taken to see

that there is no unnecessary diversion of credit for the

sake of fulfilling the targets.

 150A

Total Advances
3037

Priority Advances
442

1969

Totru Advonces .~~

22396 ,~(.~::::::::::::::::::::::>:::::::~:::::::::::::
........ . ........
........ . .
.
.......
...... ...
.......
.......... . .
..........
..........
.......... . .

Priority Advnnce5
7906
1980

Totru Adveulces .~ .................... .

9 c990N
..........................
/ ••••••••.•..
.
. ........................ ......... : ......... .

Priorit.y Advance 8
39688
1990
Illustration ~ 4B

Commercial Bank's Advances to Priori~y

Sector
 151

Institutional credit to small industries on a well

planned and national basis was essential for the growth of

small scale industries. Individual institutions handled

credit being given to small-scale industries till June 30,

1961. The biggest impediment on the way of the credit giving

institutions was the 'risk' involved in giving the credit.

In sincere credit seeking and irregularities connected with

the utility of the loans obtained and finally the difficulty

in recovering the dues and such other difficulties were

deterrents in extending credit facilities to small scale

industrialists.

The Reserve Bank of India, therefore with effect from

July 1960, started the 'Credit Guarantee Scheme' whereby the

lending institution was automatically protected to the tune

of 50 percent of the unrealised credit. As an experiment,

the scheme was introduced in 22 selected districts spread

over the whole of India. 93 credit institutions (43 schedule

banks, 21 state co-operative banks, 14 SFCs, SBI and its 7

subsidiaries and the Madras Investment Corporation Ltd. ,)

in the country were selected and declared eligible for

operating the guarantee scheme.

Credit Guarantee Scheme popularly known as CGS is one

of the earliest measures taken to enlarge the flow of credit

 152

to small scale sector. This scheme provided the degree of

protection to the institutions against possible losses. For

this purpose RBI is operating this scheme for small scale

industries since 1960. The Redcliff Committee in England

expressed the view that consideration should be given for

establishing an Industrial Guarantee .Corporation with

Government support to facilitate the commercial exploitation

of technical innovation. In India, they are ahead by a step

and established the Credit Guarantee Organisation of India

with Central Government support to guarantee almost all

types of advances to small scale industrial units.

Under the guarantee scheme. generally the guarantee

organisation pays 75 percent of the amount in default after

an account becomes sticky and recalled, subject to a certain

fixed maximum. Commercial banks/SFCs can join the scheme

executing the agreement. They have to submit quarterly

statement of advances to small scale industries in

prescribed form and remit prescribed guarantee fees. Claims

can be lodged after recall of the advances even before the

security is realised or a shift is filled on the principle

that the scheme contains an element of refinance too.

4.2.4 STATE BANK GROUP AND SSIs:

The State Bank of India has been a pioneer in the

field of financing small scale sector. The bank's entry into

 153

this field dates back to April 1956, when a pilot Scheme for
financing small scale industries was introduced.

During the period after nationalisation, a number of

innovations have been made by the bank to suit the changing

needs of the time. Under the Liberalised Scheme, the bank

for the first time in the country introduced the concept of

need based approach in financing SSIs. It was revolutionary

becaue a radical departure from the security oriented

approach was followed by the banks.

In 1971, in the wake of the Thacker Committee Report,

the bank undertook the task of generating employment

potential in the country through formulatin9 and financing

employment oriented lending schemes. The objectives of it

was that anyone particularly the educated unemployed,

approaching the bank with a proposition that gives evidence

of a sincere desire and effort to venture on gainful and

profitable self employment will receive sympathetic and

objective response.

A study conducted by the bank in 1975 on the causes of

sickness in SSIs brought into focus the need for providing

counselling and consultancy assistance to small industries

right from the appraisal stage of a project. The total

 154

strength of the consultancy cells of the bank now exceeds

150. The officials of the cell provide consultancy services

free of charge. In addition, the cells also undertake

industry-wise studies for the preparation of Data Bank

Dossiers on important industry groups in the small sector.

These Data Bank Dossiers provide data. to both the bank's

operating staff and to prospective entrepreneurs in their

project formulation stage.

A maiden attempt was made by the State Bank of India

which launched a Pilot Project Scheme in 1956 and introduced

at nine of its branches, which was extended to all branches

from the 1st January 1959. The scheme of assistance which

came to be knwon as the 'Liberalised Scheme' is operated in

close co-ordination with the other financial and promotional

agencies like SFCs, Small Industries Service Institute,

National Small Industries Corporation.

State Bank Group has come a long way from the day it

entered this field by providing working capital facilities

to a few small industries. Now the range of assistance

covers all aspects of small industries promotion and

development from identification of entrepreneurial potential

to the development of entrepreneurial motivation, training,

equity support, counselling and consultancy assistance in

 155

all stages of development of a small industry and finance

both short and medium term not only for acquisition of fixed

assets and working capital but also for various other

purposes like research and development, testing and quality

control, market development etc.

4.3 COMMERCIAL BANKS • FINANCE TO SSIs POSITION IN

KARNATAKA
Karnataka has been fortunate from the beginning to

have a good banking system compared to many other states.

Dakshina Kannada district in the State has earned the

sobriquet of 'Cradle of Banks' having given birth to four

major banks viz., Canara Bank, Syndicate Bank, Vijaya Bank

and Corporation Bank, all of them are in the public sector

today. Among the other banks born in the State are State

Bank of Mysore which is subsidiary of State Bank of India

and two other banks viz., Karnataka Bank Ltd .. and Vysya

Bank Ltd.

The major commercial Banks were nationalised on 19th

July 1969 by the Government of India with the objective of

making them prime movers and pace setters for the socio-

economic progress of the country. They were expected to

extend their branch net work to the rural unbanked areas and

channelise more and more saving of the community for meeting

the credit needs of the priority sectors and other national

 156

priorities. When judged by these criteria, the commercial

banks have shown remarkable performance in the State. The

Banking development in Karnataka from 1969 to 1992 in terms

of bank branches deposits and advance is annexed to this

chapter vide Annexure - I.

The deposits mobilised by the banks in the State,

which stood at Rs. 255 crore in 1969, have increased to

Rs. 10784 crores in 1992. registering an average growth of

18.6 per cent per year. The share of Karnataka in the Bank

deposits in the entire country is around 4.6 per cent. The

average deposit per capita has increased from Rs. 78 to

Rs. 1796 during these 20 years. It is heartening to observe

that the Banks in Karnataka have mobilised 17.1 per cent of

their deposits in rural areas which is higher than the share

of rural deposits (14.8 per cent) in the entire country.

The most striking feature of banking development in

the State is the branch expansion of commercial banks. In

1969, there were only 850 branches. After ~e

nationalisation of Banks (1969) and the introduction of the

Lead Bank Scheme (1970), there has been a big leap forward

in branch expansion by commercial banks. As a result, at the

9
end of March 1992, the banks had 4316 branches. . Of the

9. CMIE. Basic Statistics Relating to Indian Economy.

Op cit. p 36.
 157

3375 new branches opened during the last two decades, more

than 3,000 branches were opened in rural and semi urban

areas. This vigorous branch expansion has resulted in

reduction of average population served per bank branch in

the State from 41,000 in 1969 to 10,400 at the end of March

1992; where as the corresponding figures for the country as

a whole are 69,000 and 13,800 respectively.lO

The development of the financial sector of a region is

closely related to the development in its real sector. The

development of banking - most important segment of financial

sector - is an important indicator of the development of the

region. The development of financial sector spurs the

development in real out put and employment in a region. This

is especially so in case of our state where banks should act

as an instrument of balanced economic development of

regions, functional diversification of banking business as

per plan priorities and as an instrument of economic change

reserving a part of financial resources for the development

of the neglected sectors of the economy like Small-Scale

Industry.

In the paragraphs below the pattern, trends and

magnitude of Commercial Banks assitance to the SSIs

Karnataka is analysed.

10. Ibid. P 42.

 158

4.3.1 TRENDS IN FINANCIAL ASSISTANCE TO SSIs BY COMMERCIAL

BANKS:

The table below indicates the financial assistance

provided by Commercial Banks in Karnataka to the Small Scale

Indstries from 1969 to 1992.

TABLE - 4.5

YEARWISE FINANCIAL ASSISTANCE TO SSIs IN KARNATAKA

FROM 1969-1992 (Amount Rs. in Crores)

During Advances Total % of S5I

the to SSIs Advances Assistance
Year to Total

1969 15.44 185.55 8.32

1970 24.62 235.19 10.46
1971 28.32 275.41 10.28
1972 32.07 356.30 9.00
1973 59.65 443.35 13.45
1974 64.90 549.13 11.82
1975 85.15 695.64 12.24
1976 82.61 859.33 9.61
1977 108.33 906.89 11.94
1978 119.92 1130.62 10.61
1979 143.67 1268.20 11.33
1980 186.00 1331.00 13.97
1981 230.00 1747.07 13.16---
1982 285.00 2125.37 13.41
1983 310.00 2504.94 12.37
1984 400.00 2738.26 14.60
1985 430.00 3676.84 11.69..........-
1986 560.46 4326.92 12.95
1987 666.55 5244.90 12.71
1988 842.66 6316.98 13.34
1989 928.50 6472.54 14.34
1990 1038.00 7228.35 14.36
1991 1063.18 7995.23 13.29~
1992 1123.65 8973.00 12.52
(March)

Source: 1. Several issues of "Institutional Finance Hews·

published by Institutional Finance and Statistics
Department, Vidhana Soudha, Bangalore.
2. Annual Economic Survey Reports published from the
Planning Department, Government of Karnataka.
 159

Illustration - 4C

Trends in Financing of SSIs by Commercial Banks

Amount (RR. in Crone)

~.----------------------------------------------------,

1000 ............................................................................................................ ····················T~·

800 ................................................................................................................................................ .

~oo ................................................................................................................................................ .
• 00 ............................................................................................................................................. .

o~cx~~~~~~~~~~~~~~
e~ 70 71 ~ 75 7. 76 7e 77 78 7~ 80 81 82 8:J 84 86 U 87 68 8~ ~ ~1

Years
 160

The Table - 4.5 provides the year-wise financial

assistance provided to SSIs since nationalisation of

commercial Banks to the year 1992 (March). It can be

observed from the above table that the average share of

assistance provided to SSIs is 12.96 per cent. During the

past two decades the share of financial assistance obtained

by SSIs is in the range of 8 per cent to 14 per cent only.

 161

4.3.2 PATTERN OF FINANCIAL ASSISTANCE BY COMMERCIAL BANKS IN

KARNATAKA:

In the table below the pattern of finance i.e.

District-wise financial assitance provided by Commercial

Banks to Small Scale Industries in Karnataka is depicted.

TABLE - 4.6
DISTRICT-WISE FINANCIAl.. ASSISTNCE TO SSIs BY COMMERCIAL·
BANKS AS ON 31.3.1992

Assistance to
SSIs by Commercial
Sl. Name of Districts Banks-Outstanding % to Total
No. As on March 1992
(Rs. in Crores)

1. Dakshina Kannada 252.62 22.48

2. Bangalore (U) 112.24 9.98
3. Mysore 104.58 9.30
4. Belgaum 103.86 9.24
5. Dharwad 84.94 7.55
6. Tumkur 57.44 5.11
7. Chitradurga 47.96 4.26
8. Bellary 44.28 3.94
9. Shimoga 38.06 3.38
10.Gulbarga 36.16 3.21
ll.Raichur 34.97 3.11
12.Kolar 32.55 2.89
13.Bangalore (R) 31.29 2.78
14.Mandya 27.75 2.46
15.Bidar 27.70 2.46
16.Bijapur 22.03 1.96
17.Hassan 20.00 1.77
18.Chickmagalur 19.26 1.71
19.Uttara Kannada 18.27 1.62
20.Kodagu 7.69 0.68

TOTAL 1123.65 100.00

Source: State level Bankers Committee - Karnataka. Lead Bank

section. Priority Sector Credit and Rural Division.
Syndicate Bank. Manipa1.
 162

Illustration - 4D

District-wise spread of the assistance

by Commercial Banks in SSIs

Six Fwd. Dists.

56.1% ____~
...............
~ ~
.................... ~
~:;
I{ ••••••••••••••••••••••••••
~............................ .
••••••••••••••••••••••••••••••••
•••••••••••••••••••••••••••••••••
...........
......
••••••••••••••••••••••••••••••••••
~
~ .......... : .. : ........ -:-:-:-:-:-: ..
.... : ................ : ...... .

~S::::/::;:::::::::::/\:j0?
• • • • • • • I

Ot.her . DiBt.B. (i ~ )
43.9%
 163

Dakshina Kannada District has obtained more assistance

from Commercial banks with 22.48 per cent followed by

Bangalore Urban, Mysore and Belgaum districts with 9.98 per

cent, 9.30 per cent and 9.24 per cent respectively.
Industrially forward districts of the state like Dakshina

Kanada, Bangalore, Mysore, Belgaum, Dharwar and Tumkur

Districts together have availed as much as 56~11 per cent.

The remaining 14 districts have availed only 43.89 per cent

of the total assistance.

This indicates that Commercial Banks have displayed

regional disparities. In fact this is one of the reasons for

agglomeration of industries in Bangalore, Mysore, Mangalore,

Tumkur and industrial backwardness in some other districts

like Coorg, Karwar, Chickmagalur and even potential

districts like - Shimoga, Hassan, Gulbarga have remained

backward industrially for want of finance.

4.3.3 BANKWISE FINANCIAL ASSISTANCE TO SSIs IN KARNATAKA (AS

ON 31.3.1992):

There are 20 nationalised banks in Karnataka, 13

RRBs with 1068 Branches and the industrial Co-Operative

Bank. Table - 4.7 depitcs the bankwise assistance to Small

Scale Industries in Karnataka.

 164

TABLE - 4.7

BANK-WISE ASSISTANCE TO SSIs IN KARNATAKA

AS ON 31.3.1992

Amount
(Rs. in Crores)
------------------------------------------------------------
S1- Advances outstanding % to
No. Name of the Banks under SSIs as on Total
March '92

1- State Bank of India 130.39 11.60

2. State Bank of Mysore 129.21 11.50
3. Other State Bank Group Bank 10.73 0.95
4. Canara Bank 182.36 16.23
5. Syndicate Bank 116.58 10.37
6. Union Bank of India 68.30 6.07
7. Vijaya Bank 66.36 5.90
8. Corporation Bank 40.11 3.56
9. Indian Bank 33.31 2.96
10. Bank of Baroda 22.86 2.03
II. Central Bank of India 24.86 2.21
12. Indian Overseas Babnk 18.43 2.96
13. Punjab National Bank 16.92 1.50
14. UCO Bank 12.01 1.07
15. Other Nationalised Banks 39.41 3.07
16. Industrial Co.Op Bank 106.95 9.52
17. RRBs 68.30 6.08
--------- --------
TOTAL 1123.65 100.00

Source: State level Banker's Committee Karnataka Lead

Bank Section. Priority Sector Credit and Rural
Development Division, Syndicate Bank, Manipal.

Canara Bank stands first among other banks in

financing Small Scale Industries in the State, followed by

State Bank of India and State Bank of Mysore. Other banks

active in financing Small Scale Industries in the state are

 165

Illustration - 4E

Bankwise Assistance to SSIs'in Karnataka

C'.anara Bank j6.~

•••••• ~H-f"'t-'L
~•••••••••• 'f-t-~~+f'" oth~r Btm1m. 22. m

S.B1 II 6%
. ..............
.. .....
~~ ......
~""'.""'~HHHH~~~
.......~. • .... • • 'l+-l-Hf+I~~-++-+'
... ~···~HH44++++~HH~
............ ~
. . . . . . . . . . . . . .~ f+l-Hf+I-++-++-++~

6.1~

fitm. 6.1~
S1lldioat..e Bank I 0 .4~
Indl. Coop. Bank 9.5~
 166

syndicate Bank, with an outstanding advance of Rs. 116.58

crores and Union Bank of India with Rs.68.30 crores and

vijaya Bank with Rs.66.36 crores. The Contribution of

Industrial co-operative Bank and the recently established

Regional Rural Banks are also considerable. They have the

outstanding advances to the extent of Rs.106.95 crores and

Rs.68.30 crores respectively.

The performance of Commercial Banks in the state in

providing credit facilities to the priority sectors in

accordance with the RBI's stipulations is quite

satisfactory. But geographically speaking, the spread of

commercial banks credit has been uneven. Mangalore,

Bangalore, Mysore and Belgaum districts are the major

beneficiaries, where districts like Raichur, Bijapur,

Hassan, Karwar and Coorg is less. But SSIs in the non-

backward districts of Mandya, Chitradurga, Bangalore

(Rural), Kolar and Bellary districts is also less. Hence

there is a need to commercial banks to step up their

sanctions to SSIs in these districts.

4.4 KARNATAKA STATE FINANCIAL CORPORATION AND SMALL-SCALE

INDUSTRIES :
Karnataka State Financial Corporation popularly known

as KSFC was established in the year 1959 under the SFCs Act,
 167

1951, for promoting industrial entrepreneurship in the State

of Karnataka. As a premier Regional Industrial Development

Bank, the Corporation gives special attention to the

backward districts to bring about balanced growth of

industries in the state.

Karnataka State Financial Corporation offers long and

medium term financial assistance in the form of :

- Loans and advances with a liberal repayment period

(normally not exceeding 8 years) including moratorium.

Loans in collaboration with other financial

institutions.

- Subscription to share capital of companies promoted

by small entrepreneurs (Special capital scheme) by way of
soft loan.

