1

Ph.D. Evaluation Report

1. Name of : Shri. B.V. Lonikar
Student -
2. Name of Guide : Dr. V.V. Mahajan
- Reader & Head,
Department of Commerce,
Nutan Mahavidyalaya, Sailu
Dist. Parbhani.

3. Name of Thesis : “A Study of Financial

- Management of Small
Scales Industries in
Marathwada”

4. Faculty : Commerce & Management

- Science

5. University : Swami Ramanand Teerth

- Marathwada University,
Nanded

6. Ex.Refree : Dr. Col. Ashok Pal

- B-101, Time square,
Fatheh Ganj
Baorda – 390002

Report
I have carefully gone through the Ph.D. Thesis of
Shri. B.V. Lonikar, I offer the following comments

1. The objectives of research suit to the title of

thesis. These objectives in nutshell are as
follows :
(i) To study industrial Development of
India & its finances so as to bring out the
importance of small-scale industrial units.
 2

(ii) To critically analysis conceptual base for

financial resource procurement by SIUs and
their utilization.
(iii) To verify various aspects of Working
capital, Borrowings, Subsidizes, institutional
finances etc. and other related variables
affecting financial management of SIUs

(iv) To know the facts of finances of Sick

Units

(v) To suggest remedial measures for

sound financial management of SIUs.

2. The research methodology used for the thesis is

appropriate and logical. The candidates deserves
special appreciation for the same

3. Each chapter covers all the significant

information, the chapter scheme is as follows
Chapter – I
Introduction, Objectives, Nature, Scope and
Research Methodology of Thesis

Chapter – II
Development of Small Scale Industries and their
Finances

Chapter – III
Conceptualities of Financial Management in
Proposed and Established SIUs

Chapter – IV
Management of Working Capital by SIUs

Chapter – V
Borrowings, Subsidies, Incentives & Hire
Purchasing
 3

Chapter – VI
Institutional Finances to SIUs
 4

Chapter – VII
Facts About Financial Facts About Financial Facts
About Financial Facts About Financial
Management of Sick SIUs

Chapter – VIII
The Four Case Studies Revealing A State of
Finances of Sick SIUs

Chapter – IX
Summary, Conclusions and Suggestions

4. The Ph.D. Thesis on “A Study of Financial

Management of Small Scales Industries in
Marathwada”prepared and submitted by Shri
B.V.Lonikar is a genuine piece of research work
completed under the guidance of Dr.
V.V.Mahajan . The various sources of
information have been properly acknowledged
and conclusions are drawn on the basis of data
collected by the candidate himself. On the whole
the thesis is genuine attempt to find out new
dimensions in the field of Financial Management.
The tabulation, interpretation of data and drafting
part of the thesis are impressive and useful to
others. Looking to the efforts of the candidate and
intensive work of research I recommend the thesis
of Shri B.V. Lonikar for the award of Ph.D.Degree
in the faculty of Commerce and Management
Science of Swami Ramanand Teerth Marathwada
University, Nanded
 5

(Dr. Col. Ashok Pal)

External Refree
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Chapter - IX
Summary, Conclusions and
Suggestions

Chapter – I
Introduction, Objectives, Nature, Scope and Research
Methodology of Thesis

Rational Behind Selection of Thesis Topic :

The forgoing discussion shows that India, as compared
to era of pre-independence has made substantial
progress in Development of Industries. However there
were number of dynamics which affect industrial
Development. Amongst all these, financial management
at the level of individual industrial unit is worth to be
considered. An Industrial entrepreneur besides his own
capital obtains the external finance in the form of
concessional or non-concessional finance or Govt
investment. The concessional finance assistance
includes grant, subsidies, and loans at less than bank
rate, with long maturity period. Such financial
assistance in underdeveloped areas is generally
provided on liberal scale. This assistance is given for
industries to sustain high level of investment, to
mitigate technological gap, to exploit natural resources,
to face initial risk, to develop basic infrastructure, to
improve economic condition and so on. If industrial
investment of the state needs success and fruitful
utilizations, there is a need to make constructive
management at grass root. At that grass root industrial
level, there exist a number of areas such as production,
finance marketing personnel and so on. In these areas,
the financial management is crucial one to decide the
fate of industrial unit. Considering this fact, it was
decided to study financial management of Industrial unit
run on small-scale basis.

Objectives :
(i) To study industrial Development of India &
its finances so as to bring out the importance of
small-scale industrial units.

(ii) To critically analysis conceptual base for

financial resource procurement by SIUs and their
utilization.
 8

(iii) To verify various aspects of Working capital,

Borrowings, Subsidizes, institutional finances etc.
and other related variables affecting financial
management of SIUs

(iv) To know the facts of finances of Sick Units

(v) To suggest remedial measures for sound

financial management of SIUs.

− Research Methodology :
Research methodology used for study is both
exploratory and descriptive.

Chapter -II
Development of Small Scale Industries and
their Finances

− Small scale industry plays an important role in Indian

economy, by generating employment and avoiding
concentration of economic power. It is grouped under
the general heading of Village and Small industries
(VSI). In Industrial Policy Resolution 1956. It is sub-
divided into eight sub-categories; viz. Khadi, village
industry, Handlooms, Sericulture, Handicrafts, Coir Small
Scale industries, and Powerlooms. Of them, first six
belong to traditional industries and latter two, the
modern technologies and are mostly urban oriented.
Traditional industries are mostly rural and semi-urban in
character.

− The small scale industry is defined in terms of capital

investment. The unit having capital investment upto Rs.
60 lakhs is said to be small scale industrial unit. If it is
ancillary unit supplying components to the large scale
industry and export-oriented unit, the limit of capital
investment is Rs. 75 lakhs. The Tiny sector industrial
unit needs capital investment upto Rs. 5 lakhs. This
limit of capital investment covers only investment in
plant and machinery. Land and factory building are
excluded.

− This small scale industrial sector is important as it

generates employment next to agriculture. It has
foreign exchange earning capacity. It can be useful for
the decentralization. It is labour intensive production
unit.
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− Small Scale Industries Under British Rule.

From the early days, even from the days of the Mughal
period India was famous for her craftsmanship. As early
as the 17th century Indian cotton goods found a ready
market in Europe and South-east Asian countries. After
1707, as there was political chaos and confusion in the
country, the British established mastery over the whole
country. The industries of 18th century may be grouped
under (i) rural industry (ii) urban industry. Villagers
worked in their cottages, which were the centers of rural
and agricultural industries. They generally looked after
local needs, which were such utility goods as
earthenware, coarse cloth, baskets, etc. These rural
industries were primitive, lacked specialization, were
traditional and not affected by the outside world. As a
contrast, urban industries were more closely organized.
They manufactured luxury goods such as gold and
silverwares, and also silk and woolen fabrics and calico
to serve wider foreign markets. Guilds or middleman
managed the urban industries. They look after the
quality of the work and the welfare of its members.

− But the supremacy of Indian handicrafts declined

because of certain technological, economical and
political developments. The Industrial Revolution in
England was one the main cause for this decline. The
application of mechanical power to the manufacturing
Industries helped England to produce goods cheaply and
displace Indian products in foreign markets and later on
even in the home market. The expansion of transport
facilities also helped British industry. But industrial
development in India was deliberately discouraged to
suit the British economy. India’s internal economy was
upset by British imperialism. Indian industries decayed.
It was difficult to set up new industries suitable to the
altered times, for want of knowledge and capital on the
part of the Indians. The British Industry, specially the
mills, developed while Indian manufactures declined.
India was the main market for British manufactures, She
exported only such raw materials as cotton, silk, hides,
oilseeds, jute and dyes tuffs, which were necessary for
the progress of the Industrial Revolution in England.
India, in fact, entered upon a period of de-
industrialisation and increased her dependence on
agriculture. Other cause also hampered the
development of Indian industry. The decline of the
handicraft industry, too, was nearly complete by 1888.
 10

this plunder of India continued till the middle of the 19th

century, preventing our own industrial development.

− Small Scale Industries the Indian after

Independence
The small scale industry has employment generating
capacity without adding significantly to cost of
production. This can be achieved by reserving the
industry for the cottage and small scale sector. The
government appointed an expert committee to identify
provisions in tax laws which had an influence on the
employment of labour. The government had adopted
labour intensive method of production.
− The government intended to increase investment in
cottage, village and small scale industries along with
other supportive policies like increased areas of
reservation for these industries. The share of industrial
production contributed by the small scale sector has to
be indicated declining trend.

− In India there is very wide scope for of village industries,

Total employment provided by this small scale industry
increased form 47 lakhs in 1950 to 188 lakhs in 1990-
91. The total production was of the volume of Rs.
167000 crores in 1990-91. Fifty percent of production in
manufacturing sector comes from small scale industry.
It produces new products like electronics, plastic non-
edible oil etc. 45 percent of production in consumer
electronics, 75 percent production of instrumentation.

− Marketing is one of the obstacle blocks for small scale

industries. The many problems which they face in
marketing their products are enumerated below :
(i) Lack of standardization.
(ii) Poor designing.
(iii) Poor quality
(iv) Lack of quality control.
(v) Poor finish.
(vi) Lack of precision
(vii) Poor bargaining power.
(viii) Lack of service after sale.
(ix) Scale of production.
(x) Brand preferences.
(xi) Distribution contacts.
(xii) Lack of knowledge of marketing.
(xiii) Competition.
(xiv) Ignorance of potential markets.
(xv) Unfamiliarity with export activities
procedures and market know-how.
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(xvi) Financial weakness.

(i) Benefits of Small Scale Industry : The small-scale

industries play a vital role in the economic growth of
developing countries. The benefits of small scale
industries are as under .

(ii) Utilisation of Resources : Small –scale industries

facilitate the tapping of resources which otherwise
would remain unused. These resources include
entrepreneurship, capital, labour and raw materials.
They can mobilize rural savings which may otherwise
remain idle, or which may be spent on luxuries or
channeled into non-productive ventures.

(iii) Employment generation : Since they are fairly labour

intensive, small-scale industries create employment
opportunities at a relatively low capital cost. In India,
there is the basic problem of absorbing the surplus
manpower in non-agricultural jobs and providing
additional employment opportunities for the increasing
population.

(iv) Generation of foreign exchange : Small scale

industries facilitate substantial foreign exchange savings
and earnings. A wide range of consumer and simple
producer goods, now being imported, can be
economically produced domestically on a small-scale
basis as long as adequate facilities are provided.

(v) Diversification of industrial structure : Small scale

industries contribute significantly to the strengthening
of the industrial structure, for many more articles can be
produced more economically on a small scale then on a
large scale.

(vi) Entrepreneurial development : Small-scale

industries serve as seedbeds of entrepreneurship. They
serve a developing economy not only by their output of
goods but by functioning as a nursery of entrepreneurial
and managerial talent. This role of small-scale
industries is of decisive importance in any economy,
where the industrial structure consists of a few large
numbers of traditional industries such as artisans,
handicrafts and cottage industries, on the others.

− Dimensions of Finance Demand from Small

Industry in the Liberalisation Period
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Since quantifying the demand for capital from small

industry is an extremely difficult task in view of ties
heterogeneity, the dimensions are discussed in the form
of identifying areas/motives requiring finance and their
relative importance.

− Broadly, credit demand of small industry can be divided

into two :
(1) Working Capital Demand, and
(2) Investment Demand.

− While the growth of working capital demand is directly

related to the growth of small industry sector, what is of
more significance in the liberation period is investment
demand. Investment demand can be subdivided into
several categories :

1. Replacement of obsolete machinery or Technological

Up-gradation and Modernisation

2. Expansion of the Unit by adding plant and machinery to

produce more

3. Quality improvement

4. New Ventures/diversification

5. Labour Saving Devices

6. Research and Development to constantly upgrade the

competitiveness of the unit.

7. Environment related investments (industry specific).

− The importance of each of these will vary from

one sub-sector to another and from time to
time.