4.4.1 CONCERNS ELIGIBLE FOR FINANCIAL ASSISTANCE FROM

KARNATAKA STATE FINANCIAL CORPORATION:

Assistance from the Corporation is available to the

industrial concerns engaged or to be engaged in

a) Manufacturing, processing or preservation of goods.

b) Maintenance, repair, testing, servicing of

machinery of any description or vehicles or vessels

or motor boats, trailer or tractors.

 168

c) Assembling, repairing or packing articles with the

aid of machinery or power.

d) Providing special or technical knowledge and other

services for the promotion of industrial growth.

e) Generation or distribution of electricity or any

other form of power.

f) Mining or development of mines.

g) Transport of goods or passengers by road, water or

by ropeway.

h) Development of industrial areas or industrial

estates.

i) Fishing or providing shore-facilities for fishing

or maintenance thereof.

j) Small Hospitals/Nursing Homes

k) Concerns engaged in Research and Development of any

process or product in relation to any of the

industrial activities.
 169

1) Providing weigh bridge facilities

m) Telex/telecommunication facilities, providing rig

drilling facilities, power laundries, xerox/photo

copying, hiring out of heavy material handling

equipments, cranes, earth moving equipments and

other similar equipments etc.

n) Setting up or development of tourism related

facilities including amusement parks, cultural

centres, convention centres, hotels, restaurants,

travel, transport and tourist service agencies.

0) Assistance to marketing entrepreneurs and assitance

for purchase of mobile sales van for improving the

marketing infrastructure of the products of

cottage and village industries and SSI units.

p) Assitance is also provided for construction,

development and maintenance of roads.

q) Assisance for Tissue Culture activities.

KSFC will provide term loan assistance to projects

costing upto Rs. five crores. (Independently and jointly

 170

with Karnataka State Industrial Investment and Development

corporation(KSIIDC)/Banks wherever necessary) .

NOTE: The expression 'Processing of goods' includes any part

or process for producing, preparing or making an article by

subjecting any material to a manual, mechanical, chemical,
electrical or any other like operation).

4.4.2 CONCERNS INELIGIBLE FOR FINANCIAL ASSISTANCE FROM

KARNATAKA STATE FINANCIAL CORPORATION:

Assistance is not provided for concerns:

a) engaged in trading activity,

b) developing farms like Poultry, dairy etc.,

c) in which directors of the Corporation or their

relatives have any interest.

The maximum amount that can be availed from Karnataka

State Financial Corporation is Rs. 90.00 lakhs, in case of

Registered Co-operative Societies and Companies, whether

public or private limited and Rs. 60.00 lakhs in other cases

like proprietory or partnership concerns or Hindu Joint

family. This excludes the soft loan/seed capital/bridge loan

(against subsidy).
 171

Financial assistance is also available to the existing

industrial concerns for expansion and/or renovation and/or

modernisation or diversification in the line of manufacture

apart from the financial assitance to the new industrial

concerns.

The Corporation is operating with 29 schemes. These

schemes are framed depending on the various needs of the

entreprenuers and also to help various sections of the

society. They are

1. Technicians' scheme

2. Scheme for women entrepreneur

3. Mahila Udyama Nidhi Scheme (MUNS)

4. Composite loan scheme

5. Scheme for Rural Industrialisation

6. Scheme for Ex-servicemen

7. Single window scheme (working capital is available

under this scheme)

8. Physically Handicapped scheme

9. Scheme for Educated unemployed

10. National Equity Fund Scheme

11. Finance to Qualified Professionals

12. Scheme for finance to Transport Vehicles

13. Computer Loan Scheme

14. Finance for Research & Development Activities

 172

15. Scheme for the acquisition of indigenous or

imported second-hand machinery

16. Scheme for Rehabilitation of Sick Units

17. Finance to Hotel Industry

18. Finance under lOBI Seed Capital Scheme

19. Scheme for Hospitals and Nursing Homes

20. Scheme for Modernisation

21. Finance for Quality Control Equipments

22. Finance for Generators

23. National Equity Fund Scheme

24. Fiance for Electro Medical Equipments

25. Equipment Finance Scheme

26. Assistance to Tissue Culture Activity

27. Scheme for Finance of Mobile Sales Van

28. Assistance for Marketing

29. General Scheme.

4.4.3 AN EVALUATION OF THE OPERATIONS OF KARNATAKA STATE

FINANCIAL CORPORATION:

A comparative analysis of the performance of leading

State Financial Corporations has been done in the following

paragraphs to evaluate the operations of Karnataka State

Financial Corporation. The comparison has been in the key

areas of operations viz., Sanctions, Disbursements,

Recovery, sanctions to Small Scale Industries and Backward

areas.
 173

During the year 1990-91 seven State Financial

corporations have registered a sanction of above Rs.125
Crores. They are:

TABLE - 4.8

PERFORMANCE OF MAJOR STATE FINANCIAL CORPORATIONS

DURING 1990-91

Sl. State Financial Corporations Sanctions

No. (Arnt.in Crores)

01. Andhra Pradesh SFC 265.30

02. Karnataka SFC 250.89

03. Gujarat SFC 215.34

04. Uttar Pradesh SFC 199.69

05. Tamilnadu Industrial Investment

Corporation 187.49

06. Maharashtra SFC 167.33

07. Rajastan SFC 126.61

Source: Annual Reports of respective State Financial

Corporations for the year 1990-91.

Karnataka State Financial Corporation occupies the

second place in sanctions. KSFC has graduated from the third

place during the previous year. Since 1984-85, in terms of

cumulative sanctions KSFC occupies the third place with

Rs.127l.84 crores. UPSFC is in the first place with

Rs.1578.07 crores followed by APSFC with Rs.15l7.95 crores.

 174

(a) SANCTIONS TO SSIs:

APSFC with an assistance of Rs.193.27 crores as

against Rs.156.25 crores in '89-90 occupies the first

position in sanction to SSIs. Karnataka State Financial

Corporation occupies the second place with sanctions of

Rs.166.98 Crores to SSIs as against Rs.125.70 Crores in

'89-90. The KFSC has graduated from the fourth to second

place compared to the year 1989-90. The position of other

State Financial Corporations is as follows:

TABLE - 4.9

SANCTION TO SSIs BY MAJOR SFCs

(Amount in Crores)

Sl. Name of the SFC Year Sanctions to Ranking

No. SSIs

01. Uttar Pradesh SFC 1989-90 147.16 3

90-91 142.99 5

02. Gujarat SFC 1989-90 149.40 2

90-91 145.23 3

03. Maharashtra SFC 1989-90 76.40 7

90-91 144.75 4

04. Rajasthan FC 1989-90 101.22 6

90-91 123.20 7

05. TIle 1989-90 106.15 5

90-91 142.05 6

Source: Report on Development Banking in India 1990-91 lOBI,

Bombay.
 175

(b) SANCTIONS TO BACKWARD AREAS:

Karnatataka State Financial Corporation occupies the

first place by sanctioning Rs.113.65 Crores to backward

areas during 1990-91. It has graduated from third to first

place during the year 1990-91. The position with reference

to other State Financial Corporation is as follows:

TABLE - 4.10

SANCTIONS TO BACKWARD AREAS

Sl. Name of the SFCs Sanctions to Ranking

No. Backward Areas
(Amt. in crores)

01. Uttar Pradesh SFC 97.07 3

02. Andhra Pradesh SFC 108.19 2

03. Gujarat SFC 82.41 5

04. Maharashtra SFC 45.58 6

05. Rajasthan FC 84.98 4

Source: Report on Development Banking in India 1990-91 lOBI,

Bombay.

As can be seen from the above table that Karnataka

State Financial Corporation has carved a niche for itself

when compared to other State Financial Corporations. Its

growth during the last decade, especially during the last 5

years, is phenominal. Hence it has been rated as the number

 176

one SFC in the country by lOBI and SIDBI. It has been a

premier term lending institution in the State with almost 50

per cent of the existing units being financed by Karnataka

State Financial Corporation. The growth of SSIs in State is

commensurate with the growth of Karnataka State Financial

Corporation. Even the field survey conducted for this study

revealed that the Small-Scale Industrialists could not have

established their units but for the financial asistance from

the financial institutions like Karnataka State Financial

Corporation.

4.4.4 OPERATION OF THE CORPORATION SINCE ITS INCEPTION .

The Table - 4.11 indicates the performance of

Karnataka State Financial Corporation since 1959-1960 to

1991-1992.
 177

TABLE - 4.11

PERFORMANCE OF KSFC SINCE INCEPTION TO 31.3.92

(Amount Rs.in Crores)

Sanctions during the year

Sl. Year Number
-----------------------------------
% increase/ Amount % increase/
No. decrease over decrease over
the previous the previous
year year
------------------------------------------------------------
1 2 3 4 5 6

1. 1959-60 11 0.28
2. 1960-61 21 90.9 0.44 57.1
3. 1961-62 46 19.4 0.55 25.0
4. 1962-63 33 (-) 28.2 0.29 ( -) 47.2
5. 1963-64 38 15.1 0.68 134.48
6. 1964-65 49 28.9 1.11 63.2
7. 1965-66 59 20.4 1.49 34.21
8. 1966-67 44 ( -) 25.4 0.81 ( - ) 45.60
9. 1967-68 88 100.0 1.03 27.10
10. 1968-69 65 26.1 1.78 72.80
11. 1969-70 64 ( -) 1.5 1.64 ( -) 7.80
12. 1970-71 151 135.9 3.37 105.40
13. 1971-72 292 93.3 5.05 49.80
14. 1972-73 292 5.70 12.80
15. 1973-74 345 18.1 8.51 49.20
16. 1974-75 319 (-) 7.5 10.47 23.00
17. 1975-76 242 ( -) 24.1 9.66 ( -) 7.70
18. 1976-77 291 20.2 11.06 14.40
19. 1977-78 226 ( - ) 22.3 10.13 (-) 8.40
20. 1978-79 322 42.4 10.61 4.70
21. 1979-80 817 153.7 17.33 63.30
22. 1980-81 1022 25.0 21.17 22.10
23. 1981-82 1292 26.4 32.49 53.47
24. 1982-83 1871 44.8 43.78 34.70
25. 1983-84 2680 43.2 58.26 33.00
26. 1984-85 4002 49.3 75.62 29.70
27. 1985-86 4795 19.8 103.57 36.90
28. 1986-87 4910 2.3 111.79 7.90
29. 1987-88 5053 2.9 125.59 12.30
30. 1988-89 6178 22.2 144.66 15.10
31. 1989-90 7641 23.6 186.20 28.70
32. 1990-91 8284 8.4 250.89 34.70
33. 1991-92 10611 28.0 332.88 32.60
34. Sanctions
As on
31.3.92 62154 1588.88

Source: 1) Annual Reports of KSFC

2) Assistance to Industry - A short guide detailing
how to obtain loan from KSFC 1992.
3) KSFC News - Vol. 14, NO.2 & 3, Aug. Sept. 1992.
 178

Illustration - 4F
Trends in KSFC's Assistance (Number)

N
.~u=m~b=e=n~______________________________________________1
80..-

.co ................................................................................................................................................

80 ..................................... ,................................................................:......................................... .

0L---6g--~~-O~--~=~g=-~7=O~==~~~-~8~0----~8~g~-~QO~----~g~1~-:g~2~
Years
-+- No. 01 Urub
 179

Illustration - 4G

Trends in KSFC's Assistance (Amount)

2000~----------------------------------------------------'

1500 ................................................................................................................................................

1000 ................................................................................................................................................

500 .................................................................................................................................................

59-80 89-70 79-80 89-90

Years
.Amount In Crores
 180

This table is synchronised as below.

TABLE - 4.12

DECADE-WISE PERFORMANCE OF KSFC

Year Number Amount

(Rs. in crores)

1959-60 11 0.28
1969-70 518 10.09

1979-80 3815 101.98

1989-90 43259 1005.11

1991-92 62154 1588.88

It can be analysed from the above Table that almost

80 per cent of the sanctions is during the last 7 years

i.e., to say the sanctions during the first 26 years is only

20 per cent of the total sanctions. There is a spurt in the

sanctions of the Corporation since 1985-86. From that year

for the first time the sanctions have crossed Rs.100 Crore

mark during one financial year and during 1990-91 it crossed

Rs.200 crore mark and during the year 1991-92 it even

crossed Rs.300 crore mark. Even in terms of number of units

sanctioned more than 75 per cent of the total units

sanctioned by the Corporation is during the last 7 years.

 TABLE - 4.13

ASSISTARCB TO SMALL-SCALE INDUSTRIES DURING 1987-88 TO 1991-92 AND AS ON 31.03.1992

(Amount Rs. in crores)

1987-88 1988-89 1989-90 1990-91 1991-92 As on 31.03.92

51. Particulars
No. No. Amt. No. Amt. No. Amt. No. Amt. No. Amt. No. Amt.

1. Total Sanctions 5053 125.58 5984 140.99 7369 181.80 7898 243.10 10300 325.25 57684 1433.39
2. Sanctions to SSIs 4232 94.93 5078 106.72 6060 128.70 6185 166.97 7597 232.84 44751 987.68,
3. 2 as % of 1 83.75 75.59 84.85 75.69 82.23 69.14 78.31 68.68 73.75 71.58 77.57 68.90

Source Annual Reports of KSFC from 1987-88 to 1991-92.

 182

Illustration - 48
KSFC's Sanctions to SSIs

Sanot. .t~
Non...~I
SalloW. to NonSS.. 12~
«5.71

Amount (Rs. in Crores) Number of Units

 183

'l2\BIE - 4.14
DIS'JRIC'l'-WISE ANALYSIS OF UlANS SAR:TIOOFD 'ID SSIs AS Cfi 31.3.1992
(Arrount Rs. in Crores)

S1.No. Nane of the District Number % to Total Anount % to Total

----------------------------------------------------------------------
1 2 3 4 5 6

I. BAC'IQIiARD DIS'IRICl'S
1. Bidar 1167 2.6 36.31 3.6
2. Mysore 3264 7.2 73.56 7.4
3. Dharwad 3871 8.6 66.75 6.7
4. Raichur 995 2.2 24.44 2.4
5. Be1gaum 3734 8.3 52.24 5.2
6. Bijapur 3637 8.1 22.31 2.2
7. Dakshina Kannada 2396 5.3 54.50 5.5
8. 'fumkur 3223 7.2 52.80 5.3
9. Gulbarga 1464 3.2 22.00 2.2
10. Uttara Kannada 788 1.7 11.58 1.1
11. Hassan 1114 2.4 17.73 1.7
-----------------------------------------
'lUI'AL - I 25653 59.32 434.42 43.98
-----------------------------------------
II. amm DIS'IRICl'S
1. Bangalore 8147 18.2 390.46 39.5
2. Shinoga 4519 10.0 27.68 2.8
3. Kolar 1058 2.3 34.02 3.4
4. Chi tradurga 1789 3.9 40.75 4.1
5. Mandya 1096 24.4 20.36 2.0
6. Chickrtaga1ur 700 1.5 7.09 0.7
7. Be11ary 1329 2.9 28.51 2.8
8. Kooagu 460 1.0 4.37 0.4
-----------------------------------------
TCYrAL - II 19098 42.67 553.26 56.01
-----------------------------------------
State Total 44751 100.00 987.68 100.00

Sooroe : Annual Report of KSFC for the year 1991-92.

 184

Illustration - 4.1

Pattern of KSFC's Assistance

Anlount (Hs. in Crores) Number of Units

 185

During its existence of more than 25 years it has sanctioned

only 14,722 units. Whereas, during the last 7 years it has

sanctioned almost around 50,000 industrial concerns.

During the first twenty years (1959-60 to 1979-80) of

the operations of KSFC, the total sanctions we~e only Rs.I00

crores whereas during the succeeding four years i.e., during

1980-81 to 1983-84, another Rs.I00 crores were sanctioned.

Since then every year the corporation is sanctioning more

than Rs.I00 crores. During 1990-91 and 1991-92, the annual

sanctions were Rs.250 crores and Rs.333 crores respectively.

It can be observed from the ,Table 4.13 that as on

31.3.92 almost 69 per cent of the sanctions (amountwise) and

77 per cent (Numberwise) is towards SSI sector. It is also

observed from the trends between 1987-88 to 1991-92 that the

share (Numberwise) towards SSI Sector to the total sanctions

has declined during 1990-91 and 1991-92. It was 84.85 per

cent during 1988-89 and has declined to 78.31 per cent

during 1990-91 and has further declined to 73.75 per cent

during 1991-92. However, in terms of amount-wise sanctions

the share of SSIs to total sanctions is around 70 per cent

and above except during the year 1989-90.

The financing plan has given priority to backward

region as may be seen from the Table - 4.14 that in terms of
 186

number 57.32 per cent of the sanctions have gone to backward

districts and in terms of amount it is 43.98 per cent.

However, if we carefully analyse, the major portion has gone

to 6 districts namely Bangalore, Mysore, Dharwad, Mangalore,

Tumkur and Belgaum. These 6 districts have availed 70 per

cent of assistance. Remaining 13 districts have availed 30

per cent of the total sanctions. There is an agglomeration

of Industries in these districts. This corroborates the

statement that th financial institutions have displayed

regional disparity in financing. This has contributed for

the concentration of industries in certain pockets of the

state like -- Bangalore, Mysore and Tumkur.

 187

4.4.5 INDUSTRY-WISE CLASSIFICATION OF LOANS SANCTIONED:

Table - 4.15 indicates industrywise classification of

loans sanctioned by KSFC since inception to 31.3.1992.

TABLE - 4.15

INDUSTRY-WISE SANCTIONS AS ON 31.03.1992

(Amount Rs. in Crores)

51. Industry Number % to Amount , to

No. Total Total

1. Food 8138 18.18 170.15 17.22

2. Textiles 13594 30.37 58.57 5.93

3. Paper 496 1.10 143.77 14.55

4. Leather 449 1.00 2.71 0.27

5. Rubber 500 1.11 19.25 1.94

6 . Chemical 1658 3.70 82.08 8.30

7. Engieering 2087 4.16 138.90 14.06

8 . Electrical 1686 3.76 95.80 9.69

9. Others 16143 36.07 276.45 27.98

------------------------------------------
TOTAL 44751 100.00 987.68 100.00

Source: Annual Report of KSFC for the year 1991-92

It can be observed from above that in terms of

number, textiles sector has availed more assistance followed

by Food Industries. In terms of amount Food Industries have

availed more financial assistance followed by Paper,

Engineering and Electrical Industrial Sector. Karnataka's

economy being predominantly an agro based one has resulted

in more agro based food industries like rice mill, oil

 188

mill, floor mill, oil refineries etc. Further Karnataka is

known for its textiles like handloom, powerloom and
weaving. Then the solubrious climate in the state provides
scope for the establishment of electrical and electronic

industries.
 189

Illustration -4J

Industry-wise Sanctions of KSFC

,00 d 1N( . r.,,?1)

.~O* ~
-4'J . . . . '-H-H-H-t+t-H'1''''''
Otherrs 28.0%
,."
/.t"• ••••••• ~++-H4++-H-t++1"\.
01 ••••••••••• U4-+-1-~-++~f-t++io.

Rubber 1.9%
14.6%
Textilers 6.9%

Chemical 8.3%
leering 14.1%
Elect. & Electronics 9.7%
_ _ _ _ _ _ ____ ~ _ . - . _ . - . _ _ ..... • .. _ _ ..... ~ .......... " ..................... L.L.JII ........ . I . ' U " '-- •

In the Table below KSFC's sanction during 1989-90 to 1991-92 and since inception upto 31.3.1992 (Constitution-
wise is presented :

TABLE - 4.16

CONSTITUTION-WISE CLASSIFICATION OF LOANS SANCTIONED

(Amount Rs. in Crores)

Sanctions
Since Inception up to 31.3.1992
Sl. Type of 1989-90 1990-91 1991-92
No. Constitution
Number Amount Number Amount Number Amount Number ' t o Total Amount % of Total
--------------------------------------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10 11 12

I-'
1. Public Ltd. , Companies 41 11.11 20 8.39 18 6.30 367 0.63 65.73 4.58 1.0
2. Private Ltd. , Companies 355 59.79 411 82.35 346 84.64 3347 5.80 500.28 34.90 0
3. Partnership Concerns 714 39.02 958 58.97 1069 85.80 7214 12.50 334.28 23.32
4. Proprietary Concerns 6528 76.08 6892 100.78 9170 155.33 46563 80.72 527.45 36.79
5. Others (Co-operative
Societies and Joint
Hindu Family 3 0.20 3 0.39 8 0.80 193 0.33 5.65 0.39
TOTAL
----------------------------------------------------------------------------------
7641 186.20 8284 250.88 10611 332.87 57684 100.00 1433.39 100.00

Source : Annual Report of KSFC for the year 1991-92

It can be seen from the above that in terms of number and amount more finance has been availed by the
proprietory concerns (as much as 80.72% interms of number and almost 37% in terms of amount). In terms of
of amount, Private Ltd., Companies have availed about 35% of the total amount sanctioned by the KSFC followed
by Partnership concerns to the extent of 23%. It can also be observed that the sanctions to Co-operative
Societies is very less. This is because these Societies can obtain finance along with concessions from
Governmental Agencies.
•••• 1 ~~ze w~se ana~ys~s .o~ KSFC operation

TABLE - 4.17

SIZE-WISB ANALYSIS OF TERM LOAR SANCTIONED (DURING 1990-91 TO 1991-92 AND AS ON 31.03.1992)
(Amount Rs. in Lakhs)

51. 1990-91 1991-92 Since Inception up to 31.3.1992

No. Size of Loan -----------------------------------------------------------------------
Number Amount Number Amount Number % to Total Amount % to Total
----------------------------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10

1. Upto Rs.0.50 lakhs 3531 865.36 4643 1074.21 28048 46.38 5305.66 3.98
2. Rs. 0.50 - Rs. 2.00 lakhs 1910 2426.77 2265 3097.43 17665 29.19 21032.11 15.80
3. Rs. 2.00 - Rs. 5.00 lakhs 1711 5330.15 2277 7491.36 9116 15.07 29503.98 22.17 .....
4. Rs. 5.00 - Rs. 7.50 lakhs 259 1647.99 313 1993.38 1959 3.23 12475.04 9.37 ~ .
5. Rs. 7.50 - Rs.I0.00 lakhs 263 2418.51 354 3185.23 1326 2.19 11712.81 8.80 .....
6. Rs.I0.00 - Rs.20.00 lakhs 160 2394.92 254 3608.17 1277 2.11 17588.38 13.22
7. Rs.20.00 - Rs.30.00 lakhs 96 2320.65 117 2803.18 661 1.09 14755.99 11.09
8. Rs.30.00 - Rs.45.00 lakhs 35 1308.10 50 1881.00 217 0.35 8114.96 6.09
9. Above Rs.45.00 lakhs 28 1782.38 61 4071.28 194 0.32 12552.77 9.43

Total
----------------------------------------------------------------------
7993 20494.83 10334 29205.24 60463 100.00 158888.19 100.00

Source : Annual Reports of KSFC for the years 1990-91 and 1991-92

It is clear from the above, that in terms of number, more sanctions are towards the loan
between Rs.0.50 lakhs to Rs.5.00 lakhs. But in terms of amount more finance is in the range of
Rs.I0.00 lakhs to Rs.45.00 lakhs and above Rs.45.00 lakhs.
 192

4.4.8 THE RATIO OF DISBURSEMENT TO SANCTIONS:

'Sanctions' is only a paper work. Only through the

process of disbursements the sanctioned amount is released

and the Fixed Assets created. Normally, the disbursements

will be in stages depending on the progress of the project.

In the table below the disbursement of KSFC during the

last 5 years and as on 31.3.92 and the corresponding ratio

to sanctions has been workedout.

TABLE - 4.18

DISBURSEMENT PERFORMANCE OF KSFC

(Amount Rs. in Crores)

Sl. Year Disbursements Sanctions % of disbursement

No. to sanctions

l. 1987-88 104.79 125.59 83.43

2. 1988-89 124.60 144.66 86.13
3. 1989-90 147.02 186.20 78.95
4. 1990-91 190.71 250.89 76.01
5. 1991-92 246.34 332.88 74.00
6. As on
31.3.92 1206.52 1588.88 75.93

Source: Annual Reports of KSFC from 1987-88 to 1991-92.

 194

TABLE - 4.19
RECOVERY PERFORMANCE OF THE KSFC DURING 1987-88 TO 1991-92
(Rs. in Crores)

Arrears at Current Total Total % of 5

Years the beginning Demand Recover- Recovery to 4
of the year able
amount
1 2 3 4 5 . 6
(2 + 3)

1987-88 75.92 45.30 121.22 75.48 62.26

1988-89 71.28 114.93 186.21 95.05 51.04

1989-90 84.90 141.78 226.68 117.71 51.92

1990-91 103.16 155.19 283.35 137.61 48.22

1991-92 134.19 224.06 358.25 174.60 48.73

Source: Annual Reports of KSFC from '87-88 to '91-92.

Recovery is normally a hard job. It is the tendency of

the people to postpone the payments. Apart from this, there

will be genuine reason for not keeping the repayment

schedule from the SSI entrepreneurs like raw material

problem, stiff competition, labour problem, power problem

etc. If we carefully analyse the Table above, the recovery

against current demand is increasing and the recovery

against arrears is decreasing. The recovery against arrears

is normally a long drawn process involving the procedures

like - referring to concerned Deputy Commissioner, invoking

personal guarantee if any. auctioning of the collateral

security etc.
 1~5

TABLE - 4.20
TRENDS IN RECOVERY DURING 1987-88 TO 1991-92
(Amount Rs.in Crores)

51. Year Recovery % increase over the

No. previous year

1. 1987-1988 75.48

2. 1988-1989 95.05 25.92

3. 1989-1990 117.71 23.84

4. 1990-1991 137.61 16.90

5. 1991-1992 174.60 26.88

It can be seen from the above Tables that the recovery

performance of KSFC is quite good. Even though the recovery

against recoverable is decreasing from 62 per cent in '87-88

to 49 per cent in '91-92. This is mainly because of the

factor that the Corporation is providing facilities like

reschedulement of term loan, rehabilitation to sick units

and other facilities to help the ailing industries. The same

has not affected the overall recovery performance of the

corporation which can be seen by analysing the percentage of

overdues to the loans outstanding. (i.e., Default Ratio) In

the table below the Default Ratio (corporate) is given.

 196

TABLE - 4.21

DEFAULT RATIO OF THE LOANS SANCTIONED BY KSFC

Sl.
No.
Year
,
Default Ratio

1 1989-90 16.93

2 1990-91 18.80

3 1991-92 20.02

Source: Press note prepared by Planning and Development

Department of KSFC June '92.

The Default Ratio during the previous year was only

20 per cent. This is to say 80 per cent of the units

assisted by the corporation are regular in repayment. But

the default ratio is increasing. During the three years

under review, it has risen from almost 17 per cent to 20 per

cent. This is mainly because of the abnormal increase in the

operations of the KSFC and actually not matched by the

required administrative staff and the delays like legal

impediments in taking stern against the defaulters are the

main reasons for the increase in the default ratio.

 197

4.5 THE COMPARATIVE ANALYSIS OF INSTITUTIONAL FINANCE TO

SSIs IN KARNATAKA:

As detailed in the previous paras of this chapter,

the institutional net-work to provide financial assistance

to SSIs is as follows :

1. Nationalised Commercial Banks

2. Karnataka State Financial Corporation

3. Industial Co-operative Bank and

4. Regional Rural Bank

The development of Small Scale Sector is the aggregate

result of combained inputs of technological skills, labour,

finance and Managerial efficiency. The process of providing

financial input is also a combined effort in the sense that

normally those who require long term capital approach KSFC

and for meeting working capital requirements for short

periods are hleped by commercial Banks. Small industries run

by Co-operative societies naturally look to the co-operative

credit organisation like Industrial co-operative Bank for

assistance. The smaller units in the Small Scale Sector

located in the villages normally look for Regional Rural

Banks.
 198

The Table - 4.22 provides present flow of institu-

tional finance to Small Scale Industries in Karnataka.

TABLE - 4.22

INSTITUTIONAL FINANCE TO SSIs IN KARNATAKA AS ON 31.3.1992

(Amount in Crores)

Sl. Financial Institution Assistance % to

No. provided to SSIs Total

1. Commercial Banks 1123.65 49.15

2. Karnataka State Financial

Corporation 987.68 43.20

3. Industrial Co-operative Banks 106.95 4.67

4. Regional Rural Banks 68.30 2.98

TOTAL 2286.58 100.00

It can be seen from the table above that almost 50 per

cent of the present institutional flow of credit to SSIs is

from the Commercial Banks. This is closely followed by KSFC

with 43.20 per cent. Industrially Co-operative Bank normally

concentrating itself in the Co-operative Sector has a share

of 4.6 per cent. The latest entrants. RRBs have a share of

2.98 per cent of the total institutional finance to SSIs in

Karnataka.
 199

Illustration - 4K

Flow of Institutional Finance to SSIs

in Karnataka

COn"lmerci ~l Bftnk 8 1123,65

~
---" ....
...................
,
................. .
"-----

~ ....................... .
•••••••••••••••••••••••••••

...........................
: ............................ : ......... .:/." RRBs 68.3
~
~ ...........
....... :-/'/
......................../
~
.
106.96

KSFC 987.68

Amount (R&. in Crore&)

 200

Now, let us analyse the contribution made from the SSI

sector to Staters economy in terms of production, investment

and employment vis-a-visa the institutional finance

received. The table below presents production, total

investment total number of persons employed in State in the

SSI sector in the State as on 31.3.92.

TABLE - 4.23

SSIs & THEIR CONTRIBUTION TO THE STATE's ECONOMY AS ON

31.3.92

Sl. SSIs Unit Value

No. Contribution

1 Production Arnt.Rs.in Crores 2527

2 Investment do 1274.90

3 Exports do 105.44

4 Employment Number 8,70,065

Against this the institutional finance for this sector

is not adequate. This clearly indicates that the

availability of institutional finance to this sector is

neither commensurate with their needs and growth nor in

proportion to the volume of activity generated by this

sector.
 201

4.6. CONCLUDING REMARKS

"A Banker-a fellow who lends you his umbrella when the
sun is shining and wants it back the minute it begins to

rain"ll -a familiar observation of the banker's role by Mark

Twain. At a time when small enterprises are complaining that

they are not getting enough umbrellas the explanation

possibly given is, why the sun is not shining.

Banks should develop a new credit strategy: CREDIT

MUST LEAD TO DEVELOPMENT AND NOT MERELY FOLLOW IT. This

involves change in attitude or perspective. Credit has been

following centres of development where large industries are

concentrated and society in general has been starved of

institutional finance.

Banking need not be inordinately concerned with the

maximising of profits. Banking must be an important lever

for socio-economic changes. Banking must become plan

oriented, priority minded and socio-economic motivated. The

profitability of the business of financing small scale

industries should not be thrown overboard. Small industries

do throw open enormous scope for profitable employment of

11. Birla Institute of Scientific Research. Opcit. P 182.

 202

funds by banks. Any developmental activity does involve

initial expenditure and losses, but the returns would begin

flowing in later, and in the longer run the business would

become profitable. In any case, presently the total advances

of banks to small industries form a small percentage of

their credit profolio and as such the effects on

profitability will be minimum.

Even in financing large industries, security is not

regarded in isolation. The repaying capacity and the

potential for cash accruals is deemed more important. The

same principles and techniques should be applied to

financing small-scale sector is undisputed. Bankers have to

take with a firm conviction that small-scale sectors playa

large part in contributing to the GNP and deserve the

required financial aid by banks. Therefore, banking at the

outset may look as an economic dimension, but it has in it a

social utility and a creative activity.

 ARNBXURE - I

BANJCING DEVELOPMENT IN KARNATAKA (1969-1991)

(Amount Rs. in Crores)

Karnataka All India

Year --------------------------------------------------------- -------------------------------------------------------
Branches Deposits , Growth Advances , Growth C.D. Ratio Braches Deposits , Growth Advances , Growth C.D.Ratio

1969 850 255.22 188.55 72.7 8832 5148.37 3716.70 72.2

1970 1034 300.91 17.9 235.19 27.1 78.3 11006 6027.87 17.0 4578.50 23.2 75.9
1971 1190 369.18 22.6 275.41 16.8 74.5 12850 7243.10 20.1 5051. 3 6 10.3 69.7
1972 1415 403.16 9.2 356.30 29.3 88.3 14587 8359.65 15.4 5613.81 11.1 67.1
1973 1580 483.36 19.8 433.35 21.6 89.6 16385 10084.01 20.6 7091.10 26.3 70.3
1974 1692 556.83 15.1 524.56 21.0 17938 11610.53 15.1 I\J
94.2 8245.41 16.3 71.0 0
1975 1847 670.88 20.4 670.95 27.9 100.0 20050 13710.73 18.0 10073.45 22.2 73.5 w
1976 2049 876.19 30.6 859.33 28.1 98.0 23485 17595.45 28.3 13553.10 13.5 77.0
1977 2282 1111.74 26.8 906.89 5.5 81.5 26958 21364.52 21.4 15327.25 13.1 71. 7
1978 2478 1356.22 21.9 1130.62 24.6 83.3 29476 26491. 53 23.9 18310.09 19.5 69.1
1979 2669 1598.23 17.8 1268.20 12.2 79.3 32219 31274.80 18.0 21559.02 17.7 68.9
1980 2750 1933.51 20.9 1459.67 15.1 75.5 34385 36997.04 18.2 24760.40 14.8 66.9
1981 2914 2292.75 18.5 1747.07 19.7 76.2 37935 44010.13 18.9 29381.79 18.7 66.7
1982 3057 2713.00 18.3 2125.37 21. 7 78.3 40787 52279.55 18.7 35679.14 21.4 68.2
1983 3359 3127.02 15.2 2504.94 17.9 80.0 44294 61492.83 17.6 41292.23 15.7 67.2
1984 3462 3229.02 3.2 2738.26 9.4 84.8 45537 65056.49 5.7 45093.44 9.2 69.3
1985 3905 4245.47 31.4 3676.84 34.3 86.6 52721 85867.57 31.9 56325.94 24.9 65.6
1986 3937 5046.41 18.8 4326.92 34.3 85.7 53364 102625.00 42.3 64677 .42 14.8 63.0
1987 3998 5784.97 14.6 5244.80 21.2 90.6 54431 119022.57 15.9 72549.43 12.2 60.9
1988 4087 6732.75 16.4 6316.98 20.4 93.8 56282 141822.92 19.2 87745.71 20.9 61.9
1989 4130 7066.29 4.96 6857.99 8.56 97.0 56960 144890.50 2.16 96008.52 9.41 66.3
1990 4234 8422.10 19.18 7228.35 5.40 86.0 59388 185722.00 28.18 97990.00 2.06 52.76
1991 4279 9665.35 14.76 7995.23 10.60 83.0 60190 210812.00 13.50 130071.00 32.73 61. 7

Source RBI Publications on Banking Statistics.