− The gradual growth or expansion of enterprises

can be seen not only in the factory sector but
more importantly in workshop and household
sectors as well. This will be true in the short-
run as well as medium-run. But in the long-run,
the absolute decline of household sector and
the relative decline of workshop sector will
result in a decline in the investment demand
for expansion emerging from these sub sectors.
The decline of these sub sectors itself could be
partly due to their transformation/expansion in
 13

the organized sector and partly due to their

failure to cope up with the competitive
pressures from the organized sector.

− In fact, in Korea expansion and modernization

together accounted for more than 50 per cent
of the total investment demand of small and
medium industries (SMI) for finance in the 80s,
i.e., when the Korean economy was undergoing
industrial restructuring (Asian Development
Bank, 1987).

− In the 90s, there has been an increasing

awareness of quality, among others, due to
liberalization and globalisation. As a result,
many a firm is going for ISO certification. To
improve standardization and quality in small
industry, Government has introduced subsidy
to encourages small industry units to acquire
ISO certification (Financial Express, 1996). The
demand for finance for quality improvement
will be steady and substantial in the short-run,
medium-run and long-run from the factory
sector while it will not be that significant from
the workshop sector. The concept of quality
will not be crucial in the household sector.

− Financial Infrastructure for Small Industry

Development
The existing financial infrastructure for small industry is
presented in Table 2.3. While each of these
institutions/banks have specific roles in terms of
meeting the need of finance of small industry, among
them it is SIDBI which has been playing a major role
interms of meeting the diversity of investment demands
for small industry development. However, considering
the dimensions of investment demand which is likely to
emerge in the near future, there is an absolute
necessity for promoting specialized institutions/agencies
for overall small industry development, like in Japan and
South Korea .

− Considering the emerging competition in the

light of industrial liberalization, technology and
quality have been identified as the two prime
areas of concern for small scale entrepreneurs
(NCAER, 1993). Therefore, promoting small
industry development through modernization
and technology upgradation is a major
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challenge to be faced by the Policy Makers.

Though SIDBI does provide financial assistance
to this, there is a need for an exclusive
financial institution to deal with the problem-
small industry Technology Finance Corporation
(SITFIC). The SITFIC can promote the
development of new technology by financing
research and development, initial
commercialization of new technologies and
inventions, and upgrading of manufacturing
processes of small scale factories and
workshops.

− Also, there is a need for financing the

expansion and transformation of “small-size”
household and workshop enterprises. Such
expansion/transformation may emerge in the
form of :

(i) Expansion and modernization of

existing units by youngsters who have inherited
the units from their elders,

(ii) Starting of new enterprises by those

who have had prior job experience in a similar
industry, and

(iii) Technical qualified youngsters from a

family of entrepreneurs starting new units (by
using superior technology available domestically
or externally).

− The major objective of such an

institution (Small Industry
Development Investment
Corporation) is to facilitate the
expansion and transformation of
“small-size” workshops/ household
enterprise into modern factories.

− Industrial liberalization has made enhancement

of competitiveness crucial for the development
of small industry. Further, the changing
composition of small industry in the 90s
indicate that the sector is undergoing
transformation in the form or relatively faster
growth of the non-household manufacturing
sector. Therefore, technology upgradation and
modernization, and expansion/ transformation
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of traditional small industrial unit will gain

ground in the future. These together will
primarily lead to a considerable increase in the
investment demand of small industry for
finance.

− Also, the trend of setting up of their

own R & D facilities will add to the
increase in investment demand.
Quality improvement,
diversification, labour saving and
environment related investments
will be the other dimensions of
investment demand.

− To meet the diversity of investment

demand requirements, it is
essential to broaden the financial
infrastructure for small industry
development. Exclusive financial
institutions like SIDBI, are required
such as Small Industry Technology
Finance Corporation, Small Industry
Development Investment
Corporation, and Deposit Insurance
and Credit Guarantee Corporation
(DICGC), in addition to widening the
scope of National Research
Development Corporation (NRDC).
These steps would enable the
development of an appropriate
financial infrastructure which, in
turn, would contribute to the
overall development of a
competitive small industry sector in
India.

Chapter –III
Conceptualities Financial Management in Proposed
and Established SIUs

− Introduction :
Financial management is the life blood of any business.
It is rightly termed as the science of money. Industry or
Business need finance for the production of goods and
services as well as their distribution. The efficiency of
production and marketing operations of industrial unit is
directly influenced by the manner in which the financial
management of the enterprise is performed by the
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entrepreneur. Finance Management assumes an

important role in the industrial unit and it should be
given equal importance, as with production and
marketing management. Under the systems approach
we have an integration and co-ordination of these three
vital sub-systems of industrial unit going hand in hand
and offering jointly ways and means to accomplish the
profit or survival goal of the enterprise, along with
productivity and satisfaction. This chapter endeavours
to bring out significant variables of financial
management in SIUs from Marathwada. In order to
substantial aerial observations, an experience survey of
SIUs was conducted to collect data on practicalities of
financial management.

− Objectives of Financial Management :

Funds are obtained for investment in industry.
Entrepreneur protect and conserve these funds and
make 'maximum use of such funds. There are twin
objectives, which he keeps in mind i.e. profitability and
liquidity of his funds. These, though are conflicting,
entrepreneur has to secure the balance and optimise
the utilisation his funds. The major objectives for SIUs
owners in his finance management entails the following
:

1. Procurement of money needed by industrial

unit;

2. Keeping and increasing the invested money

through sound financial policies and programme;
and

3. Generating in-come or profit for the

enterprise.

4. Rational financial planning, forecasting of

cash receipts and disbursements-cash

5. Raising of funds, either equity capital or

fixed interest capital which includes both partner
share capital and loan capital (securing of funds);

6. Optimum use and allocation of funds

(administration of funds); and

7. financial controls (budgets and other

controls).
 17

− The wise and integrated approach in financial

management by an entrepreneur alone can accomplish
both productivity (maximum wealth) and satisfaction.

− Financial manager is called upon to take three major

decisions :
1. investment decision ; e.g., capital budgeting or financial
plan :

2. financing decision or formulation of the best financing

mix or capital structure of the enterprises; and

3. Profit sharing or using decision or profit policy. Financial

management involves the implementation of these
three major decisions. The decisions are inter-related
and Financial manager or entrepreneur has to
implement jointly. Together, these vital decisions
determine the value of the SIU to its partners and
investors. Financial manager makes use of analytical
tools in the analysis, planning and control of the
enterprise involving funds.

− Hence the SIU entrepreneur while managing finance

has to take care the following factors :-

1. Discovering ideas for a product planning and

development with the help of marketing research.

2. Procuring finance - cash and /or credit.

3. Acquiring fixed assets-bought/hired.

4. Acquiring current assets, e.g., raw materials,

fuel, supplies, etc. on credit

5. Ensuring the release of goods to the market

as per marketing plans

6. Arranging the flow of material, (from the raw

state to till the disposal of finished goods,)

7. Arranging physical and financial controls

such as production control, inventory control, cost
accounting and so on.

8. Arranging the finances for production,

marketing, physical distribution, personnel,
receipt of payments.
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9. Throughout the whole period of funds-flow

cycle or manufacturing cycle, Arranging the
payment to suppliers and employees.

10. Arranging the payment to partners, and for

taxes.

− The field survey observation & brings out the fact that in
majority of SIUs from marathwada that there was no
financial planning and its absence has given to many
problems. The following observation will make the fact
clear :-

(i) There was a waste of resources due to ever

changing economy and Govt. policy.

(ii) The non-co-ordination of various functional

areas created over lopping and inadequacy of
funds.

(iii) Funds for production and funds for

marketing were never in co-ordination with funds
realised after marketing.

(iv) There was absence of communication of

financial matters to different levels of supervisors
& managers and which resulted in mis-
management/non-coordination.

(v) There was no understanding of short Term &

long term financial objectives.

(vi) Facts pertaining to Rational use of Capital,

protection of capital, smooth cash flow, were
found overlooked and the same resulted into
funds shortages.

(vii) Financial matters were kept secret by owner

and the same could be obstacled in settlement
after demise of owner.

(viii) There was no proper financial procedure &

forecasting.

− A financial plan for a new project of SIU covers the

following expenses :
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(1) Cost of fixed assets.

(2) Cost of working capital requirements to run

the business.

(3) Promotion expenses.

(4) Organisation expenses.

(5) Cost of establishing the SIU business from

the time company being operations until its
income is sufficient to meet the expenses.

(6) Cost of raising initial capital such as

brokerage, underwriting commission, cost of
printing, advertising and issue of prospects, etc.,

(7) Cost of goodwill patents, etc.

(8) Provision for contingencies.

When enquires made with SIUs entrepreneurs with

regard to above almost more than two fifth
entrepreneurs did not have knowledge of these( 1 to 8).

− In devising the capital structure by the proposed SIU;

the following shortfalls are noticed :-

(i) Inflated estimation capital expenditure without

caring business objectives.

(ii) No Provision for meeting un-for seen liabilities,

expansion, depreciation, conservative liberal
ploughing back of profit, for bad debts, secret
reserve, working capital etc.

(iii) In appropriate Balance between fixed &

Working Capital as well as between owned capital
& borrowed capital.

(iv) Overlook to liquidity of capital with

procurement capital at reasonable cost along with
safety.

(v) Keeping abnormal proportion in capital plan

(vi) Maintenance of complicated financial

structure
 20

(vii) Keeping ratio between current Assets &

Current Liabilities frequently more than 2:1.

(viii) Unawareness of External Environment like

state of trade, Attitude of Investment market,
General level of Interest Rates, Govt taxation,
Govt. Policy & so on.

− When the needs of growth capital be considerable, say,

Rs. 1 crore., a SIU has the following sources :

1. Depreciation and free reserves,

2. loans from banks and finance corporations,

3. further collection from partners and

4. issue of convertible debentures partly as rights

issue to members and partly by prospectus. Let
us assume that a SIU needs Rs. 100 crores. It can
raise Rs. 37.50 Lakhs through free reserves and
depreciation. it may have loans from banks and
finance corporations to the extent of Rs. 12.50
Lakhs. It may have Rs. 50 Lakhs. as convertible
debenture issue as Rights Issue to members. The
model Financial Plan for growth may be as
follows:-

Capital Outlay (Uses) Sources of Finance

(Rupees in Lakhs) (Rupees in Lakhs)

1. Additional Fixed 62.5 1 Depreciation 18.7

Capital 0 . 5

2. Additional Working 25 2 Free Receives 18.7

Capital . Loans from Banks and 5

3. Cost of Raising 7.50 3 Financial Institutions 12.5

Capital . 0

4. Contingency 05 4 Convertible (7 year) 50.0

Provision . Debenture issue 0
(Right Issue0

Total Capital Outlay 100 Total Resources. 100

Note :
 21

1. The present equity share capital is Rs. 30

Lakhs.
2. The free reserves are Rs. 30 Lakhs.
3. There is no loan capital and proposed loan
capital for further expansion is Rs. 05 lakhs
(convertible debentures) and Rs. 12.50 M. from
banks and Finance Corporations.
4. Debt : Equity ratio of 2:1 is permitted.

Source : This model is derived after consulting experts and

SIU
entrepreneurs.

− In the formulation of a financial plan of a SIU,

entrepreneurs has to make the decision relating to the
total amount of securities to be created. Capitalisation
indicates the total par value of the outstanding amount
of securities in the form of owned capital, debenture
capital and the face value of other long-term
obligations. Short-term loans or temporary bank loans
are usually excluded from the capitalisation.

Capitalisation = Ownership capital + long-term loan

capital or
= Share Capital + free reserves +
debenture
capital + long-term loans

− Capitalisation of a SIU, i.e, the determination of the

amount of securities to be created is not arrived at on
the basis of cost concept. Capitalisation should be
based on the earning power. In other words, the
process of capitalisation begins with an estimate of the
future earnings of the SIU. No one puts money into a
SIU without expecting return on it in the shape of
dividend or interest. The value of a SIU is determined
by its ability to earn return on capital invested. The
higher the rate and regularity of its earnings, the
greater the value of SIU and the greater the amount of
capital which may be safely invested in it. Another way
of saying the same thing is that a SIU is worth that
amount upon which a fair return may be realised.