 CHAPTER - V

ruN EVALUATION OF THE FINANCIAL ASSISTANCE BY THE FINANCIAL

INSTITUTIONS TO SMALL-SCALE INDUSTRIES

In order to assess the magnitude, impact of

financial assistance on the SSIs and also to know the

problems of SSIs, a detailed field survey has been

conducted. The field survey brings out the experience of

SSIs with financial institutions and the problems faced

while obtaining loan. The findings are aimed to provide

certain guidelines to both financial institutions as well as

the loanees (SSIs).

The survey covers a sample of 100 units. Following

parameters were kept in view before selecting the unit for

the field survey. The first parameter is the background of

the entrepreneurs. Normally, it is the effort of the

promoter which plays a major role in the successful running

of an industrial venture. Hence, while selecting the units

for survey those SSI units are selected which are promoted

by both technically qualified and those concerns which are

run by non-technical persons. It is also a parameter while

selecting the unit for the field survey, whether the unit is

a proprietory, partnership, private or public limited

company. The representative SSI units representing all the

above types have been selected to make proper conclusions

based on the constitution of the unit.

 205

As it is known that SSI sector is an heterogenous

group consisting of several types of industries and hence,

sample units from various industrial sectors like
Electrical, Electronics, Food, Enginering, Rubber, Leather,
Textiles have been selected.

The SSIs located in Bangalore, Mysore, Hubli have been

selected for the field survey. Bangalore is an industrially

forward area, Mysore is a developing area whereas Hubli is

one of the industrially backward areas of the state. In view

of this, the industries located in these areas have been

selected for field survey. The units established during the

late 1970's and 1980's have been selected so that the latest

position/picture about the working of an SSI concern can be

projected. Due care is taken before selecting the SSI units

for the field survey about their performance. The 100 units

selected for the survey are the samples from the following

types of SSIs.

(1) Type of Entrepreneur - Whether technically qualified

or having experience in the
chosen line or not.

(2) Type of Unit Properietory, Partnership,

Private Limited or Public
Limited Company.

(3) Nature of Industry i.e.,Electrical, Electronics,

Food, Engineering, Rubber,
Leather, Textiles etc.
 206
(4) Location of Industry
(5) Year of Establishment -
(6) Performance of the
units
(7) Quantam of Assistance -
The industries located in and
around Bangalore, Mysore and
Hubli have been selected.
The SSIs established during
late seventies and eightees
have been selected.
While selecting the units for
field survey care has been
taken to see whether the unit
is running profitably or
running under loss or sick.
The units financed in the
range of Rs.0.50 lakhs to Rs.
60.00 lakhs have been
selected.

Further due care has been taken while selecting the

units that they do not fall under tiny category or in the

verge of transforming into MSI category. The units with a

turn over from Rs.IO lakhs to Rs.50 lakhs have been given

more stress. The same can be seen in the Table-5.1.

 207

TABLE - 5.1

VALUE-WISE AND INDUSTRY-WISE PROFILE

(Production)

51. Range INDUSTRY TYPE

No.(In Lakhs)----------------------- ________________________ _
FOOD E&E CHEM TEXT HTL LEATHER RUBBER PAPER OTH

1 < = 5 0 0 3 0 0 1 0 1 3
2. 6 - 10 1 2 0 1 0 1 1 2 1
3 . 11 - 15 0 6 1 1 0 0 1 1 2
4. 16 - 20 1 0 1 0 0 1 0 2 0
5. 21 - 25 5 2 3 1 1 0 1 0 4

6. 26 - 30 6 0 0 0 0 0 0 2 1
7 . 31 - 40 1 0 1 1 1 1 1 1 1

8 . 41 - 50 0 1 1 1 1 O· 0 2 2

9 . 51 & 1 0 0 0 1 1 0 3 2
Above

5.2 OBJECTIVES OF THE FIELD SURVEY:

The survey is to assess the impact and magnitude of

financial assistance provided by the Financial Institutions

to the SSIs. The utilisation of finance depends on various

aspects like promoter - his background, raw material and the

availability of the same at a reasonable price and on time.

Hence the survey apart from the above mentioned major

objectives have also made an effort to -

 208

- assess the background of the promoters education as

well as experience,

- constitution of the unit and its bearing on the

running of the unit in terms of source of funds and

the working of the unit,

- to analyse the time taken for implementing the

project Vis-a-visa the time taken for obtaining the

loan from the Financial Institutions as well as the

time taken for the complete release of the loan,

- source of raw-material, its availablity and its

impact on the running of an SSI concern,

- securing finance, both term loan and working capital

loan at an appropriate time,

- the total cost of project, total financial

assistance obtained and the analysis in terms of

profit or the working of the SSI concern,

- the problems faced to obtain the loan,

 208A

what are the major heads of working cost of an SSI

concern?

The format of the questionaire is enclosed as an

annexure to this chapter.

The findings of the field survey are presented in the

form of the profile and then an integrated analysis of

various factors like - promoters' background and its impact

on the running of the concern, time taken for

implementation, Ratio of employment - office to factory and

its effect on the working cost of the unit are given. The

data collected have been analysed with the help of the

computer.

Hence, in this chapter an effort is made based on the

field survey to present the impact, nature of financial

assistance and the problems faced while obtaining the loan.

5.3 PROFILE OF THE FILED SURVEY:

The profile of the surveyed units based on the

promoters' background, Industry type and unit type is as

follows:
 209
: 1 ) Type of Promoter
(a) Below SSLC 9
(b) SSLC - 13
(c) Graduates - 24
(d) Post Graduates 7

(e) Technically Qualified - 46

( 2 ) Unit type

(a) Proprietory - 22

(b) Partnership 24

(c) Private Limited - 10

(e) Public Limited - 44

(3 ) Industry type

(a) Food - 15

(b) Electrical and Electornics - 14

(c) Chemical - 10

(d) Textiles 5

(e) Engineering - 14

( f ) Hotel 4

(g) Leather 5

(h) Rubber 4

( i ) Paper - 14

( j ) Others - 15
 210

It can be seen from the above that as much as 9

industrial groups are covered in the field survey. These are
major industrial groups. Majority of the SSI units
established are in this area and is the true representation
of SSI industries group.

(1) Promoters' Education and Background: Of the 100

units surveyed, the educational backgound of the promoters'

is as follows 46 are Technically qualified, 24 are

Graduates, 7 are Post Graduates, 13 have studied upto

Matriculation, and 9 are below Matriculation. Of the 100

entrepreneurs, 87 have changed their profession i.e. to say
there is no relation between their earlier profession and

the present profession and only 10 people have continued in

the same profession i.e., they have started the present

concern based on their previous concern. We could not

ascertain the background of the remaining 3 entreprenerus.

This clearly indicates that the promoters' education or

background should not be an over riding factor while

deciding about a project. More than anything else it is the

promoters' commitment and motivation that matters in the

successful running of an industrial concern.
 211

(2) Implementation - a Micro Report:

Of the units surveyed an effort is made to know the

time taken for implementing the project. This is further

linked to the problems with Financial Institutions in delay

in implementation if any. The table below shows the time

taken for implementing the project among the surveyed units

which ranges from 1 month to 63 months. The average time is

12.65 months.

After having carefully observed the Table- 5.2 the

following points crop up .
( i ) 39 units have taken time ranging from 1 to 6 months.

(ii) 30 units have taken time ranging from 7 to 12 months.

(iii) 8 units have taken time ranging from 13 to 18
months.
(iv) 4 units have taken time ranging from 19 to 24
months.

(v) 17 units have taken time ranging from 24 months and

above.

The reasons cited for the delay in implementation

are :

a) Problems with machinery suppliers with regard to

quality and installation. It has been observed during

the field survey that majority of the machinery

suppliers do not adhere to the delivery schedule and

 IMPLEMENTATION MICRO REPORT

YEAR OF DATE OF COMME- DIFF.

UNIT NAME ESTABLISH- NCEMENT OF COMML. (MONTHS)
MENT PRODUCTION

1 2 3 4

PAVITHRA FABRICATORS 01/02/89 07/09/89 7

MORZARIA PRODUCTS PVT LTD 01/12/69 01/01/70 1
KARNATAKA ELECTRONICS 01/05/80 01/01/81 8
SMAK PHARMACEUTICALS LTD. 01/01/88 01/01/89 12
SUDARSHANA AUTOMOBILES 01/01/76 03/01/77 12
SUSHRUTHA ELCOMA PVT LTD. 01/12/79 04/01/85 62
COZY POLYSTONE LTD. 01/12/89 01/01/91 13
APPOLLO FOOTWEAR PVT. LTD. 01/09/82 11/11/83 15
B.L.L.C. PVT. LTD. 01/12/77 01/01/80 25
SUSHRUTHA NURSING HOME 01/02/87 01/01/88 11
I'V
SUNIL ROLLER FLOUR MILL PVT LTD 01/08/89 05/01/90 5 I-'
GREARS & TRANSMISSIONS 01/01/74 04/04/74 3 I\J

KUKREJA ENTERPRISES 01/01/88 01/01/88 9

PERIWAL PLASTICS PVT LTD. 01/03/70 01/01/71 10
SRI SAl COIR 01/01/89 31/05/89 5
LEWIS NATURAL FOODS 01/12/87 01/01/91 38
NAPTHA RESINS & CHEMICALS 01/09/74 01/05/75 8
BINFO ELECTRONICS 01/11/87 01/01/88 2
AGRO CHEM INDUSTRIES 01/06/85 01/01/86 7
SHRINIDHI CONTAINERS 01/08/90 07/03/91 7
THYLI INDS PVT LTD 01/01/75 01/02/75 1
ULTRA FABS PVT. LTD. 01/04/82 06/01/83 9
ASHWINI INDUSTRIES 01/06/82 01/01/83 7
HIGHLAND GRANITES 01/03/88 01/01/91 35
GANESH CONSULTANCY & ANALYTICAL SERVICES 01/02/85 01/12/86 22
HOTEL POORNlMA RESTAURANT 01/01/91 01/10/91 10
SRI GAJANANA GRANITES 01/04/86 01/08/86 4
S.P.S. GRANITES 01/12/84 01/01/89 50
VARADARAJA SILK THROWING FACTORY 01/10/90 08/01/91 3
DAVANGERE WIRE ROPES 01/08/86 11/06/87 10
TECNO TOOLS 01/08/83 01/09/85 25
GEMINI DISTILLERIES 01/05/84 01/02/85 9
AUTOMATION TECHNOLOGIES 01/08/86 01/09/87 13
SUSHMA PVC VERISERS 01/10/85 01/04/86 6
NATURAL & ESSENTIAL OILS 01/07/80 01/02/81 7
GANESH ENTERPRISES 01/08/88 15/02/89 7
DURO TRADES & RUBBERS 01/05/86 01/12/86 7
PIONEER PLASTICS INDUSTRY 01/08/83 01/02/84 6
ALOIS PRINTRONIKS (P) LTD 01/07/88 01/03/89 8
FALMA LABS PVT LTD 01/02/88 02/11/88 9
VENUS FISHERIES PVT.LTD 01/01/86 01/08/86 7
KARANATAKA VENEERING IND. 01/01/73 01/09/74 20
SEQRONICS (I) PVT. LTD. 01/01/84 01/01/86 24
KHOBA CHEMICALS & SYNTHETICS 01/11/87 11/06/91 44
ADVANCED COMPONENTS 09/10/75 01/01/79 39
ALUMINIUM TRANS PRODUCTS 01/02/78 01/08/81 43
MYSORE MACHINE AIDS 01/05/85 01/08/85 3
AGRO THERM PVT LTD 01/02/87 01/09/87 7 N
DUTTA INDUSTRIES 01/02/86 14/09/86 8 ......
KINGSLY EXPORTS 01/01/88 01/04/88 w
3
NILGIRI DIARY FARM LTD 01/01/89 01/03/89 2
VIGIL FILAMENTS PVT LTD 01/04/84 01/11/84 7
DIXIT'S ENGS COMPONENTS 01/08/90 01/11/90 3
SKANDA OFFSET PRINTERS 01/12/88 01/06/89 6
HOUSY FABRICATION 01/04/84 01/09/84 5
MARl GOLD FOOD INDUST. 01/10/85 01/01/86 3
PRINCESS RANJU ELECTRO 01/03/82 01/10/82 7
KODAGU FOODS P LTD. 01/10/80 01/01/81 3
MBM POP RIVETS 01/12/78 01/10/86 22
KARNATAKA RUBBER INDS. 01/12/80 01/01/83 25
METALLIC SOAPS & CHEMICAL 01/12/78 01/01/81 25
KANVA INDUSTRIES 01/11/74 01/01/75 2
HOYSALA FASTNERS 01/12/84 01/09/85 9
PERFECT ENGG. WORKS 01/10/70 01/12/70 2
CIRCUITRON PVT. LTD. 01/11/88 01/01/90 14
MYSORE NAILS & FASTNERS 01/09/79 24/04/80 8
SYNTHORG (P) LTD 01/08/77 01/01/78 5
WOLROM MULY PRODUCTS 01/12/85 10/01/87 14
SPARELLI DAPHNE LABS LTD 01/12/86 01/05/90 42
SUKUMAR SOFT DRINKS 01/05/88 12/02/91 34
CLASSIC LAB 01/06/87 12/12/89 31
AMARNATH ENTERPRISES 26/07/87 01/08/88 12
NILGIRI CANCER CENTRE 01/02/86 07/08/90 55
SPECTRO COLOURS 01/11/79 07/01/85 63
SHANTHI ENTERPRISES 01/08/89 04/02/90 6
FUE PROS 01/12/88 01/05/90 17
AKSHAYA RUBBERS 01/12/88 01/06/90 18
VINEETHA ELECTRICALS 01/08/86 01/11/86 3
SANKETH ELECTRONICS P LTD 01/01/85 15/08/85 8
CHANDRA PRAKASH AGARABHATTI WORKS 01/08/90 03/12/90 4
ARIAN AGRO AGENCY 01/01/81 15/04/81 3
SHEKAR AUTOMOBILES 01/09/83 02/04/84 7
APCO HAND LOOMS 01/02/84 21/08/84 7
UNITECH APPLIANCES 01/11/82 10/01/83 2
SYSTAMASTIC ENTERPRISESS 01/09/89 13/02/90 6
THE MYSORE CONSLTANTS 01/11/89 10/02/91 16 !\J
SUNDER AGENCIES 01/10/79 10/04/80 6 .....
~
RAMCO ENTERPRISES 01/01/82 10/02/82 1
TERMOTIC INDUSTRIES 01/11/78 01/03/79 4
ZAN-TECK LUMBERS 01/01/81 03/04/81 3
PALAVI TRADES 01/09/81 02/01/82 4
MSORE BOX COMPANY 01/01/82 01/03/82 2
SYSCON ENTERPRISES 01/05/81 01/12/81 7
KALPANA ENTERPRISES 01/05/83 09/09/83 4
SHAH ENTERPRISES 01/12/85 12/04/86 4
HONEY PRODUCTS 01/11/90 03/04/91 5
RAJ INDUSTRIES 01/01/82 12/02/82 1
RAJ GARNITIES 01/08/89 01/02/90 6
RUPESH ENTERPRISES 01/01/85 09/03/85 2
MAHAVEER INDUSTRIES 02/05/81 01/06/83 25
 215

poor after-sales service. The machineries once

installed normally will not function smoothly in the
initial stages. There will be some initial teething
problems in the smooth running of the machinery.
Generally all the leading manufacturers of various
machineries required for the industry will have Sales
Engineers who take care of the problems arising during

the initial time or the problems arising

intermittantly. But in case of the machineries
supplied to SSIs, it has been observed that the

suppliers have rendered poor after-sales service.

These problems at the initial stages of production
will further compound the problems. The problem is
more pronounced if the machinery is imported or

supplied through the dealer.

b) Too many formalities, procedures, clearances from

various government agencie~ike FPO licence for

food based industry and if more than 20 persons are

employed the unit will come under the Factories Act

and the PF regulations, ESI regulations have also to

be followed. These types of problems after the

installation of machinery and construction of building

will put heavy burden on the successful running of the

 216

unit in the form of unneccessary interest burden, loss

of production, losing to competitors in the market
etc.

c) The procedures of the financial institutions before

the first release like documentation is cumbersome and

costly. Before the first release, the loanee has to

sign several documents like, Hypothecation Deed,

Guarantors Deed, Loan Agreement and if the loanee is

offering a collateral security, the original documents

of the property like Title Deed have to be deposited

with the Financial Institution. Apart from this the

entrepreneur has to provide, No Encumberance

Certificate on the property from the Sub-Registrar,

Tax Paid Receipt on the property from the Municipality

etc.

d) It was also expressed during the field survey that

Financial Institutions charge interest during

implementation period which causes a lot of heart burn

and leads to cash crunch as the unit will have

teething problems during the implementation stage, and

 217

e) Unhealthy competition through under or over invoicing

(i.e., inflating or selling the product at a lower

rate) and selling without proper bills. There is a

provision in the Sales Tax Act if the particular

commodity is used for industrial purpose, there is

differential tax rate. The normal Sales Tax at present

is 8 per cent. But for industrial use it is 4 per

cent. The traders use the 'e' form (which certifies

the use of the product for industrial use) to buy the

product at a lower rate and sell it at an higher rate.

If a trader is selling without legitimate bills, he

will not charge the taxes to the buyer and hence will
be selling at a lower rate. This will certainly affect

genuine and honest manufacturers.

(3) Raw Material: Raw material is an integral part of the

production process in a manufacturing industry. It is the

quality of the raw material that will determine the quality

of the product and then the sales. It is a vital element in

the production process in terms of quantity, quality,

availability, delivery schedule. Therefore an effort has

been made in the field survey to know the source of finance

for raw material i.e., whether the raw material is procured

through working capital or through internal accruels or

 218

other means and also to know the source and the nature of

problems faced by the entrepreneurs while obtaining the raw-

material. (See Table-5.3).

TABLE - 5.3

SOURCE OF RAW MATERIAL

Sl.No. Source Number

1. Open Market 30

2. Governmental Institution 17
3. Imported 21
4. Scarcity 32

It can be observed from the table above that 30 per

cent of the units got their raw material through open

market, 17 per cent through government institutions and 21

per cent of units got their raw material through import. The

implications are that majority of the SSI concerns are

obtaining their raw materials from the open market which is

costly. Whereas the supplies from the government

institutions are cheap but cannot be relied on quality and

timely delivery.
 219

TABLE - 5.4

INDUSTRY-WISE RAW MATERIAL PROBLEMS

51. Industry Scarce High Imported Seasonal Others

No. Price

1 Food 8 2 0 2 0
2 Ele. & Elect. 0 1 1 3 2

3 Chemicals 3 2 1 2 4

4 Textiles 5 3 1 1 10

5 Engineering 1 0 9 6 11

6 Hotel 8 14 4 1 0

7 Leather 9 0 7 2 3

8 Rubber 3 2 2 0 13

9 Paper 17 1 2 9 12

10 Others 2 2 19 10 17

The table - 5.4 shows that 56 units to be dependent on

scarce raw material, 26 units faced the problems with the

price, 36 units faced seasonal availability of the raw

material. There are certain raw materials like, Wax, Special

Steel, Wood, Asbestos, which are scarce and controlled items

and the 5SI units have to plan their purchase in advance.

This will affect their production schedule. There are

certain other industries like Fruit processing, Food/Agro

based industries which are dependent on those raw materials

whose availability is seasonal like fruits and agro based

articles.
 220

It was also observed that majority of units obtained

the raw material through working capital assistance.

(4) Marketing Problems:

The concept of marketing begins even before

conceieving the product and continues hence. The successful

marketing efforts has a bearing on the successful working of

the industrial concern. During the field survey it has been

tried to assess various marketing problems like severe

competition, pricing, distribution, awareness etc. Most of

the units surveyed have expressed that they are facing

severe competition. As much as 37 units have stated that

they have problems with pricing i.e., to say they are not

getting remunerative prices for their product. 22 units have

informed that they have problems with the distribution

network. i.e., higher lead-in-time for payments from

distributors. The remaining units do not have any

distribution problem because they are handling the marketing

themselves. Surprisingly as much as 55 units have struggled

in the initial stages to gain the awareness of the endusers

both in terms of product and the company.

(5) Capacity Utilisation, Break-even Analysis and Trends

in Production and Profit:

The utilisation of funds from the SSI units financed

by SFCs/Commercial Banks or other Financial Institutions

 221

reflects from the capacity utilised (utilization of various

factors of production like land, labour, capital and man
power), Break even point (the point at which the costs are
equal to revenue) and the production. Hence, an effort has
been made in the field survey on these lines.

It is pertinent to note that 26 of the units surveyed

have achieved the capacity utilisation in the range of 81-90

per cent. The capacity utilisation is below 50 per cent for

only 13 units. 14 units have achieved the capacity

utilisation of more than 90 per cent. Rest of the untis (45)

have utilised capacity in the range of 51-80 per cent.

In order to know the health of the units, a question

was asked during the field survey on the Break-Even Point

(BEP). It is the point at which revenues are equal to costs.

In the sense at a particular level of production, the point

at which the unit will break-even the cost and any
production beyond that point will be the profits for the
unit. Interestingly, 6 units have revealed that their BEP is

at 98 per cent, because these were sick units with

accumulated losses. The BEP in the majority of the units

surveyed is in the range of 34 per cent 65 per cent.

Higher the BEP; lower will be the profit margins for the

entrepreneurs. Hence it is always the concern of a

 222

successful entrepreneur to keep the BEP level at the minimum

by cutting down the unneccessary costs. The BEP for 27 units

is in the range of 66 per cent to 85 per cent. This is

mainly because, these units are highly raw-material oriented

and the prices of these mateirals are subject to frequent

fluctuation. This has affected the Break-Even Point of the

unit. It is pertinent to note here that these are the

industries which are based on scarce and seasonal raw

material whose availability is subject to fluctuations and

the price is also subject to wide variations.

The production figures of the last 3 years viz

1988-89, 1989-90, 1990-91 have been collected from the

units. 13 units have registered negative growth rate and 27

units have registered positive growth ranging from 2.05 per

cent to 12.13 per cent. In case of remaining units either

there is no change in production trends or the trends are

not available for 3 complete years.

The industry-wise production trends are given in the

Table - 5.5.
 223

TABLE - 5.5

INDUSTRY-WISE PRODUCTION TRENDS

SL.NO. INDUSTRY POSITIVE NEGATIVE

VARIANCE* VARIANCE**

1. FOOD 05 01
2. ELECTRICAL AND ELECTRONICS 04 02
3. CHEMICALS 04 04
4. TEXTILES 00 00
5. ENGINEERING 06 02
6• LEATHER 01 01

7. RUBBER 02 00
8. PAPER 02 01

9. OTHERS 03 02

* The production trend in these cases for the three years

assessed indicates the increase over the previous year.

** The production trend in these cases for the three years

selected indicates decrease over the previous year.

The negative trend is more pronounced in Chemical

Industrial Sector and positive trend is more pronounced in

the Engineering Sector. This can be attributed mainly to the

factor that the chemical industries are more prone to

variances in the availability of raw materials and wide

fluctuations in the prices of both raw materials and

finished products. Normally in the Engineering industry it

is more job work oriented and hence there are less

 224

fluctuations. The market for Engineering industry is vast

whereas the market for chemical industry is limited. There

is also considerable manufacturing risk and loss due to the

rejections in the chemical industry. Coupled with this there

are problems with effluents and pollution. The Engineering

industry has greater scope for diversification and with

little investment and minor adjustments it can diversify

its production as per the market requirements. The chemical

industry is dependent more on raw material whose prices are

subject to greater fluctuations whereas the Engineering

industry is dependent on limited raw materials like iron and

steel and depending more on the skill of labourers.
 225

(6) Profile of Working'Cost of the Surveyed units:

In the table below, industry-wise working cost of the

SSI units is presented.

TABLE - 5.6

DISTRIBUTION OF WORKING COST IN PERCENTAGE C%)

Sl. INDUSTRY RAW LABOUR TRANS- ELEC. ADMN SALES OTHER

No. TYPE MATERIAL COST PORT CITY COST COST COST
COST COST COST

1. FOOD 19 11 13 7 21 15 12

2. E & E 23 12 11 12 07 24 11

3. CHEMICALS 31 21 9 13 13 10 12

4. TEXTILES 20 13 19 10 11 14 13

5. ENGG. 28 10 1 10 22 19 10

6. HOTEL 13 13 0 41 1 11 0

7 • LEATHER 15 15 1 3 24 11 31

8. RUBBER 26 17 11 22 14 10 0

9. PAPER 21 10 10 31 10 17 10

10. OTHERS 10 11 9 11 22 26 11

In case of Food Industry the major cost is towards

raw-material, transport, sales interest payments and

 226

administration cost which together constitute 68 per cent of

the total costs. In case of Electric and Electronics

Industry major costs is towards sales followed by raw-

material cost and then labour and electricity. In case of

chemical industry the major cost is towards raw-material

followed by labour cost and the other costs including the

servicing of the loan. In the textile sector sales and raw

materials are the major components of the working cost. Raw

material and adminstrative cost are the major working costs

in case of enginering industry. The administrative cost is

more in case of leather industry. In Rubber industrial

sector raw-material and electricity costs are more. In paper

industry majority cost is towards electricity. Over all raw

material, selling, administrative cost and servicing the

loan are the major costs.

(7) Ratio of Employment:

The ratio of employee in the office to that of the

factory will give an indication of the overhead costs of the

industrial unit. By collecting this information in the field

survey, an effort has been made to assess this factor. The

Table - 5.7 presents the industry-wise ratio of employment.

 227

TABLE - 5.7

RATIO OF EMPLOYMENT

SL. INDUSTRY TYPE FACTORY OFFICE RATIO

NO. STAFF STAFF [OFFICE .
FACTORY]

1. FOOD 210 31 1 6.77

2. E & E 88 37 1
·· 2.38

3. CHEMICALS 208 164 1 1.27

,
4. TEXTILES 10 2 1 5.00

5. ENGINEERING 116 45 1 2.58

6. LEATHER 88 86 1 · 1.02

7 RUBBER 31 10 1 · 3.10

8. PAPER 19 10 1
·· 1.90

9. OTHERS 649 105 1 · 6.18

The ratio of employment in office to factory is

higher in food industrial sector. The lowest ratio is in

leather industrial sector, (See Table-5.7).

(8) Financial Assistance Profile:

Another parameter for selecting the unit for field

survey is the Financial Institutions which have financed.

KSFC and Commercial Banks are the major financial agencies

providing credit to SSIs in Karnataka. Hence, 46 units are

 228

those which are financed by KSFC, 32 units are those which

are financed by Commercial Banks and 22 units are those

which are financed by other Financial Institutions like-

Industrial Corporative Banks.

It is also observed that only in 19 cases the term

loan lending institution is providing working capital

facility. In 81 cases they have obtained term loan and

working capital loan from different financial institutions.

It is pertinent to note that normally SFC's do not lend

working capital and commercial banks mainly provide working

capital facility. They provide term loan where they will get

refinance from IDBI or SIDBI. It is generally felt that the

units after obtaining term loan and the unit is put into

operation they apporach for working capital loan and there

will again be another appraisal.

Hence it is convenient for the SSI entrepreneurs if

the term loan lending institutions provide working capital.

(9) Pattern of Assistance:

An effort has been made in the field survey as to the

pattern of Financial Assistance i.e., whether the finance is

more towards land or bulding or plant and machinery. The

 229

table below shows that of the surveyed units more loan has

been given to land and bulding and very less on plant and

machinery. For miscellaneous purposes as much as 22 units

have obtained the loan. More loan towards land and building
indicates that it is an un-productive expenditure whereas an

investment on the plant and machinery will be a productive

one.

TABLE - 5.8

PATTERN OF FINANCIAL ASSISTANCE

SL. INDUSTRY TYPE LAND BUILDING P & M MISCELLENEOUS

NO.

1. FOOD 04 08 06 02
2. E &E 03 07 06 01

3. CHEMICALS 03 04 04 02
4. TEXTILES 04 05 05 01

5. ENGINEERING 03 03 10 04

6. HOTEL 02 04 01 00

7 LEATHER 02 04 05 01

8. RUBBER 01 02 03 02

9. PAPER 05 07 09 04

10. OTHERS 02 06 01 06
 230

(10) Assistance Profile (Term Loan and Working capital):

As can be seen from the table below, majority of the
units have availaed Term Loan ranging between Rs.IO-20
lakhs. It can also be observed that more food units have

obtained less loan (i.e. within Rs.IO lakhs) and good number
of Engineering and Electrical and Electronics units have
availed more loan in the range of Rs. 40-60 lakhs. In the

sense food industry is less capital intensive compared to

other industries.

In other words the expenditure on fixed assets for

food industry is less because they are raw material oriented
industries and are more capital intensive industries.
Whereas in case of Engineering and Electronics industries

the investment on fixed assets is on an higher side. In

order to house the sophisticated machineries, they require

to construct building at considerable expenditure.

• 231

TABLE - 5.9

FINANCIAL ASSISTANCE PROFILE (TERM LOAN)

SL. INDUSTRY TYPE UPTO Rs 10 - 20 Rs 20 - 40 Rs 40 - 60

NO. Rs. 10 lakhs lakhs lakhs
lakhs

1. PAPER 5 1 4 1

2. CHEMICALS 2 4 3 1

3. FOOD 8 3 2 2

4. RUBBER 1 1 0 1

5. LEATHER 1 3 1 0

6. ELE. & ELECT. 4 6 1 3

7 ENGINEERING 1 6 4 3

8. HOTEL 0 1 2 1

9. TEXTILES 3 2 0 0

10. OTHERS 2 5 6 2
 232

TABLE - 5.10
FINANCIAL ASSISTANCE PROFILE (WORKING CAPITAL LOAN)

WORKING CAPITAL LIMIT SANCTIONED

INDUSTRY TYPE UPTO Rs 10 - 20 Rs 20 - 40
Rs. 10 lakhs lakhs
lakhs

FOOD 03 08 01

ELE. & ELECT. 05 06 03

CHEMICALS 05 03 02

TEXTILES 03 02 00

ENGINEERING 09 02 02

HOTEL 01 00 01

LEATHER 02 02 01

RUBBER 02 02 01

PAPER 08 03 03

OTHERS 10 03 02

It can be observed from the Table-s.lO, that

Engineering industral sector has availed less working

capital loan compared to other industrial groups. The

working capital intensity is more in food, paper and

Electrical & Electronics industrial sector.

(11) Promoters' Contribution:

The success of the project hinges mainly on the stake

of the promoter especially the financial stake in the

project. Normally the means of finance is 75:25, i.e.,

minimum promoter's contribution should be to the extent of

 233

25 per cent of the cost of the project. But in case of

technically qualified entrepreneurs it may be 90:10. But

after implementing the project we have tried in the field

survey to assess the exact stake of the promoters. Of the
surveyed units there are 13 units with 10 per cent
promoter's contribution, 14 units with 15 per cent, 35 units

with 20 per cent, 14 units with 25 per cent and 14 units

above 20 per cent.

(12) Time taken for Sanction and Release of the Loan:

In the following table, average time taken for
sanction (Industry-wise) is presented.

TABLE - 5.11

INDUSTRY-WISE PROFILE OF TIME TAKEN FOR SANCTION

(MACRO REPORT)

SL. INDUSTRY Average No. of Days

NO. taken for Sanction

1. FOOD 254

2. ELECTRICAL AND ELECTRONICS 137

3. CHEMICALS 165

4. ENGINEERING 121

5. TEXTILES 338

6. HOTEL 141

7. LEATHER 133

8. RUBBER 180
 234
TABLE - 5.12

lNDUS'.l1l.YWISE PROFILE OF TIME TAXEN FOR SANCTION

(MICRO REPORT)