Causes of Over-Capitalisation of SIUs

1. Promotion with inflated assets. Book value of SIU more
than its real value.

2. High promotion expenses, high remuneration of

promoters; high price of goodwill etc.
 22

3. Floatation of SIU in inflationary period and when boom

subsides, earnings fall, leading to over capitalisation.

4. Inadequate owned capital, defective financial plan,

chooser of capital becomes beggar of capital, top heavy
borrowing; high interest charges, shareholders starved
due to falling dividends, falling market value of
business.

5. Defective depreciation policy, affecting adversely

company's efficiency and leading to low profits -
Depreciated assets.

6. Manipulation of accounts to inflate profits and declare

liberal dividends and no retained profits.

7. High taxation policy.

− Effects of Over-Capitalisation :
(A) Effects on the SIU :
1. Low dividend rates,

2. Low market price of SIU and loss of investors

confidence.

3. Manipulation of accounts to show prosperity

on paper.

4. Inadequate provision for depreciation,

replacement and reserves.

(B) Effects on the Partners

(1) Depreciation in business value (2) Low, uncertain
and irregular income. (3) Low loan value of shares (4)
Unhealthy speculation and exploitation of real partners.

− Causes of Under-Capitalisation of SIU

(1) Under-estimation of future earnings by
accident.
(2) SIU floated in recession find themselves
under-capitalised during prosperity because they
have unexpected increase in earnings.
(3) Conservative dividend policy adopted by the
entrepreneur providing liberal depreciation, liberal
retained profits and emphasis on self-financing for
growth-Appreciated assets.
 23

(4) Latest process of production and

techniques, rationalisation, scientific
management, finance out of past savings,
maximisation of productivity and efficiency,
increase in profits.
(5) Built-up secret reserves.

According to Gerstenberg capital structure *[*The term

capitalisation is synonymous with capital structure or financial
plan. Hence, requisites, of sound financial plan or capital plan
are equally applicable to sound capital structure.] or financial
structure of a SIU is the make-up or form or composition of
capitalisation i.e., the type of securities to be created and the
relative proportion of each type of securities in the total
capitalisation.

− Most of the SIUs in Marathwada prefer or adopt high

geared capital structure to meet inadequacies of funds.
 24

− Mode of Finance :
While devising a sound capital structure, SIU has
to lay more emphasis on the pattern of the capital
structure, i.e., the relative importance to be given to the
ownership resources or creditorship resources. In
general the determinants of mode of finance are :
(1) the volume of earning expected.
(2) Stability of earnings.
(3) Predictability of earnings.

− If earnings of the SIU are highly unpredictable,

irregular, uncertain and fluctuating, equity or owned
share capital is always desirable. For a speculative
business, risk of loss is considerable, SIU has no
immediate prospects of profitability. Hence, such SIU
can raise only owned share capital. An equity or owned
share of a prosperous SIU is better than a partner share
of a doubtful SIU or a borrowing from money lender.
Hence, in the final analysis much depends upon the
financial position of a SIU and its earning power. Bonds
and partner shares have a greater appeal to the
conservative investors and institutional investors like
banks, insurance company, provident funds, etc., who
may be legally debarred from going in for equity shares,
Bonds and partner shares have also a special appeal in
a deflationary period. If investors demand safety,
regularity and security of income and capital, bonds and
partner shares are suitable, in our capital structure.
Partner shares depend upon financial position, and
earning power of the SIU. Bonds and loan capital
depend upon financial position, earning power and
security offered by the SIU.

− Determinants of Capital Structure in SIU :

Factors determining the capital structure or capital
gearing or the proportion of securities or the factors
affecting the composition of capitalisation in SIU are as
follows –

1. Trading on the Owned Capital

2. Nature of Enterprise :
3. Object of Finance :
4. Control in Management :
5. Attitude of the Investment Market.
6. General Level of Interest Rates :
7. Business Cycle :
8. Government Taxation Policy :
9. Period of Finance :
 25

Chapter – IV
Management of Working Capital by SIUs

− Introduction :
Current assets are assets convertible into cash within
one year. Management of working capital usually
involves management or administration; i.e., planning
and controlling these current assets, namely cash and
marketable securities, accounts receivables and
inventories, and also the administration of current
liabilities.

− Cash and credit in the SIU is comparable to the blood of

the human body. Like blood, finance gives life and
strength, i.e., profit and solvency to SIU. Financial
management is called upon to maintain always the right
cash balance so that flow of funds is maintained at a
desirable speed not allowing any slow downs or,
stoppages. Thus, the enterprise can have a balance
between liquidity and profitability. Planning and control
of working capital naturally centres round sound cash
planning which includes setting of cash policies and
procedures, and the control over cash and credit. Cash
is of course the major and very sensitive component of
working capital.

− The concept of gross capital is a financial concept

whereas that of net concept is an accounting concept.
SIU is interested more in the amount of current assets
with which it has to operate. If it can balance receipts
and disbursements perfectly, the business would
operate with maximum efficiency. To the management
of a company, the source of the working capital-
owned/borrowed resources- is immaterial. However, in
an ever-changing economy, it is very difficult to secure
perfect equilibrium between inflow and outflow of cash.
Hence, it is the objective of sound financial
management to always maintain enough supply of
working capital. However most of the SIU are unable to
maintain enough supply of working capital.

− Factors Determining Requirement of Working

Capital
There are so many factors that determine the
requirement of working capital of a particular SIU. Each
factor influences in its own way in determining the need
of the working capital of the SIU. It differs from firm to
firm and according to the nature of the business.
 26

However, in this chapter some of the above factors are

discussed.

(i) Nature and Size of SIU Business

(ii) Manufacturing Cycle
(iii) Business Fluctuation
(iv) Production Policy
(v) SIU’s Credit Policy
(vi) Availability of Credit
(vii) Growth and Expansion Activities
(viii) Profit Margin and Profit Appropriation7
(ix) Price Level Changes
(x) Operating Efficiency
(xi) General Type of Business :
(xii) Size of the Business Unit :
(xiii) Terms of Purchase and Terms of Sale :
(xiv) Turnover of Inventories :
(xv) Process of Manufacture :
(xvi) Importance of Labour :
(xvii) Proportion of Raw Material to Total Costs :
(xviii) Cash Requirements :
(xix) Seasonal Variations :
(xx) Banking Connections :
(xxi) Growth and Expansion :

− For normal rate of expansion in the volume of business,

SIU may have greater and greater proportion of retained
profits to provide for more working capital; but for fast –
growing SIU it shall require larger and larger amount of
working capital. A plan of working capital should be
formulated with an eye to the future as well as present
needs of a corporation. Permanent working capital must
be secured on a long –term basis.

− Concept of Operating Cycle

Management of gross working capital of current assets
is sought to be measured with the help of operating
cycle of working capital.

− Cash plays a vital role in lubricating business operation.

It is needed to buy material inputs and incur other
expenses in course of business operation. The outflow
of cash that occurs in course of business operation is
recovered when sale-proceeds are realized. The cash
which is thus recovered is used again on raw-materials
expenses etc., and thereby, a cycle is created. In this
cycle cash becomes raw materials, work-in progress
finished goods in storage and sundry debtors before it
 27

resumes the form of cash. The flow from cash to

suppliers, inventories to receivables and back in to cash
is called the operating cycle. Four distinct components
of the operating cycle are :

1. Raw material cycle,

2. Conversion cycle,

3. Storage cycle, and

4. Collection cycle.

− Duration of the components to operating cycle

is measured in terms of number of days. When
average stock of raw materials is divided by
average consumption of raw materials per day
duration of gross material cycle obtained.
Subtraction of duration of trade-credit from
gross raw-material cycle yields net raw
material cycle. Duration of trade credit is equal
to average balance of sundry creditors divided
by average amount of credit purchase per day.
Conversion cycle is the quotient of average
stock of work-in-progress divided by average
daily consumption of work-in-progress. Storage
cycle is obtained when average stock of
finished goods is divided by average cost of
goods sold per day. Collection cycle is equal to
average balance of sundry debtors divided by
average value of credit sales per day.

− Practical Problems in Managing Working

Capital

1. Terms loans are sanctioning by certain financial

agencies to acquire plant and machineries. They are
not issuing working capital loans. The SIU owners have
to approach commercial and other private banks for
working capital. In this, there is a gap between the
need and the actual sanctioning of loan. This
arrangement creates lot of time gap and this delay
causes more failures in new business ventures.

2. Term loans are purely for establishing fixed assets.

Some time, due to delay in getting working capital,
business people are forced to divert some fund allotted
for purchasing machinery etc. to acquire current assets.
 28

This will result in either reduction in production or

quality due to non availability of machines etc.

3. Some entrepreneurs may spend more in furnishing the

office, residence and on personal conveyance, which in
paucity of funds for managing daily operations.

4. Improper inventory management may cause more

accumulation of stocks on hand. Major share of working
capital may be locked up in stocks.

5. Lack of proper stockist, and marketing network may also

cause problems in working capital.

6. Policy of purchasing raw materials on cash and selling

the products on credit will certainly affect the liquidity
position of the firm.

7. Wrong estimation of requirement of working capital and

delay in making arrangement for getting the working
capital will also cause problem.

8. Delay in issuing working capital from the financial

agencies due to non-availability of required documents,
security etc., will certainly affect the business. This is
the major problem faced by small business managed by
untrained managers.

9. All management functions are carried out by single or

two persons in small business. They do not devote
much time on this matter. They have to depend on the
information’s given by their office staff. This may lead
to wrong financial planning.

10. Another major problem is high rate of interest. Quick

disposal of loan is available from private money-lenders
at higher rate of interest. In order to get rid of financial
crisis, business people get into the clutches of private
money-lenders. Most of them may not be in a position
to get out of the clutches of private financial agencies.
Most of the small firms practically working to pay the
interest for the loan obtained.

11. Government fiscal policy, import export policy, will also

affect the financial position of the business. Change of
policy may either affect the business or cause delay in
getting loan from the banks.
 29

− Suggestions for Effective Working Capital

Management
The following suggestions are made to overcome the
problems in managing working capital.

1. No diversion of fund from one head to other

head.

2. Follow scientific inventory management.

3. Seek the help of trained financial managers.

4. Adopt credit purchase and cash sales.

5. Delays the bills payable.

6. Expedite bills receivables.

7. Reduce the value of current assets at all

time.

8. Increase the marketing network.

9. Use own fund or go for zero capital as for as

possible.

Chapter – V
Borrowings, Subsidies, Incentives & Hire Purchasing

− Problems Of Borrowing
− Multiplicity of Documents
Entrepreneurs found it difficult to fill up various forms
required for seeking credit assistance. They often paid
for getting the forms filled up, besides spending a lot of
money on the preparation of required legal documents
such as affidavits. Even with expenditure of money, it
was sometimes difficult (as stated by 18 entrepreneurs)
to get the project report and other documents prepared.
For a loan from the Maharashtra Financial Corporation,
there were eleven documents to be furnished with
application besides depositing the imprest money.
Finding revenue records for the last 30 years for
verification of security and getting permission from the
competent authority under the Urban Land (Ceiling and
Regulations) Act, 1976 to mortgage land and buildings
with the Corporation were other problems. While on the
recommendations of the High Powered committee for
examining Bank Credit problems of small Scale
Industries, and on the advice of the Reserve Bank of
 30

India, banks had adopted simple application forms for

credit facilities up to Rs. 25,000, but the problem of
multiplicity of documents regarding term loans from the
Maharashtra Financial Corporation was still there.

− Inspections
In connection with loans from the Department of
Industries, 30 of the 39 applicants stated that the
Inspector harassed them at the time of verification of
particulars of the unit and even later. According to the
Rules, the Director of Industries or officers authorized by
him, were to inspect the premises, books, machinery,
stocks, shares and other belongings connected with the
unit in respect of which the loan was to be granted. To
ask for a loan from the Department of Industries was
thus to invite an army of Inspectors. For a loan from the
banks against stocks, monthly statements of stocks
were to be sent which was again a problem for small-
scale units.