Unit Name Date of Date of No.of Days

Application sanction Taken

1 2 3 4

Sri Sai Coir Consumer 01/04/89 01/05/89 30

Lewis Natural Foods 04/10/89 01/12/89 58

Naptha Resings & Chemicals 06/11/74 01/01/75 56

Binfo Electronics 11/08/87 01/09/87 21

Agro Chem lndistries 01/12/85 01/01/86 31

Srinidhi Containers 10/09/90 13/09/90 3

Thyli Inds.PVt Ltd. 05/10/89 01/11/89 41

Sudharshan Automobilies 12/03/87 18/08/87 159

Davanagere Wire Rope Ind. 15/02/91 06/07/91 141

Techno Tools 01/01/83 14/04/83 103

Automation Technology 01/04/90 03/08/90 124

Sushma Pulverisers 01/10/85 01/01/86 92

Natural & Essential Oils 01/12/79 01/01/80 31

Ganesh Enterprises 01/05/91 09/09/91 131

Duro Treads & Rubbers 13/03/82 09/09/82 180

Poineer Plastics Inds. 01/02/88 01/05/88 90

Alois Printroniks P Ltd 01/10/89 01/06/90 243

Falma Laboratories Pvt. 27/10/87 05/05/88 191

Karnataka Vennering lnds. 13/09/88 02/02/89 142

Seqronics (I) Pvt. Ltd. 01/12/84 01/01/85 31

Khoba Chemicals & Synthecis 18/07/87 01/06/88 312

Advanced Components lnst. 01/11/90 09/06/91 221

 235

1 2 3 4

Aluminium Trans Products 09/12/80 01/04/81 113

Dutta Industries 08/04/86 01/09/86 146

Kingsley Exports 01/01/88 01/11/89 300

Nilgiri Dairy Farm Ltd 01/10/89 - 03/08/91 671

Vigil Filaments P Ltd 01/10/84 01/11/84 31

Dixit Eng. Components 01/07/88 14/10/88 327

Skanda Offset Printers 04/03/79 09/08/79 158

Housy Fabrication Comb. 02/12/85 04/04/86 123

Mari Gold Food Printers 13/02/87 19/09/87 218

Princess Ranj Electro 01/01/89 01/10/89 273

Kodagu Foods P Ltd. 01/01/88 01/10/88 274

MBM Pop Rivets & Fastners 01/01/85 01/01/86 365

Karnataka Rubber Inds. 01/01/85 01/01/86 365

Metallic Soaps & Chemicals 11/11/88 01/04/89 141

Kanva Industries 04/10/80 05/03/81 152

Haysala Fastners 01/01/85 01/02/85 31

Perfect Engg. Works 12/02/90 14/06/90 122

Mysore Nails & Fastenrs 09/11/83 10/04/84 153

Synthorg (MYSR) Pvt. Ltd. 09/12/89 18/07/90 221

Woltrom Muly Products 01/14/86 01/07/86 91

Sparelli Daphne Labs Ltd 25/05/87 25/11/88 550

Sukumar Soft Drinks 09/12/90 10/03/91 91

A J Bantex (p) Ltd. 01/02/88 21/06/88 141

Mysore Polimers Rubbers 20/09/82 21/10/82 31

Classic Lab 06/05/89 01/09/89 118

Amarnath Enterprises 01/11/89 15/01/91 75

 236

1 2 3 4

Nilgiri Cancer Centre 13/04/90 31/03/91 352

Harry's Food Producrs 13/04/90 26/07/90 104

Spectro Colors 01/12/90 05/03/91 94

Ganesh Consultancy 07/01/87 31/03/81 83

Hotel Poornima Restaurant 12/11/83 01/04/84 141

Varadaraja Silk Throning 01/01/90 01/01/91 365

S P S Granites 11/01/82 17 /05/82 126

Sri Gajanana Granites 01/01/89 23/06/89 173

Pavithra Fabricators 03/01/91 10/07/91 188

Smak Pharmaceuticals Pvt. 11/01/86 01/08/86 202

Cozy Polystone Ltd 31/03/85 09/12/85 984

Applo Footwear Pvt. Ltd 01/01/83 31/03/83 89

Sushautha Nursing Home 01/07/88 31/12/88 183

Sunil Roller Mill Pvt. Ltd. 01/01/90 01/06/90 151

Gears & Transmiss 01/01/74 31/03/74 89

Kukreja Enterprises 01/01/87 01/01/88 365

Peruwal Plastics P.Ltd. 06/01/87 09/03/87 62

Amrut Food Product 14/01/86 16/02/86 33

Harison Allied industries 18/03/84 20/05/84 63

Amar Traders 10/12/83 17/01/84 38

Star Glass & Tiles 07/05/83 08/07/83 62

Dyana Diesels 15/10/82 09/12/82 55

Trikaya Adds 07/06/86 16/08/86 70

Madan Hardware 02/09/85 06/12/85 95

Sudhir Steels 01/07/89 02/12/89 154

Deepak Tools 08/09/87 06/01/88 120

 237

1 2 3 4

Manjula Furniture 09/12/83 10/04/84 123

Swagath Agencies 26/02/89 31/03/89 6

Darla Sales & Agencies 10/01/89 11/05/89 121

Bhavasar Enterprises 12/12/86 14/04/87 123

Rupesh Silk Weaving 03/03/90 05/01/91 308

Malothra & Sons 07/03/91 10/04/91 34

Kumar Chemicals 08/12/87 01/01/88 24

Raghu Pharmaceuticals 10/07/88 01/02/89 206

Venlon Ployster Film Ltd 13/09/89 14/01/90 123

MSR Poultry Farm 02/06/79 03/10/79 123

Pavithra Fabricators 09/01/80 10/05/80 122

Morzaria Products Pvt. Ltd 04/02/80 06/06/80 123

Karnataka Electronics 09/02/80 10/04/80 61

Smak Pharmaceuticals Ltd 12/12/82 09/04/83 118

Sudarshana Automobiles 09/05/78 10/10/78 154

Sushrutha Elcoma Pvt Ltd 05/09/81 10/12/81 96

Pavithra Fabricators 04/12/85 05/05/86 152

Syscon Engineering 09/04/88 10/07/88 92

Kalpana Enterprises 02/03/91 06/07/91 126

Raj Granites 10/01/87 09/06/87 150

Shah Automobiles 09/01/86 10/05/86 121

Honey Products Pvt. Ltd 02/12/81 13/03/82 101

Raj Industries Equipments 12/12/86 01/04/87 110

Landmarks Associates 09/05/83 12/12/83 217

Pavithra Fabricators 02/03/81 04/06/82 459

------------------------------------------------------------------
 238

It can be observed from the Table - S.l~a maximum of

338 days has been taken for sanction in case of a textile
industry and a minimum of 133 days in case of a leather
industry.

If we look at the micro level as presented in the

Table-S.12, it is with a minimum of 3 days to a maximum of

550 days. Here in case of micro analysis, the average time

taken is 157 days which is on the higher side. This is
because the reception of the officers towards the project
is not encouraging and the red tapism. Apart from this the

clearance for sanction for the project is reciprocal. The

entrepreneurs also should show keen interest in providing

required papers to the financial institutions at the right

time. The delay at one stage will have cascading effect.

Financial Institutions are of the opinion that the delay is

mainly due to the legal impediments and other related

clearances from other departments of the government.

An analysis has been made to know the time taken for

the release of the loan. Normally sanctioning is only a

paper work and actual disbursement of the term loan happens

in stages. This will have a greater bearing on the

implementation of the project. It has been observed during

the field survey that the Financial Institutions have taken

 239

time ranging from I month to 45 months. The average time

taken for the complete disbursal of loan is 8.68 months.

However, some of the entrepreneurs during the field survey

felt that the Financial Institutions' procedures of

disbursement are hard and rigid. The clauses like FIC (First

investment clause), (i.e. difference between Fixed assets

and loan sanctioned or 50 per cent of the promoters

contribution which ever is higher), security created, margin

money, income tax clearance certificate, Bankers opinion,

CA's certificate (for investment and ource of funds), ULC

clearance (including approved building plan), commitment

charges, clearances from other governmental agencies like-

pollution control Board, KEB etc., are hard to obtain at a

reasonable period of time and running around from pillar to

post is required.

We have also interviewed the officers of Fianancial

Institutions about the grievances of the entrepreneurs. They

are of the opinion that for the successful implementation of

the project and for the proper utilisation of public funds

these norms are necessary.

 240

(13) Profile of the Interest Rate Charged:

Servicing a loan is a crucial element to run an

industrial unit. The development banks are entrusted with

the objective of industrialisation of backward areas. Hence

depending on the location of the project different rates of

interest are charged. The rate of interest has a greater

bearing on the project financing, pricing and profitability

of an SSI unit.

In the field survey an effort has been made to

assess the rate of interest paid by the SSIs and its impact

on running the unit. The Small Scale Industrialists

expressed during the field survey that interest for the loan

is the major Component of their working cost. If the

utilisation of funds is not proper and the unit is not

running on sound lines, the interest gets accumulated along

with the penalty for default and thus leading the unit to

sickness.

The interest rate charged for the surveyed units range

from 10 per cent to 16 per cent. Majority of the units are

paying interest in the range of 13 - 14 per cent (37 per

cent of the surveyed units). There are 20 units each paying

interest in the range of 11-12 per cent and 15-16 per cent,

as seen from the Table-S.13.

 241

TABLE - 5.13

PROFILE OF INTEREST RATES

SL. INDUSTRY RATE OF INTEREST

NO. TYPE UPTO 10% 11%- 12% 13%- 14% 15%-16%

1. FOOD 1 1 8 5
2. ELE.& ELECT. 3 3 6 2
3. CHEMICALS 0 1 5 4
4. TEXTILES 1 3 0 1
5. ENGS. 2 5 6 1

6. HOTEL 0 0 3 1

7. LEATHER 1 1 1 2

8. RUBBER 1 02 0 1

9. PAPER 4 3 5 3

10. OTHERS 11 1 3 0

The differential interest rates followed by the

Financial Institutions from time to time will be in tune

with the policies of the Government to boost

industrialisation and entrepreneurship in backward regions.

(14) Repayment Analysis:

The repayment period for the term loan is between 5 to

8 years and stretchable upto 10 years. It is based on the

productivity and profitability of the particular concern.

 242

The SSI units financed should get breathing time

Defore they start repaying the loan. The repayment period

should also be comfortable to the SSI enterprises. 27 Units

surveyed have been given repayment period upto 60 months. 21

units have availed repayment period between 61-72 months. 22

Units have a repayment period of 73-82 months. 12 Units have

been given 83-92 months. The same can be seen from the table

below.

TABLE - 5.14

PROFILE OF REPAYMENT

SL.NO. INDUSTRY REPAYMENT PERIOD (In Months)

TYPE UPTO 60 61 - 72 73 - 82 83 -92

1. FOOD 8 2 ·3 2

2. ELE.& ELECT. 4 5 3 2

3. CHEMICALS 2 3 2 1

4. TEXTILES 0 3 2 0

5. ENGINEERING 6 3 3 2

6. HOTEL 3 1 0 0

7. LEATHER 3 1 1 0

8. RUBBER 1 1 1 1

9. PAPER 3 2 5 4
 243

It can be observed that Food, Hotel, Engineering

Electrical and Electronics have got least repayment period
between 5 to 6 years. Because the cash generation capacity
is more in this industrial sector. The repayment period is
longer in the other industrial sectors because the
gestation period is more.

(15) Profile of Default/Regular Units:

In the Table-S.lS unit-wise details of amount
sanctioned, recovered, outstanding and the amount in default
is given.

It can be observed from the above that as much as 26

units are in default to the financial institutions. The

financial institutions during the time of sanction fix the

repayment period depending on the cash generation of the

project. The repayment period for the term loan varies from

5 years to 9 years. There are projects which involve time

for building construction or may be getting the imported

machinery wherein the project requires more time for

implementation. In these cases the repayment period will be

longer. If the project is being housed in a leased

accommodation and the machineries can be acquired in short

notice and there will also be sufficient cash generation

once the project goes on stream, the repayment period will

 244
TABlE - 5.15
FR(FllE <F lMT WISE ~ITI~ <F AKUfl' SAR::TICNED
RFX:lJ\.1mID, CUrSTANJIN:i AN) NUJNl' IN DEFAULTS

~tCUtron
AM:XMl' NOJNT PMXJNl' AMXJNI'
SANCI'IONID RFXXNERED OOI'STANDIN:; DEFAULT

P. Ltd. 33.50 8.50 25.40 1.10

giri cancer Centre 35.00 6.32 28.46 5.80
rctr0 Colors 4.54 3.85 0.80
resh Consultancy 3.00 2.10 0.95
J:P. S. Granites 5.85 1.94 3.91
. Gajanna Granites 16.30 3.30 13.00
~ Po1ystone Ltd. 60.00 60.00
shrutha Nursing Hare 20.00 3.00 17.00 17.00
. 1 Roller Flour Mill 57.70 8.20 51.50
~eja Enterprises 10.00 1.80 12.20 2.20
~iwal Plastics Pvt Ltd. 60.00 41.90 18.10
J. Bantex Pvt Ltd. 8.12 2.56 5.56
IrO Treads & Rubbers 14.00 1.00 15.00 0.20
rrnataka Rubber Inds. 9.45 7.82 3.42 1.80

'sore Polymers Rubbers 31.12 21.50 9.62

.ngs1ey Exports 26.00 4.36 22.72

lradaraja Silk Throwing 8.10 2.25 5.90

.tra Fags Pvt Ltd. 17.80 11.20 4.80

nus Fisheries 25.00 22.50 2.80

neetha E1ectricals 8.80 8.95

mini Distilleries 30.00 12.96 17.04

sore Machine Aids 3.71 1. 72 2.52 1.80

LC Pvt Ltd. 52.00 37.33 14.67

tit Engg. Ccrrq:lonents 55.00 3.20 53.42 4.56

 245

I~
AM){JNI' AM:XJNI' AM:XJm' AMJUNI'
SANCl'IONED REOJVERED OOI'STANDIK; DEFAULT

Ivitra Fabricators 1.00 1. 70 0.30

trzaria Prooucts Pvt Ltd 25.00 25.00

irrnataka Electronics 2.00 2.00

fA!< Phannaceuticals Ltd. 59.00 4.00 65.66 6.6

bdarshana Automobiles 31.87 21.92 9.95

!tshuutha Elcana. Pvt Ltd. 15.00 15.00

~ptha Rasins & Olanicals 60.00 50.00 10.00

l:Ro Chan Industries 25.00 7.00 18.00

~ Laboratories Pvt 60.00 11.00 49.00

fEA Olanicals and Shynthecis 40.00 43.45 3.45

~llic Soaps and Chanica1s 19.29 20.50

:are11i Daphne Labs Ltd. 23.25 4.85 18.70

NFD Electronics 11.00 1.21 9.79

rIa-1ATION Technology 23.00 3.02 20.00 1.80

DIS Printroniks Pvt. Ltd. 38.70 1.20 37.50

QRONICS (I) Pvt Ltd. 4.50 4.50

IIJANCEI) Canponents 24.00 26.50

GIL Filaments Pvt Ltd. 25.50 19.00 6.50

incess Ranju E1~ 7.93 1.18 6.75 0.40

iarshan Automobiles 31.87 22.02 9.95

::hno Tools 14.45 3.00 11.88 3.61

1esh Enterprises 22.00 4.00 18.00

rnataka Veneering Inds. 33.75 29.85 3.90

:ta Industries 10.00 7.35 3.10

 246

•
N-UJNT AM:XJNI'

f
AM:XJNT AlOJNT
SANCTIONED REXXNERED OlJI'STANDIN:; DEFAULT

~ Offset Printers 4.11 3.80 0.75 0.40

~sy Fabrication canbines 3.90 3.90

pd. Gold Food Products 2.25 2.00 0.42 0.25

~ Pop Rivets and Fasterns 10.00 10.00

tmva Industries 11.00 4.50 8.80 4.58

~sala Fastners 4.00 2.32 3.80 1.80

sore Nails and Fastners 4.65 3.00 2.10 0.85
s and Transmissions Ltd. 30.00 24.85 6.53 0.41
is Natural Focds 30.00 36.00 6.00

2.50 0.65 2.00

11.00 8.00 3.25

ilgiri Diary Fann Ltd. 24.90 9.50 15.10

:dagu Foods Pvt Ltd. 17.00 7.95 11.05 2.32

Jlcumar Soft Drinks 25.20 1.20 26.20 4.80

~th Enterprises 30.00 17.10 13.90

:rr-ry' s Food Products 3.90 2.80 1.20

:Jtel Poornima Resturant 10.00 0.18 9.82

[0110 Footwear Pvt Ltd. 29.32 11.58 21.63 8.54

ri Sai Coir Consurrer 59.35 1.25 59.33 13.00

!lrinidhi Containers 24.60 0.70 23.90

lyli Industries Pvt Ltd. 10.00 2.80 6.00 6.00

ivangere Wire Rope 1005. 57.00 47.50 10.20

loneer Plastics Inds. 18.00 14.00 4.20 0.72

II'lthorg (MYS) Pvt Ltd. 3.70 3.85

l1.fran M=>ly Products 13.80 10.00 3.95

 247

be less. For example, food industry, readymade garments

etc. Further the principal repayment for these industries

will be once in a month and the interest once in a quarter.

For those units who have longer repayment periods will get
both principal and interest repayments on a quarterly basis.

Therefore the units in default mean, they have failed

to keep up the schedule of repayment which will attract

penal rate of interest. The reasons cited are delay in the

implementation of the project, management and/or labour

problems, problem of availability of raw material - at right

time at reasonable prices.

(16) Problems faced while obtaining Loan:

The problems faced by the entreprefteurs are classified

as follows.

(a) Too many Formalities and Procedures:

Before sanction and relaese of loan, the small-scale

industrialists have to comply with several formalities like

incometax clearance certificate, Chartered Accountant's

certificate etc. Generally majority

, of the SSI entrepreneurs

are not incometax assessees. Inspite of that they are asked

to comply with a certificate from the Incometax Authorities.

Further the financial institutions insist on the Chartered

 248

Accountants" certificate for source and utilisation of

funds. But source and utilisation of funds are physically

visible in the form of fixed assets like land, building etc.

(b) Reception of the Officers towards the Project not

encouraging:

There are instances where officials of the financial

institutions not showing desired reception/encouragement

towards the small-scale entrepreneurs. This is either

because of the pressure of work or in some cases because of

the negative attitude of the personnel of the financial

institutions.

(c) No Proper Guidance:

Normally an entrepreneur has to contact several

departments when he enters a financial institution like loan

advance section, disbursement department, accounts section

etc. The entrepreneur may not be aware of the several

departments within the institution to obtain loan. Hence in

the field survey an effort has been made to assess the

problem of the entrepreneurs on these lines.

(d) In-ordinate Delay in Clearnace of Loan Proposals:

This may happen because of several formalities or

because of no proper guidance or both. Further before the

loan clearance, several approvals have to be obtained

 249

from competent authorities within a financial institution.

There is a cause and effect relationship between the

factors mentioned above. These problems have been assessed

and has been presented below.

The following table indicates the industrywise

problems faced by entrepreneurs. It is relevant to note that

only 59 entrepreneurs have desired to comment/opine on this

count.

TABLE - 5.16

PROFILE OF THE PROBLEMS FACED WHILE OBTAINING LOAN

SL. INDUSTRY A B C D
NO. TYPE

1. Paper 10 4 I- I

2. Chemical 2 4 1 1

3. Food I- I 2 3

4. Rubber 5 3 0 1

5. Leather 2 4 1 1

6. Ele & Elect 2 1 1 0

7. Engg 1 1 2 2

8. Hotel 2 5 1 1

9. Textile 6 2 1 1

10. Other 2 1 1 1

A - Too many formalities and prodecures

B - Reception of the officers not encourging
C - No proper guidance
D - Inordinate delay in clearance.
 250

As can be seen from the Table-5.16, 33 entrepreneurs

have expressed that there are too many formalities and

procedures and 26 have expressd that the reception they

received towards their project was not encouraging. As much

as 20 per cent are feeling that there is an inordinate delay

in clearing their papers and 17 per cent are of the opinion

that there is no proper guidance from the financial

institutions.

It can be analysed from the above that more than 90

per cent of the borrowers have complaints towards the

financial institutions. This calls for qualitative change in

the approach of the financial institutions towards

entrepreneurs. There is a need for more transperency in the

operations of financial institutions. It is also high time

to reconstitute the present procedures and formalities of

the financial institutions. In this direction a welcome step

has been taken by the Government of India by asking lOBI to

suggest amendments to the SFC's Act of 1956.

~17). OVERALL EXPERIENCE WITH THE FINANCIAL INSTITUTIONS:

The Table-5.l7 shows the industry-wise experience of

the entrepreneurs with the fianancial institutions.