− Valuation of Security
Another problem mentioned by the entrepreneurs
concerned the valuation of security. In the Maharashtra
Financial Corporation or commercial Banks the valuation
of old plant and machinery was made after deducting
depreciation at the income-tax department rates from
the price mentioned in the suppliers invoice, and for
non-standard fabricated machinery, the assessor’s
valuation was taken; this did not take inflation into
account and hence resulted in under valuation. The
valuation of new machines did not include freight and
erection charges which in some cases formed a
substantial part of the cost of machinery.

− As regards banks, entrepreneurs said that the margin

between the value of the security and the loan was very
large particularly if the former consisted of raw-
materials or finished stocks. Commercial banks other
than the State Bank group retained a margin of 30 to 40
per cent and it increased all the more on account of the
way material was evaluated. Stocks of raw –materials
were valued at the market price or controlled price,
whichever was lower. This would have no adverse
effect if materials were available at controlled prices.
However, often small entrepreneurs had to purchase 80
to 90 per cent of their requirements at black-market
prices which were much higher than controlled prices.
Thus if the controlled price of iron sheets was Rs. 2,700
per metric ton and the market price Rs. 4,200, the
 31

banker would value the stock of iron-sheets at Rs. 2,700

and would sanction a loan of Rs. 2,025 under the
liberalized scheme by retaining a margin of 25 per cent
on the controlled price. Thus, the effective margin for
an entrepreneur who had actually purchased iron-sheets
from the market amounted to more than 50 per cent. It
was fairly well known that wider disparities existed
between the fair and the market prices of most of the
industrial raw-materials such as iron, lead, zinc and
copper. This obviously had an adverse effect on the
borrowing capacity of small entrepreneurs. Similarly, a
margin of 30 to 40 per cent was required against
finished stocks which were valued at the cost of
production. This also affected the borrowing capacity of
the small entrepreneurs. They maintained that the
finished goods ought to be valued at wholesale prices.
 32

− Multiplicity of Limits
Under the current practice, different limits existed for
purchase of raw-materials, retention of finished stocks
and supply of goods on credit. Multiplicity of limits
caused hardships when there were seasonal variations
in demand and supply. In order to solve this problem,
the State bank introduced a Special Hypothecation
Scheme under which an integrated credit limit to meet
the various needs of entrepreneurs was sanctioned and
the collateral was left to the possession of the borrower.
This facility was available for credit limits up to Rs. 1
lakh, which was too low.

− Delay
The grant of a loan was made in two stages-the sanction
and the disbursement. Sanctions were often accorded
after long delay and disbursement also took a few
months. Of the 28 entrepreneurs who got loans through
the Department of Industries, only two managed to get
in less than a month, nine in six months and seventeen
in more than six months. For one units, it took as many
as four years to get the sanction. This problem of delay
had been faced all over India. It was estimated that for
a Bank loan up to Rs. 10000, the time taken was at least
three months and a half. More time was taken in the
case of bigger loans. For a loan between Rs. 100000
and Rs. 5,00000 the time taken was about nine months.
In a study of Vidharbha also inordinated delays had
been found.

− Repeated Visits
Thirty-five of the 39 entrepreneurs who applied for a
loan to the Department of Industries said that they had
to visit the District Industries Centre many times ( an
entrepreneur, even mentioned fifty visits) before they
could secure a loan. In the bureaucratic set-up as it
existed, the applicant had to meet and bribe the official
at every step- the receipt clerk, the inspector, the officer
and the issuing clerk. In a small-scale unit, the
entrepreneur had often to play multiple roles as
entrepreneur, manager, worker and messenger. Even
one trip to the District Industries Centre requiring
absence from work for three to four hours cost him a lot
and he preferred to borrow from private sources at a
higher rate of interest.

− Corruption – Economic and Political

 33

In our sample, of the total of 28 entrepreneurs who

secured loans from the Department of Industries, 15
declared that they had paid bribes, six that they had
used political influence and two that they had depended
upon kinship with officials for obtaining loans. The
amount of the bribe varied with the position of the
official in the hierarchy. An Inspector had to be paid Rs.
1000 to 2000 and a clerk (who processed the
application or who issued the cheque) had to be paid Rs.
125. The messenger also expected from Rs.50 to Rs.
100. A jargon had grown around this passage of money;
“speed money”, “Sewa” (service) and “tea” were some
of the terms used for consideration money. The smaller
entrepreneur was likely to be hit harder. An artisan
entrepreneur of Paithan stated that his loan had been
pocketed by the Inspector himself and that he had been
asked to repay it. About 75 percent of the
entrepreneurs stated that the treatment depended upon
whether one had the patronage of influential persons. It
was found that even the addresses of some of the units
which had obtained loans were not available in the
records of the Department. Two inter-related factors
leading to non-payment of loans were faulty
maintenance of records and bribery. The entrepreneurs
who received loans from the Maharashtra Financial
Corporation stated that they had to bribe the revenue
officer for getting the revenue records verified for the
last thirty years and also to bribe the officer under the
Urban Land (Ceiling and Regulation) Act for seeking the
permission to mortgage property. For loans from banks,
only three per cent of the entrepreneurs stated that
they had paid bribes.

− Subsidies
The Department of Industries provided financial
assistance in the form of subsidies for helping the
growth of small-scale industries in Maharashtra (i)
under the Maharashtra State Aid to Industries Act, 1935;
(ii) by subsidizing the rate of interest; and (iii) for
special purposes.

− Interest Subsidy
The Entrepreneurial Training Programme was started by
Government of India in 1971-72 to provide employment
to un-employed engineers. In 1974-75 the Union
Government lunched a programme of providing financial
subsidy to these engineer entrepreneurs for setting up
industrial units. Under this programme they were to be
given a subsidy on interest payable on loans taken by
 34

them from banks, the State Financial Corporations and

other financial institutions15. Only those engineers who
had undergone training under the various schemes of
assistance to the educated unemployed sponsored by
the Government of India or the Planning Commission
were eligible for this assistance.

− Subsidy for Special Purposes

The programme of providing subsidy on purchase of
generating sets was announced by the Government of
Maharashtra in 1983 “with a view to counteracting the
shortage of power and encouraging the industrialists to
purchase their own generating sets”. Under it, a loan of
75 per cent of the cost of a generating set was to be
granted by the Maharashtra Financial Corporation or a
bank, 20 per cent was to be given as subsidy by the
Department of Industries, and the remaining 5 per cent
was to be contributed by the entrepreneur.

− Incentives
The Government provided fiscal and monetary
incentives to promote the establishment of new
industries and to encourage expansion in established
industries. Some additional incentives were provided to
the small-scale sector. Incentives were also provided to
encourage the locational dispersal of industries in rural
and backward areas. We shall deal with these one by
one.

− The incentives offered by the Central Government

were : income-tax concessions, exemption from excise
duty and the capital subsidy in backward areas.

− In our sample, only 34 units were eligible for the 5-year

tax holiday, because the other units did not fulfill the
requirement relating to the number of workers. None of
the rural industries fulfilled this condition. The benefit of
deduction of depreciation was availed of by the eligible
units. In our sample, 42 entrepreneurs installed new
machinery and they availed of the investment
allowance.

− The Government of Maharashtra announced a package

of incentives for industries, after the formation of the
reorganized Maharashtra. These incentives were
announced as part of the New Policy of Industries
Development, and were aimed at “attracting industry to
a few selected Focal Points of growth, sustaining and
developing industries in selected cities and development
 35

of industries in the State as a whole”. In 1973, a few

more incentives were announced, and the rules
governing old ones were changed. In 1998 the
Maharashtra Government issued an Industrial Policy
Statement providing for further incentives. These were
to be available to units set up after April 1990 in Focal
Points, Industrial Areas, Industrial Estates, backward
areas, sub-mountain areas, Bet areas, and to those set
up by qualified engineers. Industries of all sizes could
avail of them. These are being discussed below.

− Investment Loan for Priority Industries

Investment loan was to be granted to priority industries
to supplement the promoter’s contribution for the
purchase of land, construction of factory building and
purchase of plant and machinery. The loan was to be
equal to the amount of interest-free loan to which the
unit would be entitled. A project report was to be
prepared by a consultant on the panel approved by the
Director. The entrepreneur was to apply in the
prescribed form (H) to the Director of Industries. The
application was to be accompanied with the following (i)
a copy of the project report, (ii) an attested copy of the
constitution of the firm or an affidavit to the effect that
the applicant was the sole proprietor of the firm, (iii)
documentary proof regarding acquisition and possession
of land acquired for the project, (iv) an attested copy of
the confirmation of the order for machinery placed by
the firm with the suppliers along with copies of letters of
credit in the case of imported machinery, and (v)
certificate from a registered architect regarding
progress of construction of the building.

− In our sample tiny units were eligible but it was difficult

for them to complete the formalities such as getting the
project report and the certificate of a registered
architect. None of the entrepreneurs applied for the
loan.

− Cost of Feasibility Report

In 1966 the State Government announced that 50 per
cent of the cost of the feasibility report prepared by
approved consultants would be paid by the Government
to be converted into equity capital if the project was
established. In 1978 the Government announced that
this assistance would be given in the form of a loan at
the rate of interest fixed by it for loans under the State
Aid to Industries Act. The amount of loan admissible
was 75 per cent of the cost of feasibility report up to a
 36

maximum of Rs. 75,000. In case the cost of the report

was not considered reasonable by the Director, he might
determine the reasonable cost. The amount was to be
recovered in five annual installments. An entrepreneur
was to apply for the grant of loan to the Director in the
prescribed form (I). The application was to be
accompanied with a copy of the feasibility report and
original receipt of payment to the consultant.

− During six years (1974-1980) only five units in

Maharashtra had received the loans amounting to Rs.
64,000. The whole of this amount went to the large and
medium-scale industries. Small-scale units could not
afford to pay for feasibility studies. In our sample none
of the entrepreneurs got a feasibility report prepared
even though it was required for applying to banks or
Government Corporations for loans.

− Concessions to Non-Resident Indians

The special facilities and incentives available to non-
resident Indians included the following :
(i) import of machinery up to a value (CIF) of
Rs. 25 lakh purchased out of the applicant’s own
foreign exchange savings abroad without going
through import licence formalities; only the
customs clearance permit was necessary for this
purpose;

(ii) import of permissible raw-materials and

components for meeting the requirements for one
year up to Rs. 10 lakhs purchased out of the
applicant’s own foreign exchange earnings
abroad;

(iii) priority in allotment of plots and in issuing

letters of indent for land where regular allotment
was delayed;

(iv) assistance to get applications to the

Government of India for import of machinery and
raw-material expeditiously processed;

(ii) higher level of concession than those to

which they were entitled on the basis of the
backwardness of the area.

There were no non-resident Indians in our sample.

Chapter – VI
 37

Institutional Finances to SIUs

− Finance is not only the simple requirement alone to any

project but also to be considered as a blood circulation
of that project as it is required till winding up the
enterprise. One of the key problems in this area in that
the enterprise should not be over financed as well as
under finance. Due to inadequate financial assistance,
there was a big hamper to the industrial development.
However, after independence the specialized network of
financial institutions with a fairly big capital base was
established to provide financial assistance to small scale
industries.

− Procedure for Getting Financial Assistance

The new SIU entrepreneurs find it difficult to get
financial assistance from the funding agencies as they
do not know the procedures. A sort of brief guidance is
very essential for them. The guidelines are to be
pointed to their purpose of assistance needed. The
following points may enlighten the new SIU
entrepreneurs to get assistance for their small
enterprises.

1. The long-term loans are required for acquiring fixed

assets like land, building, plant and machinery, other
installations, fitting, fixtures etc.

2. The short-term loans are required as working capital for

day-to-day requirements, for procurement of raw
materials, wages for workers, and for transport costs.

3. The rate of interest may vary according to the category

of beneficiaries/entrepreneurs (SC/ST), Ex-servicemen,
physically handicapped persons etc.

4. The promoters contribution varies from 10 per cent to

25 per cent depending upon the category of
entrepreneurs /location of the units.

5. The security of the term loan would normally be by

mortgage of land and building and by hypothecation of
machinery and equipment acquired through financial
assistance and / or personal guarantee / surety.

6. The collateral security limit is at the discretion of the

funding agency.
 38

7. The repayment of loan usually be on installments,

spread over 5 to 10 years depending upon the cash
generation and the profitability of the project.

8. A moratorium for repayment of installments of the

principal amount ranging from 12 months to 24 months
is allowed from the date of the first release of the loan.
However the interest is to be paid on quarterly basis
from the date of first release of the loan amount.

9. In respect of cases where there has been considerable

delay in implementing the project due to factors beyond
the control of the promoters, rescheduling of repayment
of loan and extension of time for repayment of interest
may be allowed on request.

10. The short-term loan for working capital is extended for

(a) Purchase of raw materials

(b) Consumable stores/spares

(c) Ready stock in process

(d) Payment of wages

(e) Administrative and manufacturing expenses

11. Normally the entrepreneurs approach commercial banks

for working capital requirements.

12. The working capital facilities could be classified as

advances on

(a) Lock and key pledge of stocks

(b) Factory/Godown type hypothecation of stock

(c) Advances against stock in process

(d) Advances against bills (when finished goods

are supplied on credit)

(e) Clear advances (contingent needs)

(f) Packing credit to exporters to execute

export orders. Working capital loan is sanctioned
in the form of cash credit, overdraft facility and
bills purchase and discounting facility.
 39

13. The Dept. equity norm for SSI is 3:1 for Khadi and
Village Industries 9:1.

14. The promoter’s contribution is fixed in relation to the

cost of the project (based on location and category of
beneficiary)

15. The investment subsidy is available from the State and

the Central Governments.

16. The scheme of support and incentives to the

entrepreneurs are administered by the Government and
promoting Central agencies.

− Institutional Framework :
To provide financial assistance to entrepreneurs that
Government has set up a number of special financial
institutions besides commercial banks. They may be
classified into two categories.

1. All India Financial Institutions

2. State Level Financial Institutions

− The list of financial Institution and

percent of SIUs owners availing finances
from them are given against each of
institution

− All India Financial Institutions are :

− Industrial Financial Corporation of India –IFCI

(40%)

− Industrial Credit and Investment Corporation

of India – ICICI (12%)

− Industrial Reconstruction Bank of India – IRBI

(16%)

− EXIM Bank of India – EXIM BANK (6%)

− Unit Trust of India – UTI (6%)

− Life Insurance Corporation of India – LIC

(12%)

− General insurance of India – GIC (8%)

 40

− National Small Industries Corporation – NSIC

(12%)

− Small Industries Development Bank of India

– SIDBI (16%)

− National Bank for Agricultural and Rural

Development – NABARD (14%)

− Housing Urban Development Corporation –

HUDCO (12%)

− Housing Development Financial Corporation

HDFC (16%)

− National Co-operative Development

Corporation NCDC (14%)

− Export Credit Guarantee Corporation – ECGC

(10%)

− Khadi and Village Industries Commission –

KVIC (22%)

− Commercial Banks - SBI, IOB, CB, PNB,

UCOB, etc. (86%)

− State Level Financial Institutions

− State Financial Corporation – SFCs (34%)

− State Industrial Development Corporation –

SIDCs (12%)

− Small Industries Promotion Corporation of

Maharashtra – SIPCOM (12%)

− Of the above, except a few all India financial

institutions, all others cater to small enterprises.

− Schemes of Assistance to Small Enterprises and

percentage of entrepreneurs availing assistance
from them are given ahead.
− Technical Schemes (12%)

− Special Capital Scheme (14%)

− Seed Capital Scheme (14%)

 41

− Composite Loan Scheme (8%)

− Disable Entrepreneurs (4%)

− Modernization (8%)

− Electro-Medical Equipment (12%)

− Nursing Home/Hospital (4%)

− Equipment Finance (42%)

− Quality Control Equipment (2%)

− Assistance to Ex-Servicemen (6%)

− Single Window Scheme (4%)

− Tourism Related facilities (4%)

− Mahila Udhyam Nidhi Scheme (4%)

− National Equity Funds Scheme (2%)

− Assistance for Marketing (2%)

− Refinance Scheme for Acquisition of ISO

9000 by SSI unit (RISO9000) (12%)

− Prime Minister’s Rozgar Yojana (28%)

− Integrated Rural Development Plant etc.

(42%)

− Lead Bank Scheme for Facilitating Institutional

Finance
For the purpose of facilitating institutional finance
fourteen commercial banks were nationalized in the
year 1969. Among the commercial Banks the State Bank
of India pays special attention to the need of small
enterprises. A “Lead Bank Scheme” is operated among
commercial banks to co-ordinate the funding to small
enterprises at the District level.

− The Ninety Per Cent Guarantee scheme

The scheme was introduced in the year 1957. Under
the scheme the losses arising out of repayment of loans
 42

are shared by the Central, State Governments and the

banks in the ratio of 50:40:10. The maximum aggregate
amount payable by the Government of India shall not
exceed five per cent of the total funds disbursed and
outstanding under the scheme in the state as on 30th
June or 31st December proceeding. The first scheme for
handloom co-operative was introduced in1957 in order
to cover ninety percent of the losses incurred by the
banks. The scheme is implemented in all the states. It
covers all advances to handloom cooperatives coming
under the Reserve Bank of India scheme for handloom
finance. The scheme does not cover the default, but
only the ultimate losses.

− In the year 1961, the scheme was modified. Under the

second scheme, defaults arising from loan provided
under the guarantee scheme to the co-operative are
met. The share of guarantee of the Central
Government, State Government and the Bank is
50:40:10. In 1962 the scheme was extended to loans
and allowances sanctioned by the State Bank of India
and its subsidiaries in areas where cooperative banks
were unable to finance industrial co-operatives. The
scheme covers all types of industrial co-operatives. The
states like Gujarat, Maharashtra, Madhya Pradesh and
Punjab were first to take advantage of the scheme.

Chapter VII
Facts About Financial Management of Sick SIUs

− Small scale industry occupies an important position in

the economy of Marathwada but the growing sickness in
small scale units has created an alarming situation.

− The growing sickness in small scale units in Marathwada

has created an alarming situation not only for
entrepreneurs but also in financial management. Many
units come up, utilise finances both of project promoters
and outsiders, struggle through out for completion of
project and its operation, meet with financial failure and
disintegrate finally. It results in loss of finances to
project promoters, loss to financial institutions,
unproductive use of the community's scare savings and
finally adds to the already serious unemployment
situation1. Hence, it is essential to analyse the
magnitude and the causes of this sickness so as to
ensure to have proper financial management.
 43

− The RBI has defined a sick unit as one which has

incurred financial or cash loss in the last year and is
likely to incur cash loss in the current year as well as in
the following year. Sickness is characterised further by
a worsening debt/equity (total outside liability/tangible
not worth) ratio and an imbalance in the financial
structure such as the current ratio (current
assets/current liabilities) being less than one2. A small
scale unit is sick when the unit accounts with the banks
are irregular continuously for six to nine months, the
rate at which the unit is eating away its capital is more
than 10 per cent per annum, there is continuing default
in the payment to the creditor and the unit has
remained closed for the previous six months3.
Irrespective of size, a sick unit is one which works well
below its break-even level or which fails to generate
internal surplus on a continuous basis to meet its
obligation and depends on external funds for its
survival.
 44

− What is Industrial Sickness ?

An industrial unit is said to be sick when it is not
healthy. The health of an industrial unit can be
measured on the basis of a number of criteria, among
which the more important is the return on capital and
reserves after providing for depreciation. The Study
Team of the State Bank of India, in its report on Small
Scale Industries Advances, 1975, defines a sick unit as
one which fails to generate an internal surplus on a
continuing basis and depends for its survival upon a
frequent infusion of external funds. The Reserve Bank
of India defines an industrial unit as sick"if it has
incurred cash loss for one year and in the judgement of
the Bank, it is likely to continue to incur cash loss in the
following two years and it has imbalance in its financial
structure such as current ratio being less than 1:1 and
worsening debt equity ratio.

− It would be seen that industrial sickness is not an over

night phenomenon. It develops in course of time.
Before a unit actually gets sick, a number of symptoms
appear on the financial sides that indicate the
impending sickness. A few important symptoms directly
or indirectly related to finance are as follows : (i) slow
turnover in the account of the unit; (ii) frequent
requests for overdrafts or drawing beyond the
sanctioned limit, sometimes even without prior
intimation to the bank; (iii) failure to honour its bills on
maturity ; (iv) return of bills drawn by a unit on its
buyers ; (v) slow off-take of stocks ; (vi) inexplicable
delays in the submission of stock statements ; (vii)
tendency to draw less by cheque than in cash; and (viii)
over-valuation of stocks, diversion of stocks or failure to
ensure stocks ; etc.

− Why Units Become Sick ?

The financial management has direct concern to know
about exact reasons of sickness or has to answer the
question “Why unit is sick?” Units become sick because
of mistake made by the banker or by the SIU owner or in
some cases due to reasons beyond the control of both
these parties. We can classify the various factors
responsible for sickness under these three heads,
namely, the bankers, the SIU owner borrowers and
environment, i.e., situation beyond the control of both.

− The Bankers. The bankers may commit the following

mistakes & affect the finances of units :
 45

− Permitting location of the project at an ill-

suited place causing to need of more overhead for
up-keep;

− Inadequate credit or too much credit leading

to over or under capitalization ;

− Accepting over ambitious and unrealistic

sales projections for assessing the financial
requirements;

− Laxity of control by not ensuring a proper

way of disbursal resulting into diversion of funds;

− Ineffective financial supervision due to lack

of adequate and trained staff to supervise credit ;

− No casual inspection of stocks ;

− Permitting delay in submission of

statements, returns and financial accounts ; and

− Deficient or defective documentation.

− An apparently unbelievable fact is that, in some cases,

the manager may himself be responsible for the
difficulty in recovery of advances. Lack of integrity
apart, laxity in the matter of follow-up and control may
spoil many good accounts. Some of the following
actions of the managers directly contribute for making
financial account sick :

− Non-compliance with the terms of sanction ;

− Allowing excess drawings in too many

accounts too frequently ;

− Inspecting godowns in a casual manner

without any element of surprise ;

− Confining to cabin and building an ivory

tower attitude ; and

− Thinking that for advances sanctioned by

higher authorities he is not responsible.
 46

− The SIU Owner Borrowers. The mistakes on

the part of SIU owner - borrowers can be
further classified into categories, namely,
‘honest’ and ‘dishonest’ mistakes concerning to
finances.

− Honest mistakes. These are those financial

mistakes which occur not because of mal-
intention on the part of the borrower but
because of his ignorance to plan things
properly. The following area a few such
examples :

− Wrong choice of products leading to waste

of finance;

− Inadequate equity base;

− Over-investment in fixed assets not

immediately required for purchase of
unproductive fixed assets;

− Deficiency in managerial financial skills ;

− Defective purchase policy resulting in piling

up of stocks;

− Uneconomic pricing policy ;

− Poor credit collection system ;

− Excessive borrowings;

− Incorrect estimation of demand of the

product and the competitive position ;

− Inadequate marketing arrangements or

improper distribution system ; and

− Obsolete plant and machinery resulting in

high costs of production and inferior quality
leading to cash loss.

− A until will seldom become sick overnight. Although one

can not have a mechanical device for giving an alarm in
the case of a danger signal, the fact remains that all
units growing sick invariably give out adequate alarming
signals. These signals are like the early warning
 47

indicators which, when perceived, should stimulate a

branch manager’s curiosity for taking a preventive
action in time to safeguard the bank’s interest. It is,
therefore, necessary that the SIU owner should be
aware of these symptoms. Below is a checklist of some
of the symptoms manifested by potential problem
advances. However, none of these symptoms/signals
can be considered as a positive proof of any problem.
They are simple indicators, which call for further probe.
None of them may be a crucial factor by itself, but the
existence of a number of these symptoms in any
account should definitely the SIU owner for full
investigation :

− Continuous cash losses.

− Money raised on all assets available.

− Manipulation in stock statements.

− No turnover of stocks – accumulation of

finished goods.

− Unexplained delay in the submission of

periodical statements and the balance sheet.