 251

TABLE - 5.17
OVERALL EXPERIENCE WITH FINANCIAL INSTITUTIONS

SL. INDUSTRY FAIR GOOD BJIlD

NO. TYPE

1. FOOD 13 9 10
2. E & E 2 21 II

3. CHEMICALS 0 0 (1
4. TEXTILES 7 0 '11
5. ENGG. 1 3 F2

6. HOTEL 1 3 i4

7. LEATHER 1 0 '0

8. RUBBER 0 0 k9
9• PAPER 3 1 'I
10. OTHERS 4 2 -0

As can be seen from the table above 32 units have

expressed that their experiences, the treatment they

received from the financial institutions is fair. 39 Units

have indicated that their experience with the financial

institutions are good. However, as much as 29 entrepreneurs

feel that their experience with the financial institutions

is bad.
 2S2

5.4. ANALYSIS OF THE FIELD SURVEY DATA

Now in the second part of this chapter an effort has

been made to analyse the data in the following manner:

1. How the surveyed units are fairing on the basis of the

a) Promoters' background

b) Industry-wise

c) Constitution-wise

d) Financial Institution-wise.

2. The various parameters like education, implementation

period, (Industry wise and constitution wise), Break even

analysis (Industry wise and constitution wise), Time taken

for disbursement of loan from the financial institutions are

also analysed in an integrated analysis.

I. Educational Background of the Promoters:

It is to note that 46 per cent of the units surveyed

belong to the technically qualified category either through

qualification or service. It is important to note that as

much as 22 per cent of the units were run by people with an

educational background of even below SSLC. The same can be

seen from the Table-S.18

 253

TABLE - 5.18

. ANALYSIS OF THE PROMOTERS' EDUCATION

SL.NO. PARTICULARS NO.

1. TECHNICAL 46
2. GRADUATES 24
3. S.S.L.C AND 22
BELOW S.S.L.C
4. POST GRADUATES 07

II. Industry-wise Implementation Analysis:

a) The time taken for implementation in majority of the

units is either 1-6 months or 12-24 months. 61 per cent

of the units are in this range. As much as 24 per cent

of the units have taken implementation time of more

than 24 months. The gestation period is less among

engineering and chemical industrial sector. Whereas it

is too long in the case of electronics. The same can be

seen from the table-5.19

 254

TABLE - 5.19
INDUSTRY-WISE ANALYSIS OF IMPLEMENTATION

SL. INDUSTRY 1 - 6 6 - 12 12 - 24 24 MONTHS

NO. GROUP MONTHS MONTHS MONTHS & ABOVE

1. Paper 11 0 1 1
2. Chemical 5 0 1 2
3. Food 1 6 2 3
4. Rubber 2 2 0 0
5. Leather 0 1 1 1

6. Ele & Elect 2 2 3 3

7. Engg 5 2 3 2
8. Hotel 0 0 0 0

9. Textile 1 0 1 0

10. Others 3 5 1 1

b) Constitution-wise Implementation Analysis:

It can be observed from the Table-5.20 that private

limited units have taken more time i.e., 24 months and

above, compared to other units. 47 per cent of

surveyed proprietory firms have taken 1-6 months

implementation period. Even partnership concerns have

also faired in the same manner. 43 per cent of the

partnership concerns have taken 1-6 months time for

implementation.
 255

TABLE - 5.20

CONSTITUTION-WISE ANALYSIS OF IMPLEMENTATION

SL. PARTICULARS 1 - 6 6 - 12 12 - 24 24 MONTHS

NO. MONTHS MONTHS MONTHS & ABOVE

1. PROPRIETORY 7 1 2 5

2. PARTINERSHIP 9 2 7 3

3. PRIVATE LTD 11 7 12 11

4. PUBLIC LTD 1 o o 2

III. Analysis of Source of Raw-Material:

Obtaining raw-material continously at a reasonable

price plays a crucial role in the running of an industrial

concern especially so if it is an SSI concern. This depends

mainly on the nature and source of the raw material. It can

be noted that Food, Rubber, Engineering & Electronics

industries faced scarcity in obtaining the raw-material as

per the Table-5.2l.

 256

TABLE - 5.21

INDUSTRY-WISE ANALYSIS OF SOURCE OF RAW MATERIAL

SL. INDUSTRY SCARE OPEN IMPORTED THROUGH

NO. GROUP MARKET GOVT. INST.

1. Paper 2 0 0 1

2. Leather 1 0 1 0

3. Textile 1 1 0 1

4. E1e & Elect 6 1 3 0

5. Food 7 0 4 1

6. Hotel 0 0 1 0

7. Engg 9 1 0 0

8. Rubber 5 0 0 1

9. Others 15 2 2 2

IV. Industry-wise Break-even Analysis:

As much as 4 units are breaking even in the range of

85-98 per cent. This is in chemicals, foods and rubber

industrial sector. This is mainly due to the extreme delay

in implementation and raw-material problem coupled with

marketing and management problems. The break-even is very

low in engineering sector which can be seen from the

Tab1e-5.22.
 257

TABLE - 5.22
INDUSTRY-WISE BREAK EVEN ANALYSIS

SL. INDUSTRY 34-45% 46-55% 56-65% 66-75% 76-85% 85-98%

NO. GROUP

l. Paper 1 0 1 1 0 0
2. Chemical 4 0 3 2 3 1

3. Food 4 2 1 3 0 1

4. Rubber 2 1 1 1 1 1

5. Leather 1 0 1 1 0 0

6. Ele & Elect 0 0 0 0 1 0

7. Engg 9 2 1 0 2 1

8. Hotel 0 0 0 1 0 0

9. Textile 2 0 0 1 0 0

10. Others 8 1 2 2 1 0

V. Constitution-wise Break-even Analysis:

It can be observed from the Table-5.23 that even

though private limited concerns have taken more time to

implement but are breaking even at a lower level of 34-45

per cent. This is mainly because of the low overhead costs.

Nearly 90 per cent of the units break-even in the range of

34-45 per cent which are private limited companies.

 258

TABLE - 5.23
CONSTITUTION-WISE BREAK EVEN ANALYSIS

SL. INDUSTRY < 34% 34-45% 66-55% 56-65% 66-75% 76-85% 85-98%
NO. GROUP

1. Proprietry 3 2 2 o 3 '0 2

2. Partnership 1 7 3 o 1 1 I

3. Private Ltd 5 9 4 9 2 1 1

4. Public Ltd 2 1 o 9 2 2 o

VI. Analysis of Promoters' Contribution: (Constitution-wise)

TABLE - 5.24

ANALYSIS OF PROMOTERS' CONTRIBUTION (CONSTITUTION-WISE)

S1. Constitutions 10% 15% 20% 25% >25%

No.

1. PROPERIETORY 2 1 4 3 9

2. PARTNERSHIP . 2 3 2 7

3. PRIVATE 3 0 1 1 4

4. PUBLIC LTD 5 6 5 7 8
 259

Depending on the type of entrepreneur, whether

technically qualified, experienced or the promoter belongs

to the weaker section of the society and the location of the

project - whether situated in a backward or forward area,

the promoter's contribution varies from 10 per cent to 25

per cent. No financial institution provides 100 per cent

finance. There should be some stake of the entrepreneurs to

run the industry with commitment and interest. Normally the

promoters' contribution will be in the form of initial start-

up expenses, preliminary and pre-operative expenses, margin

towards machinery and working capital. Normally the

financial institutions insist for FIC (First Investment

Clause) before the actual disbursement of the loan. The

promoter before asking the release from the fiancial

institutions has to show proof towards the investment made

by him from a Chartered Accountant.

It can be observed from the Table-5.24, that 54 per

cent of the proprietory firms have invested more than 25 per

cent of the project as their contribution. Almost similar is

the case of partnership concerns. Whereas more than 75 per

cent of the public limited companies have managed to invest

less than 25 per cent. But 50 per cent of the private

limited companies have invested only 10 per cent of the

project cost.
 260

VII. Institution-wise Disbursement Analysis:

As mentioned earlier the present study is concentrated

more on the operations of KSFC and Commercial Banks.

Karnataka State Financial Corporation popularly known as

KSFC was established in the year 1959. More than 50 per cent

of the SSI concerns in the state are financed by KSFC. It is

considered as the premier term lending institution in the

country. KSFC has been rated as the best SFC in the country

by the national level financial institutions like lOBI and

SIDBI. KSFC has so far financed more than 75,000 industrial

units to the extent of around Rs. 1,100 crores.

Regarding commercial banks, Karnataka has given birth

to several commercial banks like Canara, Syndicate, Vijaya

and Karnataka Bank. There are about 4,300 Bank branches in

the state with a deposit of Rs.lO,OOO crores. The advances

are to the extent of Rs.8,000 crores

Coming to the more particular point of financing, KSFC

scores over other financial institutions in the time taken

(minimum) for disbursement. The average time taken from KSFC

is 10 months (of the surveyed units). Commercial Banks have

taken 18 months and that of other financial institutions is

21 months.
 261

TABLE - 5.25

INSTITUTION-WISE DISBURSMENT ANALYSIS

SL. INSTITUTION AVERAGE TIME TAKEN

NO. FOR DISBURSEMENT (MONTHS)

1. K.S.F.C 10
2. COMMERCIAL BANK 18
3. OTHER F.I'S 21

VIII. Institution-wise Finacia1 Assistance Analysis:

In the following table, an effort is made to trace the

share of financial institutions in the financial pattern

provided to SSIs.

TABLE - 5.26

INSTITUTION-WISE FINANCIAL ASSISTANCE ANALYSIS

SL. FINANCIAL UPTO RS.5 5-10 10-20 20-40 40-50

NO. INSTITUTIONS LAKHS LAKHS LAKHS LAKHS LAKHS

1. K.S.F.C 5 10 15 07 7

2. COMMERCIAL
BANKS 9 5 2 2 1

3. OTHER
F.I'S 4 5 3 o
 262

It is Commercial Banks which score over KSFC in the

loans provided in the range below Rs. Five Lakhs. Above

third range KSFC has provided more loans.

The inferrence from the above analysis is that KSFC

being a development bank and its major operations are being

refinanced by lOBI and SIDBI, there is no scarcity of funds

on the sanctions to the SSIs. But in case of commercial

banks there are several restrictions from the RBI in the

form of SLR (Statutory Liquidity Ratio), CDR (Credit-Deposit

Ratio), Credit Squeeze etc. The Government of Karnataka is

also involved in the funding opertions of KSFC and thus the

sanctions of KSFC are much higher. The commercial banks

being commercial in nature look towards the security of the

loan whereas KSFC being a development bank aims at the

development of industries in the backward region. The

operations of KSFC are target oriented whereas that of

commercial banks is security oriented and guided by various

regulations of the RBI.

IX. Ananlysis of Constitution-wise Source of Funds:

Now an effort is made to understand as to how the

untis (SSI) depending on constitution mobilised funds?

 263

TABLE - 5.27

ANALYSIS OF CONSTITUTION WISE SOURCE OF FUNDS

SL. CONSTITUTION OWN "FUNDS FRIENDS AND BORROWED

NO. RELATIVES FROM OTHERS

1. PROPRIETORY 21» 4 1

2. PARTNERSHIP as 4 "1

3. PRIVATE LTD 213 4 7

4 . PUBLIC LTD. PIJ 4 0

It can be seen from the Tab1e-5.27 that majority

of the private limitedhconcerns (31 per cent) were able to

manage with their own funds. It can also be observed that 50

per cent of the propriQtory firms have borrowed money from

friends, relatives andnothers.

 264

X. Industry-wise Sources of Funds

TABLE - 5.28
ANALYSIS OF INDUSTRY-WISE SOURCE OF FUNDS

SL.NO. TYPE OF OWN FUNDS FRIENDS & BORROWED

INDUSTRY RELATIVES FROM OTHERS

1. FOOD 5 3 1
2. E & E 3 0 0
3• CHEMICALS 7 0 1

4 TEXTILES 2 0 0
5. ENGINEERING 9 2 ·1

6. HOTEL 2 0 0

7. LEATHER 2 0 0

8. RUBBER 5 1 0

9. PAPER 2 0 0

10. OTHER 11 8 6

It can be observed from the Tab1e-S.28 that

majority of the food units have managed from their own

funds. It can also be observed that the entrepreneurs 'in the

Engineering industry were able to borrow from their friends

and relatives to a considerable extent. In general they are

running the show from their own funds.

 265

XI. Analysis of the Rate of Interest Charged (Institution-

wise) :

The interest rate charged by KSFC is more ranging from

13-14 per cent and that: of Commercial Banks, in the range of

below 10 per cent an&r above 16 per cent. The rate of

interest charged by ot!her financial institutions is more in
the range of 15 -16 par cent. The same can be seen from the
following table. o'

TABLE - 5.29

ANALYSIS OF INSTI~TION-WISE RATE OF INTEREST CHARGED

RATE OF INTEREST CHARGED

SL. FINANCIAL
NO. INSTITUTIONS UPTO 10% 11-12% 13-14% 15-16% ABOVE 16%

1. K S F C 4 7 22 5 4

2. COMMERCIAL
BANKS 13 5 4 2 9

3. OTHER
F.I'S 1 2 5 8 3

The rate of interest charged by other financial

Institutions is more in the range of 15 - 16 per cent.

 266

XII. Industry-wise Default Analysis:

TABLE - 5.30

INDUSTRY-WISE DEFAULT ANALYSIS

SL.NO. INDUSTRY TYPE REGULAR DEFALUT

1. FOOD 10 3

2. E & E 08 1

3. ENGINEERING 09 4

4. PAPER 07 3

5. CHEMICALS 07 2

6. TEXTILES 03 2

7. LEATHER 02 1
8. HOTEL 04 0

9. RUBBER 03 1

10. OTHERS 06 2

The above table depicts that the default is more in

food and paper industry. The ratio of regular to default is

more in Engineering Hotel Industries. Overall 32 per cent of

the units are defaulters. This is on an higher side. The

main reasons quoted for default are delay in implemention,

working capital problem, management problem, etc.

 267

XIII. Constitution-wise Default Analysis

TABLE - 5.31

CONSTITUTION-WISE DEFAULT ANALYSIS

SL. NO. INDUSTRY REGULAR DEFAULT PERCENT

TYPE

1. PROPERIETORY 19 5 26

2. PARTNERSHIP 14 4 29

3. PRIVATE LTD 07 3 43

4. PUBLIC LTD 20 7 35

As can be seen from the above table, the default is

more in private limited companies followed by public limited

companies. It can therefore be concluded that proprietory

and partnership concerns are more reliable to financial

institutions.
 268

XIV. Analysis of Problem Faced While Obtaining Loan:

TABLE - 5.32

ANALYSIS OF INSTITUTION-WISE PROBLEM FACED WHILE OBTAINING

LOAN

SL. NO. FINANCIAL A B C 0

INSTITUTIONS

1. K.S.F.C 50 6 0 2
2. COMMERCIAL BANKS 18 4 1 0
3. OTHER F.I.S 1 0 0 0

A Too much formalities and procedures

B Reception of the officers towards the project
not encouraging
C No proper guidance
0 Inordinate delay in clearance.

It can be observed from the Table-5.32 that 85 per

cent of the entrepreneurs feel that the formalities and

procedures are too many. The process of simplifying the

procedure is slow. There is an urgent need for change in the

approach of the institutions. 12 per cent of the people feel

that the reception of the officers towards the project is

not encouraging. There are no such complaints on the

guidance and movement of the files. It can be seen from the

above table that the major grouse of the loanees is towards

the procedures and formalities. The entrepreneurs during the

survey expressed that considerable time and money is being

 269

spent to procure the various documents, legal papers,

clearances from other agencies like No Encumberance
Certificate, Tax Paid Receipt, Title Deed or Sale Deed or

Partitition Deed or Gift Deed (depending on the case) etc.

Additively it is strongly felt that there is not much

coordination between the various departments within the Bank

or SFC. The entrepreneurs during the field survey have

expressed their problems in handling variou~ departments

within a bank like Sanctions, Disbursement, Recovery,

Finance and Accounts Departments.

xv. Analysis of Overall Experience with the Financial

Institutions

It can be observed from the Table-5.33, that only 22

per cent of the clients of financial institutions are happy

with their transactions. As much as 75 per cent of them have

expressed that their dis-satisfaction with the financial

institutions.
 270

TABLE - 5.33
ANALYSIS OF OVERALL EXPERIENCE (INSTITUTION-WISE)

SL.NO. FINANCIAL FAIR GOOD BAD

INSTITUTIONS

1. K.S.F.C 15 42 1

2. COMMERCIAL BANKS 2 15 1

3. OTHER F.I.S o 1 o

5.S SUMMARY OF THE FINDINGS OF THE FIELD SURVEY AND

ANALYSIS THEREON

The SSI units selected for the field survey are based

on the following parametres.

The first parameter in selecting the unit for field

survey has been the 'type of entrepreneur' i.e., based on

the background of the promoter - whether he is technically

qualified or not, educational background, experience in the

particular line he has ventured. The second parameter

considered for selecting the unit for the field survey is

the constitution of the unit i.e., whether the unit is a

'proprietary' or 'partnership' or 'public' or 'private

limited company'.
 271

There are several types of industries as for

instance, Engineering, Electrical and Electronics, Food,

Hotel etc. Due care has been taken while selecting the unit
for the field survey to see that all the major industrial
groups are represented. The units situated in Bangalore,
Mysore and Hubli have been selected for "the survey.

The objective of the field survey is to know the

problems of the SSI entrepreneurs while obtaining loan,

while running the unit and the impact of financial

assistance on the SSI concerns.

The major findings of the field survey are :

(1). The educational background of the promoters is of

little consequance while running an industrial

enterprise. As much as 54 per cent of the

concerns are run by the entrepreneurs who are not

technically qualified.