− Frequent return of bills drawn by the unit or

failure to honour bills on due dates.

− Frequent issue of post-dated cheques,

unless it has been agree upon.

− Continued failure to meet term and current

liabilities on due dates.

− Lay-off or retrenchment of workers.

− Extravagance in the personal life style of

partners/directors.

− Transfer or resignation of key management

personnel.

− Closure of factory.

− Starts dealing with another bank with the

consent of the former banks.
 48

− Borrowings from market at excessive rates.

− Diversion of funds from the existing

business to new industrial lines.

− Rumours of emerger or amalgamation.

− The borrower being involved in legal

proceedings for recovery of amount due from him.

− Loss of major product lines or distribution

rights etc.

− Plants obsolescence.

− Product obsolescence.

− Incapacity or death of the key person,

disturbing finances.

− Non-payment of mandatory dues such as

taxes, provident funds, etc.

− Utilising short-term funds for long-term

uses.

− avoiding to see the bank manager or

becoming over hospitable to him.

− Manipulative accounting, e.g., change in

mode of stock valuation, revaluation of assets and
reluctance to set up depreciation provision’s

− Dissatisfactory operation of the bank

account.

− Based on the above alarming signals, SIU owner may

follow the following norms to detect such signals in
advance and take suitable action.

− Adherence to fundamental principles of

lending.

− Utmost care should be exercised when the

owner wants to leave one bank and come to
another bank.
 49

− Monthly stock statements should be closely

examined with regard to valuation and movement
‘in’ and ‘out’ of stocks. Some physical verification
on a random basis should be done at regular
intervals.

− Stock inspection should be done frequently

with an element of surprise.

− A dialogue should be held if the account

operations indicate any sign of sickness.

− A regular contact with the debtor should be

maintained and frequently, in an informal manner,
information should be gathered about various
parties from various sources including their
competitors.

− A break-up of books debts age wise should

be obtained every month to ensure that
receivables are regularly moving.

− Financial statements must be prepared

within six months of the close of the accounts.

− Some information system, on the lines of

the Chore Panel suggestions, should be introduced
to throw up signals of incipient sickness well in
time. The information system should have inbuilt
checks to ensure the reliability of the data
furnished.
− Banks should have counseling and
consultancy services which may render help in the
selection of a product, inventory control,
production planning, costing and pricing, and
financial planning.

− Main Causes of Sickness

The T.I.S.C.O. Bombay took up this challenging
task (1999) and conducted a study in certain selected
pockets in the Marathwada to gauge the impact of
sickness in the small scale sector regarding its balanced
growth. The basic causes which have been known are
analysed below :
Causes of Sickness Impact in terms of
percentage
(a) Financial difficulties 35.2
(b) Inadequate power supply 3.80
(c) Management problems 24.0
 50

(d) Technical problems 5.40

(e) Delay in payment from Government 5.40
Dept.
(f) Marketing problems 5.40
(g) Diversification of funds 3.80
(h) Paucity of raw materials 1.90
(i) Labour problems 1.90
(j) Quarrels among partners 1.90
(k) High incidence of taxation 1.90
(l) Other problems 9.40
100.00
− According to the survey report submitted, delay in
sanction of loans, lack of market facilities, acute power
crises, ambivalent government policy, inter-unit rivalry
and unrealistic targets have been telling upon the health
of the industrial units.

− The factors such as Finance, Marketing, government

policy, power crisis, inter unit rivalry, raw material &
gestation period are discussed ahead to point out their
concern to sickness of ISU and subsequent effect on
financial management.

− Most of the entrepreneurs allege that concessions and

incentives given by the government are only on paper.
It is thus felt that they want no new facilities, but
implementation of various schemes and incentives
already announced. No doubt, the Bihar Government
has laid full emphasis on accelerated development of
small scale industries and has announced a number of
new incentives and concessions. However, it is felt that
because of communication gap and a host of
implementing agencies for different kinds of assistance
and their complicated procedures, most of these
schemes have remained on page without being of
substantial use to the entrepreneurs.

− It is also experienced that level of managerial

effectiveness in the sick units remains very low. The
entrepreneurs themselves have to perform all the
managerial functions, viz., organisation, production,
sales, purchases, general control and external
relationships. Only one or two clerks are appointed to
keep the books and records of the business. To perform
these managerial functions, the entrepreneurs have to
remain 3-4 days a week outside the enterprise. No
technical or qualified persons are appointed mainly for
fear of additional overhead costs.
 51

− Remedies And Rehabilitation

Having realised the gravity of the problem emanating on
account of industrial sickness in small scale units, the
following suggestions may be put forth to prevent the
small units falling sick and also to revive the sick units
of the State :

1. Taking financial assistance from the banks

should be free and frank and should not hesitate
in divulging the actual position of the
performance of the unit, just as a patient should
not conceal anything to doctor. This is possible
only with the generation of mutual trust and
confidence.

2. Lack of scientific management is also one of

the causes of sickness and as a preventive
measure it is suggested that before the
entrepreneur enters into any industrial venture of
a biggest magnitude, he should undergo short
term training in modern management technique
so as to equip himself with the techniques of
modern management.

3. The entrepreneurs must strive to build a

reserve fund of its own to strengthen its equity
base to fall back upon in times of needs.

4. The small scale entrepreneurs must refrain

from making unproductive expenses and should
utilise the funds for the same purpose for which it
has been granted.

5. Management deficiencies should be

overcome by inducting professionals on the Board
of Directors and by appointing competent
technical and managerial personnel in key
position in production, finance and marketing.

6. All the bills of SSI units is respect of supplies

made to the Govt. Dept/public sector
undertakings/corporations should be paid within a
period of 30 days failing which interest at the rate
charged to the unit by the bank should be paid
from the date of supply till the date of payment.

7. The government should grant legislative

protection to the sector for assured market and
process of quality control should be modified.
 52

8. The single window delivery system should

work in co-ordination with different wings to
minimise the work of time.

9. Keeping in view the weak equity base in all-

sick units, it is suggested that all identified sick
units have inadequate owned funds should be
given equity assistance in the form of interest-free
long term loans on cash basis.

10. There should be co-operation between term

lending institutions and commercial banks.
Commercial banks, by and large, provide working
capital finance. They are more in the know of
things as compared with term lending institutions
because of their daily contacts with the borrowers.

11. The Government can merge a sick unit with

a financially sound unit in order to make both of
them work.

12. The Government can simply take over a sick

unit and operate it as a State enterprise.

13. All the financial institutions of the State,

especially Bihar State Financial Corporation and
other commercial banks should be asked to
provide additional financial assistance to the sick
units including granting moratorium on interest,
reduction in the rate of interest and moratorium
on repayment of principal amount. The B.S.F.C.
should also organise a special cell to provide the
technical, financial, and managerial training and
guidance to the entrepreneurs of sick units.

14. The entrepreneurs allege that working

procedure of District Industries Cen'res (DIC) is not
favourable towards sick units. So, it is suggested
that DICs should take special care of the sick units
and should adopt a generous view regarding
sanction of quota of raw material to sick units and
should assist them in solving their various
problems in the field of production, marketing and
management.

15. The State Government should direct the

Maharashtra Electricity Board not to charge
arbitrarily on the basis of machines horse power
 53

capacity despite its own failure to supply the

adequate power.

16. The sick units should be provided subsidised

generator sets of high power and there should be
exemption from sales tax on their products.

17. Having experienced the under utilisation of

production capacity in small sick units, it may be
suggested that two or more sick units be merged,
so that there may be better utilisation of existing
plant and machinery, and to provide a sound
equity base and to reduce the overhead charges.

18. Unless a sick unit becomes viable and starts

generating surplus, no penal rate of interest
should be charged till such time.

19. At present the nursing plan is not uniform

and it differs from bank to bank. So, all the banks
should frame the nursing programmes in the
interest of uniformity in the approach to the
problem.
 54

− Sickness In Industries Inviting Sickness In

Banks
Any effort to keep the sick industrial units artificially
viable would show luke-warm response, if the
commercial banks or other financial institutions
withdraw their support. it is attempted in this chapter to
examine the credit facilities extended by commercial
banks to the sick industrial units, the extent of recovery
of loans and to highlight the growing impact of industrial
sickness on the recycling of deposits of the commercial
banks.

− If the diagnosis is wrong.

− the medicines would be ineffective.
− If the diagnosis is delayed.
− the medicines would be least pro-active.
− And if the diagnosis is time-honoured and right,
− the medicines would be highly sensitive.

− Unlike other countries, we have been

instrumentalising redundant measures to keep the sick
industrial units artificially viable. RBI has been framing
the liberal credit policy and the commercial banks
naturally come in the trap of the sick units. Particularly
in the industrial economy of Marathwada wrong viability
and techno-economic studies have been found to be the
root-and-branch cause for the present state of affairs.
No doubt, the sick units have been getting in adequate
financial assistance from the commercial banks but until
they adopt the practice of eating up their own capital,
the locking-up of funds would continue vis-à-vis the re-
cycling process would be reversed. The statistical
reports of the DIC, A'bad reveal that Rs. 150 crores of
the deposits of the commercial banks from Marathwada
and other financial institutions have been locked-up with
the sick industrial units.

− The present chapter studies the problem under

the following heads ; with reference to Marathwada

(i) Financial facilities extended by the

commercial banks to the sick industrial units.

(ii) Recovery of loans by the commercial

banks.

(iii) Cases of locking-up funds and their

impact on the re-cycling of deposits.
 55

− While announcing credit policy for

the year 1999. The chairman, Bank of Maharashtra
rightly observed that the problem of industrial sickness
would not have become so serious, if banks had been
alert. He was of the view that the greater and timely
involvement of banks in monitoring the sick units would
have warded-off much sickness. He suggested that the
bankers should have in depth knowledge of the day-to-
day happenings to their assisted units. Crux of the
problem is that they have not been showing their
interest, particularly in respect of establishing
relationship with the assisted units. If bankers show
new ethos, the cases of sickness in banks would be
avoided as the recovery of loans would establish sound
milieu for the re-cycling of funds. To accelerate the rate
of re-cycling, the RBI has also to check the one-way
process. it would be of immense use that the RBI gives
due weightage to the view points of the commercial
banks, in respect of formulating and implementing the
credit policy.

− Undoubtedly enough, the re-cycling

of funds would evidence deceleration until the assisted
units adopt the practice of diverting funds to the non-
productive heads.

− Participating in the Session on

'Industrial Sickness and its effects on banks' profitability,
the deputy Governor, RBI, Mr. A. Ghosh, advocated that
if a sizeable portfolio of industrial units is allowed to
remain sick, banks' profitability is bound to slump.

− And if the assisted units do not give

up their softness for non-productive investment ;
− the locking-up of funds would be
perennial,
− the recovery of loans would be
poor,
− the re-cycling of funds would be
injured,
− the sickness in banks would be
possible and
− the sick industrial units would
witness
− pre-matured death.
 56

− Supervision of Bank Credit and

Rehabilitation of Sick Units for
better financial Management
Bankers appraise the loan applications carefully with the
idea of eliminating such borrowers who may fail to keep
their promises by not repaying the loans or diverting
money to inappropriate uses. But an appraisal alone
can never guarantee protection against such a type of
future risk. In any business forecasting future
performance on the basis of present plans and
conditions and past performance is subject to wild
errors. These errors may take place as the future is full
of uncertainties and many changes may occur in various
fields, e.g., economic conditions, management
capabilities, technology, tastes, motivation, etc. The
future can at best be estimated and definitely
ascertained. In order to take care of these changes and,
thus, protect oneself against such future risk, post-
allocation supervision or follow-up becomes imperative.
It should be kept in mind by bankers that the loan left to
itself is lost, unless followed up.

− Assuring the End-use of Funds

The end-use of funds, in the banking world, has been
discussed to such an extent with so little end-result that
the former Governor of the Reserve Bank of India, Mr.
Adarkar, once exclaimed in desperation that “the end-
use of credit is hard to establish and there is no
expertise either with the Reserve Bank or with
commercial banks to ensure the end-use of funds.”

− The end-use of funds, in the case of

term loans, is the acquisition of
fixed assets. This can be ensured
to a large extent by disbursing the
money directly to the dealer and
not to the borrower. In the case of
working capital advances, where
the purpose is to acquire current
assets in course of time, assuring
end-use is comparatively difficult.
If working capital funds are used for
acquiring may also be for activities
outside the business and even for
speculative purposes. Luckily, for
the banking industry, the Tandon
Panel has done some remarkable
work in this direction and has dealt
 57

extensively with the subject of

follow-up.

− Let us examine the modus operandi

of diversion of funds in working
capital advances i.e., mainly the
cash credit system.

− Under the present cash credit

system, SIU borrower is asked to
furnish stock/book debts
statements every month. On the
basis of the value mentioned in
these statements, the drawing
power is calculated. Apparently,
this system appears to be all right,
as the security remains intact and
the utilization of funds is also
properly regulated. Any diversion
to other uses can be easily traced
by shortages present in the
stock/book debts. But diversion
starts when the borrower raises
more credit or current liabilities
than actually needed by him or
more than what was disclosed to
the bank. Such extra credit, when
received, helps him in diverting the
bank’s money to other unwarranted
uses.

− Difficult Accounts
Before an account becomes sick, it gradually starts
developing into a problem account or difficult account.
The characteristics of a difficult account are : no
turnover, security held not saleable, shortage either
physical or in terms of value, defective documentation
or a recalled account. A cash credit or overdraft
account, which remain fully drawn but generates hectic
last-minute activity every day, indicates the account is
turning into a difficult account.

− In concerns which start

overtrading, financial difficulties
are bound to arise. This would
force them to collect their book
debts in haste to the extent of even
offering heavy discounts. He is
also likely to borrow heavily from
 58

all possible, sources besides the

bank.

− In trying to locate the symptoms of

an oncoming difficulty in a loan
account, it should be remembered
that none of the signals can be
considered as final proof of a
problem account. Rather they are
only vague indicators which may
require further probe.

− Sometimes an account may

become difficult of recovery due to
defective appraisal done by the
banker. Giving too much too soon
can be as bad as giving too little
too late. Sometimes the project
location may be bad; the
entrepreneur may lack in
managerial or technical
competence. There could be
innumerable such reasons leading
to sickness.

− The Banker’s Rehabilitation

Approach For Rational Use of
Finances by SIUs
The objective of rehabilitation is to restore the capacity
for generating the internal financial surplus rather than
immediately recovering the amount. Otherwise, too, in
cash credit accounts, banks seldom get their money
back.

− The first thing which a banker

should do, if indicators reflect
sickness, is to review the advance,
securities and documentation so
that money is not lost in case of an
eventuality. The stock statements
showing the basis of valuation,
ageing schedules of debtors/
creditors and schedule of fixed
assets should also be obtained.
The quality and saleability of
stocks, realisability of debts and
condition of fixed assets should be
carefully assessed. The documents
should be got examined by a legal
 59

expert, if necessary, and it should

be ensured that the bank’s position
is absolutely safe.

− The second step should be to

determine whether the unit has a
potential financial viability or is it
beyond revival. An in-depth study
is required to assess and
distinguish financially viable units
from non-viable ones. In case of
potentially financially viable units a
further financial or technical
assistance may be needed while in
the case of non-viable units,
enforcement of security or
instituting legal proceedings may
be required.

− Potentially financially viable units

are those where the situation is not
completely out of control and the
borrower also is willing to
cooperate and submit to the
discipline laid down by the bank.
At this juncture, the attitude of the
borrower is very important, since
the action contemplated must get
his co-operation. The SIU owner
should also be made tactfully
aware of the actions which the
bank will not tolerate. An
opportunity for rehabilitation
should be given only to those SIU
owners whose bonafides and
character are beyond doubt. In
case where sickness has gone
beyond cure, it is not use in
throwing good money for bad
money and recovery or a writer-off
will be the only alternative.

− Once financially viable units are

identified and a decision is taken to
assist them, the following three
components shall be involved in
the rehabilitation process :
 60

(i) An analysis of the past

financial & performance operations in order to
know the unit’s financial strengths and
weaknesses. The diagnosis of the weaknesses
has to be done in detail because the removal of
these weaknesses is essential to revive the unit.
For a proper diagnosis and curative methods, the
help of professional finance experts, if need be,
may be obtained.

(ii) Deciding the level of financial

operations which the unit has to achieve in order
to generate a sufficient surplus for regularization.
The borrower should be asked to submit cash
projections for the next 6 to 12 months with
underlying assumption, projected balance sheet
and the income statement.

(iii) An examination of the

problems and the probability of attaining the
desired level of operations.

(iv) The banks may adopt one or

more of the following methods to enable the SIU
owner to come out of the wood :
(v) Discussing the problems
involved with the SIU owner .

(vi) Suggesting changes in

management or leasing of the factory to some
other person.

(vii) Suggesting changes in the

inventory levels.

(viii) Retricting expenditure on

fixed assets.

(ix) Getting additional collateral

to protect the banker from future loss.

(x) Lending additional money,

i.e., nursing

− Whenever a unit becomes financially sick, it is

not only the commercial banks but several
other persons / agencies also are affected.
Before giving an additional input of finance,
bankers should ensure fullest co-operation from
 61

them. The principal agencies, which are

normally interested in the financial revival of a
SIU unit, are as follows.

(1) Owners/promoters who have the highest

stake.

(2) The creditors, who have lent funds to the

unit.

(3) Central/State Governments who collect

taxes.

(4) Consumers, who use the product of the unit.

(5) Providing Fund Commissioner/Labour

Welfare Commissioner etc., who are interested in
the welfare of the workers.

(6) Labour force, who may lose their jobs or

their future growth.

(7) Other term lending institutions like

IDBI,ICICI, IRCI, IFCI and State Finance
Corporations.

− The hard way out

− In cases, where the nursing also fails to bring
the desired result or in cases where nursing
could not be done since the accounts became
sticky due to dishonest intentions of the
borrower, the bank has necessarily to go to
court of law for recovering the advance. Banks
should also invoke the guarantee cover for
such accounts by lodging their claims under
the Guarantee Scheme for Small Scale
Industries to the Deposit Insurance and Credit
Guarantee Corporation (DICGC). A separate
chapter, later on will provide a detailed analysis
of the various provisions of this guarantee
scheme.

− Before going to the court, it should be

remember that court action is neither easy or
inexpensive. Even if the bank succeeds in
getting a decree, there are cases where the
execution of decree becomes highly
problematic. Besides the time, energy and
money which will be needed for court action,
 62

the related correspondence will normally be

tremendous. A prudent bank will take these
factors into consideration before rushing to the
court of law.

− The study covered 50 small-scale. The study

revealed the following problems were detected
in the unsatisfactory group :

Managements No. of
Units
1. Lack of working capital management 32
2. Lack of organization 20
3. Lack of Technical/Managerial capability 17

Marketing
1. Recession in market 9
2. Unit is dependent on buyer/very few buyers 13
3. Competitive market 17
4. Wrong distribution policy or methods 4

Finance
1. Insufficient margin on selling price 5
2. Capital expenditure being financed by working 15
funds
3. Development expenditure eroding into working 5
capital
4. Interest burden and stiff repayment schedules of 7
term loan and other bank borrowings leaving
insufficient funds for working capital
5. Inadequate bank finance. 8

Production
1. Frequent break-down of plant and machinery 5
2. Raw material shortage 16
3. Powers shortage 16
4. Interruption in production schedules due to 15
transportation bottlenecks, delay in
subcontracting, etc.
5. Manufacturing process defects, poor quality 8
control leading to deterioration in quality of
products manufacture by the units.

− These factors contributing towards build-up of

unsatisfactory feature are not only applicable to small
units, but also to medium and large sized industrial
units. Existence of any of these unsatisfactory factors
should be treated as an early alarm signal of impending
deteriorating health of a unit.
 63

Chapter – VIII
The Four Case Studies Revealing A State of Finances of
Sick SIUs

− Case No.1 : Jew (Light Engineering Industry)

− Reasons For Sickness Analyzed :
The first question put to the unit while making the
survey was as to why the unit did not avail bank’s
finance for the working capital requirements and
borrowed from the friends and relatives (interest paid @
18% p.a. on an average.) The answer given by the
owner was that he did not know the various formalities
of the bank in obtaining the loans. Also the bankers
insisted for a substantial guarantor and in order to avoid
all these, he had borrowed from the friends and
relatives to start the business early.

− Conclusion :
The owner of the units stated that if the bank had
helped him in 1995, there would have the revival of the
unit as the job performed was not done by any other
unit in Aurangabad. It is due to the lack of interest on
the part of the banks to nurse a unit results into the
closure of the units was the stand taken by the
entrepreneurs. This contention is not true. The
entrepreneurs are equally or more responsible in
running there business and earning profits and should
not depend fully on the banks credit.

− Case No.2 : GCC (Chemical Industry) :

Since the unit was showing continuous cash loses for 3
years, the bank treated this unit as “Sick Unit” and
stopped further operations in the account.

− There were another symptoms of sickness also

which are as follows :

− The average cost exceeded the average

returns, thus resulting decline in profits.

− No margin money available to avail working

capital from the bank.

− Heavy accumulation of finished goods.

 64

− No cash available to repay the loan

installments and interest payment to the bank.

− There was arrears in the payment of the Sales

Tax and Income Tax dues.

− Cash in hand, bank merge even to meet the

current liability e.g. The payment of the wages
to the workers and payment of electricity,
water bill etc.

− Strained relations with the workers due to

nonpayment of wages in tome had resulted in
their leaving the jobs.

− Sales were practically stagnant resulting into

stoppage in production.

− Trade creditors insisting for payment of their

bill, while debtors were enjoying long periods
of credit.

− Stock statement not submitted for the last 4

months.

− Cash Credit account is out of order for a long

time, i.e. over 8 months.

− Reasons For Sickness :

The raw materials prices were increased by about 70%

− Potential market could not be exploited for selling the

products as the marketing method was poor.

− The debtors extended their credit period which ranged

between 4 to 6 months.

− Though there is great demand for the chemicals

produced by this units, the (customers) textile owners
are not getting returns due to lower demand of their
final product because of high prices fixed by them.
Hence this unit is suffering as its produces the
chemicals required for a particular purpose only by a
very few owners.

− One product was to be discontinued as the customer

himself started producing the chemical required.
 65

− There was a fire in the factory due to short circuit in

1995 and the actual loss estimated was to tune of Rs.
5,80,000/- out of this amount only 50% i.e. Rs.
2,90,000/- was realized from the insurance company.

− Conclusion :
In this case the owner stated that had helped much by
going out of the may and extending credit as and when
needed. But if the bank is now ready to accept further
risk and invest an amount of Rs. 7,80,000/- in the unit it
could receive and repay the entire loan with interest
within a span of 5 years.

− The banks stand was that already the total out standing
were to the tune of Rs. 780,000/- and if another Rs.
7,80,000/- were sanctioned by it under the nursing
programme, the total outstanding will be to the tune of
Rs. 15,60,000/- which is risky venture as there was no
security left with the unit of offer as a cover for the
additional sanction. Also, since the accumulated losses
were also heavy it was not possible for the unit to return
to profits within a span of 5 years and repay the entire
amounts with interest.

− The unit is therefore thinking of closing down

completely.

− Case No.3. SP & AC (Chemical Industry ) :

Conclusion :
In this case, it was found that the partners were over
confident about their business and tried to manage their
business from the internal sources without approaching
the banks. They also lacked in financial discipline as the
credit sales made could not be realized by them, thus
resulting them into heavy losses.

− Case No.4 : Printek (Printing Press Industry) :

Conclusion :
The unit stated that its only for the bank’s assistance
that the unit could be restarted and the bold approach
made by the bank official to nurse the unit should be
really appreciated. The bank officials stated that the
Bans always looked at the units from a suspicious angle
and felt that all sick units are bad and nursing should be
done only in few cases.

− Thus from the above example it can be concluded that

the circumstances which lead to the closure of the unit
 66

should be taken into accounts instead of the causes for

failure of the units and individual cases dealt with. The
same norms or yard – stick should not be applied for all
units and the reasons for sickness given in various
books should not be followed in judging units
performance.