(2). It has been found in the field survey that the

implementation period for the SSI units is

relatively longer. The major reasons being too

many formalities and procedures to be followed,

delay in sanctioning and release of the loan from

the financial institutions. Several clearance

from the various agencies, no proper planning on

the part of the entrepreneurs etc.

 272

(3). The role of Governmental agencies in providing

scarce raw-material at a reasonable price to the

SSI sector is minimum. Majority of the SSI
concerns depend on open market or imports for

raw-materials.

(4). Even though the capacity utilisation of the SSI

units is relatively on an higher side, the break-

even point is not low. This is again due to raise

in prices of raw-material, labour, power,

transport and etc.

(5). While analysing the production trends in the

three years, it has been found that majority of

the units have registered either a negative

growth or no change in their production trends.

(6). It is also found that the ratio of employees in

the office to the factory is higher leading to

more overhead costs.

(7). The results of the survey reveals that marketing

is a major draw-back for the SSI units. Most of

the units have problems like severe competition,

pricing, distribution, awareness etc. The role of

 273

the governmental agencies in furthering the

interests of SSI units in marketing is minimum or
not effective.

(8). The promoters' contribution in majority of the

SSI units is less than 25 per cent.

(9). The time taken for sanction and release of loan

to the SSI concern is too long. This will have a

cascading effect on running an SSI unit.

(10). The financial assistance on land and building to

house the SSI unit is more compared to the plant

and machinery. It has been observed in the field

survey that to house Rs. Three lakhs worth

machinery as much as Rs. Five lakhs is spent on

land and building. Instead, the entrepreneur

would have gone either for rented premises or

leased premises in the initial stages to house

his unit. More investment on land and building

will affect the profitability of the unit.

(11). It has been found out during the field survey

that food and chemical sectors are more prone to

the vagaries of market. Engineering and Hotel

 274

industries are running on sound lines. In the

same way partnership and proprietary concern are

running on a sound basis compared to private and

public limited concern.

(12). 26 per cent of the units are in default to the

financial institutions.

(13). Majority of the SSI concerns are not happy with

the procedures followed by the financial

instutions as the Small Scale Industrialists

broadly agree with the major policies of the

financial institutions.

(14). Karnataka State Financial Corporation is

providing better services compared to other

financial institutions both in terms of quantity

and quality.
 ANNEXURE 1

QUESTIONNAIRE FOR THE RESEARCH STUDY ON nINSTITUTIONAL

FINANCE TO SSIs IN KARNATAKA"

GENERAL :

1. Name of the Unit

2. Address of the Unit

Factory

Office : Phone No.

Phone No.

3. Name and Designation of

the Respondent ·
4. Chief Promoter's
Education : Below SSLC/SSLC/Graduate/
Post Graduate/Technically
Qualified.

5. Previous Occupation ·
6. Year of establishment of
the unit ·
7. Constitution of the Unit Proprietary/partnership/
Private Ltd.,/Pub1ic Ltd.

8. Date/Year of the Commen-

cement of Commercial pro-
duction of the unit ·
9. Name of the product being
produced ·
10. Any other by product
being produced ·
11. Licenced/installed
capacity ·•
 276

12. Capacity utilisation

(Average during the last
3 years)

13. Production during the

last 3 years Qty. (Tonnes Value
per annum) (Rs. )

1987-88
1988-89
1989-90

14. Break even point of the

unit ·
15. Availability of raw mat-
erials Open market/Government
Institution/Imported/Sca-
rcity

16. Any problems faced while

obtaining raw material a) Scarce Yes/No

b) High Price Yes/No

c) Restrictions
in importing Yes/No

d) Seasonal
Availability Yes/No

e) Other (if Yes I

please specify Yes/No

17. Total No. of persons

employed ·
a) Factory
b) Office ··•
18. Major end-users (either a)
name of the unit or b)
major industrial sectors) c)
d)
19. Sales during last: Quantity (TPA) Value (Rs)
three years

1987-88
1988-89
1989-90
 277

20. Problems faced in market-

ing :a) Server competition Yes/No
b) Pricing Yes/No
c) Distribution Yes/No
d) Awareness Yes/No
e) Others (If Yes,
please specify) Yes/No
21. Assistance for marketing
either by Government or
private agencies (Tick
whichever is applicable) Government/Private Agencies
22. Marketing Strategy Through Dealers/Retailers/-
Both/Directly.
23. Export/Import oriented
unit (Tick whichever is
applicable) Export/Import

24. SPECIAL INFORMATIONS

1. Name of the Financial

Institution providing
term loan

2. Date of sanction

3. Date of Realisation of
Loan (complete Disbur-
sement of Loan)

4. Total Financial assist-

ance obtained Rs. lakhs

5. Financial assistance to:

Land · Rs. · . . .. lakhs

Building · Rs. · .... lakhs
Plant and Machinery
·· Rs. · .... lakhs
Others Rs. ·.... lakhs
Total
··
6. Whether term lending

institution is providing
working capital facility Yes/No

7. Whether financial assis-

tance is provided under
any special scheme : Yes/No
 278

8. If yes, please name the

scheme and the reason
for obtaining finance
under special scheme

9. Problem faced while

obtaining loan
a) Too much formalities
and procedures Yes/No

b) Reception of the
officers towards the
project was not en-
couraging Yes/No

c) No proper guidance Yes/No

d) Inordinate delay in
clearance .: Yes/No

e) Others (If yes,

please specify) : Yes/No

10. Rate of interest

charged • • • •• %

11. Repayment period · Years/months

12. Present amount outstan-

ding with the financial
institution Rs. ..... lakhs

13. Amount in overdues if

any Rs. ..... lakhs

14. If yeas, your difficul-

in clearing the overdues: 1)
2)
3)

15. Name of the Bank provi-

ding working capital

16. Date of application ·

17. Date of sanction of
working capital ·
18. Working capital a. To buy raw material
required for (Tick b. To meet administrative
whichever is applicable: expenses
c. For bill discounting
d. Others (please specify)
 279

19. Working capital limit

sanctioned by the Bank Rs. . •.. lakhs

20. Any problems faced while (1 )

obtaining working capi- (2)
tal or being faced while (3 )
drawing working capital:

21. Promoter's contribution

in the project Rs. •.... lakhs

22. Source of funds for the

promoters contribution : Own funds/Friends and
Relatives/Borrowed from
others.

23. Tax structure of the

unit
a) Sales Tax paid during
last three years 1987-88 Rs. lakhs
1988-89 Rs. lakhs
1989-90 Rs. lakhs

b) Whether the Unit

i) Comes under Excise
Duty purview Yes/No

~o ii) If yes, what is the

Excise Duty paid
during the last 3
years 1987-88 Rs. lakhs
1988-89 Rs. lakhs
1989-90 Rs. lakhs

c) Whether the promoters:

i) Are income tax

assessee ••

ii) If yes, How much is 1987-88 Rs. lakhs

the Income tax paid 1988-89 Rs. lakhs
during the last 3 1989-90 Rs. lakhs
years ·
24. Working cost of the
unit : (Can also be furnished in
terms of percentage)
a) Towards raw material
b) Labour cost
c) Towards Electricity
d) Towards Transportation :
e) Administration cost
f)
g)
Handling cost
Selling cost •
···
h) Other costs (Please
specify) ·
 280

25. Profits/loss made

during the last three
years : 1987-88 Rs.
1988-89 Rs.
1989-90 Rs.

26. Your opinion on the a) Good enough Yes/NO

loan scheme of the b) Needs modification Yes/NO
financial institutions c) Any other (If yes
please specify) Yes/NO
27. Your overall experience a) Fair
with the Financial b) Good
Institutions · c) Bad

28. What alternative you

could have found if
financial institutions
have not helped · 1)
2)
3)
 CHAPTER - VI

SUMMARY AND CONCLUSIONS

SUMMARY

The present study, beginning with the evolution of

modern SSIs in India, its importance and role in the

economic development deals mainly with the institutional

support - financial support in particular its trends

pattern and magnitude and reveals the contributions of SSI

sector in terms of production, employment and investment

vis-a-vis the financial support it received from financial

institutions.

The contribution of the small-scale sector to the

nation's economy has often been underplayed or not fully

recognised. This sector provides the largest employment

both skilled and unskilled and is a source for supporting

large scale industry by providing ancillaries. It has

repeatedly met the domestic demand in areas like consumer

durables and has created a niche for itself on the export

front.

An effort has been made in this thesis to trace the

growth of modern SSI concept in India. During the 1950's it

 282

was the employment aspect which determined the scope of an

551. Then during the 1960's when the tempo of the

development of SS1s gathered momentum, the labour concept

gave way to capital investment. Since then the definition of

an SS1 is revised continuously based on the investment on

plant and machinery.

It has also been analysed in this thesis, the approach

of Government towards the SSI sector. Since the IPR 1948,

several changes have been effected through the IPR-1956,

1977, 1980 and 1991. To a greater extent the 'protectionist'

policy adopted by the Government contributed to the growth

of SS1s in the present scale. Further an assessment has also

been made in order to know whether the financial allocations

made towards this sector during various plan periods are in

proportion to the contribution of this sector to the

economy.

The importance, role and place of SSIs to the economy

has also been analysed. In terms of creation of employment

opportunities to the economy which is characterised by

unemployment and underemployment, contribution of 551 sector

to the G.D.P., contribution towards the export front are

also dealt.
 283

There is also an effort in this thesis to dig into the

features of capital and credit structure of an SSI. How

there has been a transition of capital and credit needs of

SSIs over the years. The thesis also deals with the present

financial structure through which the credit needs of the

SSIs are met and what are the procedu~es, terms and

conditions, security to be provided, percentage of margin

and rate of interest of the Financial Institutions while
providing financial assistance to SSIs.

It has been substantiated in the thesis with facts and

figures that the financial support, the 551 sector received

is not in proportion to the contributions made from this

sector.

It can also be seen from the foregoing analysis that

there is agglomeration of industries in the districts of

Bangalore, Mysore, Tumkur, Dakshina Kannada and Belgaum and

deglomeration of industries in the remaining districts of

the state. This factor is also corroborated by looking at

the financial assistance (District-wise) provided by the

financial institutions like KSFC and nationalised commercial

banks.
 284

Karnataka is one of the states known for sound

banking system. There has been a considerable growth in

branch expansion in the state after 1964. The performance of

KSFC compared to commercial banks in financing SSIs is

impressive. SSI finance constitutes 69 per cent (as on

31.3.92) of the total financial assistance provided by KSFC

whereas in case ~f commercial banks it is around 13 per

cent.

There is a detailed account of institutional finance

to SSIs in Karnataka in this thesis since nationalisation.

The year wise account of financial assistance provided by

commercial banks to SSIs is recorded. This analysis shows

that the average share of finance that SSIs have obtained

since 1969 to 1992 is 13 per cent of the total advance of

the commercial bank. Then an analysis of District wise and

bank wise advances to SSIs as on 31.3.92 has been made. This

analysis shows that there is concentration of industries in
certain pockets of the State where well developed

infra structural facilities, proximity to market and other

facilities are there. There is an agglomeration of

industries in places like Bangalore, Tumkur, Mysore,

Mangalore, Belgaum and Dharwad. Bankwise analysis reveals.

Canara i SBI, SBM and Syndicate Bank are in the forefront of

financing SSIs in Karnataka.

 285

KSFC today is the premier term lending institution in

the country. It has played a catalytic role in the promotion

of SSIs in Karnataka. Its operations since inception to

31.3.92, share of its assistance to SSI, District wise and

Industry wise assistance, Ratio of disbursement to

sanctions, Recovery performance are also dealt in detail.

The study based on the field survey of 100 selected

SSI units reveals that - but for the financial assistance

from the financial institutions they have not established

the industries. The field survey also revealed that there is

no much relation between the qualification of the promoter

in running the unit. It was also found out during the field

survey that proprietory and partnership concerns are running

on a sound basis compared to private and public limited

concerns. The impact of financial assistance on the SSI in

terms of production, employment have also been analysed in

the field survey. The points like more investment on land

and building than the plant and machinery, more empolyment

in office compared to factory resulting in more overhead

costs, major working cost of the majority units is towards

servicing the loan have also emerged in the field survey.

 286

RECOMMENDATIONS:

One of the major issues to be addressed primarily is

the availability of adequate and timely f1 j·c.:\;ce for the

growth of this sector. Finance as is well accepted should be

available at right time and delayed finance is no longer a

finance at all. As detailed in the previous chapters the

present institutional finance available to this sector is

inadequate. Hence SSIs should have access to new avenues of

finance like Mutual funds. It. is also recommended that since

SSIs find it difficult to raise finance the 'SSI Mutual

Fund' should be set up. There is also an urgent need to

restructure the interest rates on a scientific basis. The

interest rates are different from one financial institution

to the other.

The existing branch net work of financial institutions

is ill equipped with handling financing of SSIs effectively.

On the lines of the establishment of a separate financial

institution for the SSIs, the SIDBI, it is recommended that

special branches may be set up to exclusively deal with the

SSIs. This will help new units for speedy sanction and

release of loan as well as old units for rehabilitation.

 287

In order to make SSI units - self sustaining in terms

of source of funds and also to avoid sickness in Small Scale

Sector 'Promopt Payment Act' should be implemented

vigorously. For a majority of the SSI units - public sector

undertakings and LSIs are the major customers. The

Government should prevail on these by effecting payments not

only within the time limit but also as early as possible.

Obviously this is a major source of funding for the SSIs and

it would be rejuvenated by a positive stand in this

direction.

In view of the globalisation of trade it has become

essential for SSI units to have access to technology for

manufacture of variety of products of acceptable quality at

competitive prices. Hence, financial institutions apart from

lending on traditional lines should also think of providing

some sort of 'Technology Development Assistance Fund' for

easy flow of technology transfer.

SSIs constitute 40 per cent of the total exports, 60

per cent of the total employment in the manufacturing

sector, 45 per cent of the total industrial production and

36 per cent of the G.D.P. Whereas the finance it is getting

is less than 20 per cent of the total advances of the

 288

financial institutions. !t has also been assessed by the

Nayak Committee appointed by the Finance Ministry -

Government of India that large scale units borrow upto 19

per cent of their turnover from banks as working capital.

55! units however get only around 8 per cent. Hence, the

share of lending of the financial institutions should be

increased at least by another 10 per cent.

The question now is not of reviewing the situation but

of implementing a step by step programme for vitalising this

sector and removing all impediments in the path of this

objective. !t can be mentioned here the impediments that SS!

entrepreneurs facing are in the form of elaborate and

cumbersome procedures. They impose considerable difficulty

on the borrowing of the SS! entrepreneurs. Special and

simple application forms and simplified procedural

requirements will go a long way in promoting SS!s.

An important point to be kept in view is that the SS!

sector is not homogenous. Some of the units use 'state of

the art! technology while quite a few are carrying on with

technology as well as equipment which is several decades

old. We have 55! units catering essentially to the domestic

export
 289

The recent policy change with reference to SSIs is the

"New Industrial Policy of 1991". The highlights of this

policy are 'liberalisation' and 'the opening up of

economy'. The policy aims at removing 'Licence-Raj', direct

foreign investment, automatic approval for foreign

technologt agreements. These measures will make SSIs more

competitive and if implemented properly should help for the

pomotion of SSIs. But through the process of liberalisation,

it has also been the thinking of the government to move away

from tax and credit concessions to SSIs which may result in

'giving' from one hand and 'snatching' from the other.

Small-Scale Industries are normally exposed to the

cross currents of economic policies. There is an urgent

need to consider the policies to be pursued with regard to

SSIs in the context of overall strategy for industrialisa-

tion. That is to say the reliance or stress should be on

the 'package approach'. Even though some efforts have been

made to promote SSIs through package approach, the benefits

have not perculated.

The major achievements of banks since nationalisation

has been successful geographical coverage, with expansion

problems like rigidities, defective lending, overdues have

 290

creeped in. Therefore the Government has set up the

Narasimhan Committee to examine these aspects. The committee

has submitted its report recommending reforms. The

highlights of the recommendations are :

liberlising the financial institutions,

healthy competition between public and private sector,

no further nationalisation,

phasing out of concessional credit,

prudential regulation and supervision in a free

financial environment,

no bar on private banks,

four tier system of banking organisation SBI, its

subsidiaries at the helm including international character -

8 -10 national banks with universal character - local banks

confining to a specific region - RRBs in the bottom at the

rural areas.

To implement these recommendations the Government has

to make far reaching changes like mergers, amalgamations

which may not be possible. But other recommendations like

free competition between public and private sector banks in

the areas of branch expansion will open new vistas for

small-scale entrepreneurs.
 291

Another major recommendation of the Narasimhan

Committee is the phasing out of concessional credit and

bringing down the credit target of 40 per cent to 10 per

cent to the priority sectors and also redefining the

'priority sector'.

Keeping in view the dependency of the economy on the

priority sector (like agriculture and SSI sector) one

wonders how this is realistic. Moreover the sudden reduction

of advance on priority sector will jeopardise the interests

of people involved in this sector unless the number of

people dependent on them reduced.

There is also an urgent need for better co-

ordination between commercial banks and the state financial

corporation apart from the co-ordination between branch and

regional offices of these institutions for improving the

credit delivery system. In this regard the establishment of

SIOBI is a welcome step. SIOBI will be the Apex Bank of

small industry finance. It will also be a focal point to co-

ordinate and thereby step up the flow of financial

assistance to the Small-Scale sector. SIOBI will also

operate a special fund 'the small industries development

assistance fund' for financing those activities which are

expected to yield return over a very long period and involve

high degree of risk.

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