− In the words of Douglas C Bazil “The smaller

businessman in order to strengthen his chances for
survival must be aware of accepted cost practices,
financial ratios and other operating standards which
enable him to test ad improve his position both
financially and marketwise”
2.67
 2.68

Chapter – I
Introduction, Objectives, Nature
,Scope and Research Methodology
of Thesis

Introduction

Rational Behind Selection of Thesis Topic

Objectives

Research Methodology

(a) Review of Literature on the subject

selected for study

(b) Experience Survey

(c) Descriptive Study - Sample Survey

Approach

Hypothesis, Assumption and Method of Data

Collection
 2.69

Chapter – I
Introduction, Objectives, Nature, Scope and
Research Methodology of Thesis

Introduction :
The industrial sector which possesses a
relatively high marginal propensity to save and
invest contributes significantly to the eventual
achievement of a self sustaining economy with
continued high levels of investment and rapid rate of
increase in income and industrial employment.
Besides, the process of industrialization is associated
with the development of mechanical knowledge,
attitudes and skills of industrial work, with
experience of industrial management and with other
attributes of a modern society which in turn are
beneficial to the growth of productivity in agriculture,
trade, distribution and other related sectors of the
economy. As a consequence of these factors, any
successful transfer of labour from agriculture to
industry soon contributes to economic development.
Industrialization is thus an inseparable from
substantial, and sustained economic development
because it is both a consequence of higher incomes
and a means of higher productivity. With the rise in
income levels the people tend to spend more on
manufactured goods than on food. The differential of
income elasticity of demand confers an advantage on
the manufacturing countries in the form of providing
 2.70

expanding market while differential in productivity

makes it an attractive occupation to effect population
transfer so as to arrest the tendency of diminishing
returns in agriculture. Industrialization acts as an
instrument both of creating capacity to absorb
excess labour power and of catering for the
diversification of the market required at higher
stages of economic development.

The British government in India provided

discriminating protection to some selected industries
since favoured nation clause for British goods.
Despite this factor, some industries such as cotton
textiles, sugar, paper, matches and to some extent
iron and steel did not make progress. But one thing
was quite obvious that during the British period no
effort was made to foster the development of capital
goods industries. Rather the British Government put
definite hindrances and cold shouldered their
development. The main features of the industrial
pattern in India on the eve of planning (1950) were
as under:

(a) Lop-sided pattern of Industry.

(b) Low Capital Intensity

(c) Composition of manufacturing output

reflects the preponderance of consumer
goods industries vis-à-vis producer goods
industries.
 2.71

Within less than one year after independence,

the National Government on April 6, 1948,
announced a comprehensive industrial policy which
attempted to demarcate definite spheres for
Government undertakings and private owned
industries and also indicated the broad lines of state
regulation and control of industries. The main
features of 1948 industrial policy are as :

(a) Industries are broadly divided into four

categories.
(i) Defense and strategic industries including
manufacturer of arms and ammunitions,
the production and control of atomic
energy, and the ownership and
management of railway transport are to be
exclusive monopoly of the Sate.

(ii) Basic and key industries including iron and

steel, coal, aircraft manufacture and ship
building are in the government controlled
sphere. All new undertakings of basic and
key industries are to be owned and
operated by the Government and the
existing ones will continue to be under
private enterprise for a period of ten years
after which the question of nationalization
will be decided.

(iii) Twenty other important industries

including heavy chemicals, sugar, cotton
and woolen textiles, cement, paper, salt,
machine tools are to be run by private
enterprise but controlled and regulated by
the State. For this group there is no threat
of nationalization.
 2.72

(iv) The residual industries are to be run by

private enterprise and are to under the
general control of the state.

(b) Cottage and small industries are to play a

distinct role in the national economy. They are
to be developed on co-operative lines as far as
possible and are to be co-ordinated and
integrated with large scale industries.

After 1956, the Government realized the need

for development of industries. “Industrialize or
perish” was the slogan of Jawaharlal Nehru, the late
Prime Minister on the eve of launching, second Five
Year Plan. This is still true since it is essential
ingredient of rapid and self sustained development of
rural areas. Prof. Arnold Toynbee takes
industrialization as synonym for economic
development. It is believed that the solution to the
economic maladies like poverty, unemployment,
malnutrition etc. lies in the rapid industrialization. As
such, industrialization assumes paramount
importance particularly in developing countries like
India. (Ref.Col Ashok Pal, A Pivot Aspects in Plant
Level Management of Industrial Units -A Case of
Aurangabad District of Marathwada) In the total
process of industrialization, the small scale industrial
units occupies unique importance due to their low
capital intensities and the capacity to generate
employment. These industries shall get success for
the development of Indian Economy. However, in
actual practice the case is not so. There are number
 2.73

of hurdles in the smooth development of the small

scale industries. Amongst these hurdles a ‘need to
have appropriate Financial Management’ appears
crucial . The aim of this thesis to throw the light on
this topic buy selecting the industrial units from
undeveloped region like Marathwada.

Rational Behind Selection of Thesis Topic :

The forgoing discussion shows that India, as
compared to era of pre-independence has made
substantial progress in Development of Industries.
However there were number of dynamics which
affect industrial Development. Amongst all these,
financial management at the level of individual
industrial unit is worth to be considered. An
Industrial entrepreneur besides his own capital
obtains the external finance in the form of
concessional or non-concessional finance or Govt
investment. The concessional finance assistance
includes grant, subsidies, and loans at less than bank
rate, with long maturity period. Such financial
assistance in underdeveloped areas is generally
provided on liberal scale. This assistance is given for
industries to sustain high level of investment, to
mitigate technological gap, to exploit natural
resources, to face initial risk, to develop basic
infrastructure, to improve economic condition and so
on. If industrial investment of the state needs
success and fruitful utilizations, there is a need to
 2.74

make constructive management at grass root. At

that grass root industrial level, there exist a number
of areas such as production, finance marketing
personnel and so on. In these areas, the financial
management is crucial one to decide the fate of
industrial unit. Considering this fact, it was decided
to study financial management of Industrial unit run
on small-scale basis.

Objectives :
(vi) To study industrial Development of India & its
finances so as to bring out the importance of
small-scale industrial units.

(vii) To critically analysis conceptual base for

financial resource procurement by SIUs and
their utilization.

(viii) To verify various aspects of Working capital,

Borrowings, Subsidizes, institutional finances
etc. and other related variables affecting
financial management of SIUs

(ix) To know the facts of finances of Sick Units

(x) To suggest remedial measures for sound

financial management of SIUs.

Research Methodology :
Research methodology used for study is both
exploratory and descriptive. The same is explained
ahead:

(a) Review of Literature on the subject

1
selected for study :
 2.75

Books, reports, office record and such other

printed materials constitute an appropriate source to
have an insight into the topic selected for research.
The specific guidelines and hypothesis can be
devised from them. The subject selected for study
was found virgin since, no attempt has so far been
made in studying the problems in financial
management of small-scale industries.

The following offices and libraries were visited

while collecting the information from the secondary
sources:
(i) Dr. Babasaheb Ambedkar Marathwada
University, Aurangabad.

(ii) Gokhale Institute of Politics and Economics,

Pune.

(iii) Marathwada Development Corporation and

the Offices of its sponsored units.

(iv) Offices of the Bureau of Economics and

Statistics located at district places in
Marathwada.

(v) Collect orate of the various districts.

(vi) Tata Economic Consultancy Services,

Mumbai

(vii) District Industries Centre, Aurangabad.

10
(b) Experience Survey :
Many people in the course of their daily routine
and varied work in the practical field, acquire
 2.76

experience, and in the process accumulate a rich

fund of useful and practical knowledge which can be
drawn upon, as and when, the need for the same is
felt. So far as the Small Scale units (SIUs) are
concerned, industrial entrepreneurs, officials of
District Industries Centre, MDC and Financing
Institutions, Industrial Labour, suppliers, etc. acquire
and develop certain insight into the characteristics of
the working and impact of these industrial units. As
a result these persons are capable of visualizing the
problems, benefits, prevailing situation, future scope,
etc. in the context of the industrial units. It is, hence,
decided to conduct an Experience Survey of the
above persons.

While selecting the respondents for interview, a

care was exerted to select only those who possess
competence, relevant experience and ability to
communicate. Many a times advanced information or
some sort of preliminary training was given to the
respondents who were to be interviews. The persons
such as factory inspectors, Bank managers, etc. who
are strategically placed at the executive position are
more informative, experienced and reputed for
possessing practical ideas and diligence were
purposefully interviewed in the experience survey.

Efforts have also been made to ensure an

appropriate representation of different types of
 2.77

experience by including respondents from various

categories like the suppliers of inputs, purchasers of
output, lower or middle level officials from the
Government Departments. The number of persons
contacted for each type of enquiry was different in
size. When it was realized that an additional
respondent, if interviewed, would furnish similar
information, the interrogation against the particular
aspect or issues was stopped. This has facilitated
economy in the data collection.

During the course of interview, the respondents

were asked only the relevant questions having a due
regard to their relation with the working of industrial
units and depth of their experience. For example, if
such a person or respondent happened to be a Bank
official, the issues like difficulties in recovering the
loans, granting subsidies, attitude of borrowers, etc.
were discussed. If the respondent belonged to the
category of a supplier, the questions pertaining to his
ability or inability to supply, the terms and conditions
of supply etc. were asked. The number of persons to
be contacted was kept different from different
purposes. The scope of experience survey is kept
restricted to industrial units in Marathwada located
only at dist Head Quarters.

(c) Descriptive Study - Sample Survey

Approach 2:
 2.78

A survey of literature tells us about what existed

in the past. An experience survey provides a rough
vision of what may exist, while descriptive study
accurately describes an interprets what exists at
present It is primarily concerned with relationship or
conditions that exist, practices that prevail, belief,
point of views or attitudes that are held, processes
that are going on, effects that are being felt or the
trends that are emerging. It is, therefore, suitable for
a researcher who believes that the data required to
resolve the research problems do not exist, yet the
settings in which those data would be gathered to
exist.

After completing the experience survey, it was

thought necessary to conduct the descriptive study.
Though the variables investigated are not tabulated
in a manner usually observed, the necessary
references of these variables arrived after the
investigation made from the observations of sampled
units. This has given a logical and scientific base to
the discussion made in the thesis

The purpose of the descriptive study is to

describe accurately the gravity of the various
variables that contribute in the
development/promotion or set back of agro based
industries of various types. From the list of small
scale industries maintained by DIC office,
 2.79

Aurangabad, 200 industrial units were randomly

selected for study. (The details about this are given
ahead). This list is confined to only the units which
are in operation for last three years preceding to the
April, 1999.

Necessity for Survey:

The field survey was conducted in order to
ascertain the problems in financial management
confronted by the SIUs from the Aurangabad where
Various studies concentrating on specific aspects like
Investment/output aspects, Labour aspects, Loan
utilization aspects etc. have been made. So far the
follow up aspect of SIUs problems in financial
management has rarely been studied. It is quite
interesting to carry out an independent enquiry as to
how the SIUs industrialists running small-scale units
have been effectively or ineffectively confront the
problems in financial management. How some of
them achieved a positive bearing in increasing the
production, employment and profitability of the units.

The small-scale units are not an organised

sector; they are set up from one corner to the other.
They do not still have systematic and the highly
sophisticated way of managing their business. For
example the account books, costing records,
inventory and cash management are not looked after
with due care as a result adequate and accurate
 2.80

statistical information cannot be obtained easily.

Moreover, the small industrialists hesitate to disclose
with out reservation the information about their units
as they feel that any information supplied by them
way lead to some legal complications later e.g. The
Income Tax, Sales Tax, Excise authorities may use
them for non compliance of various statutory
requirement or for not disclosing the correct
information.

Hence, it was decided to use a judgement

sample of limited number of units from the
Aurangabad in and around to have a wide coverage
of multidimensional financial involvement of SIUs
which are comparatively better placed location like
Aurangabad for visualising situation of SIUs located in
Marthwada at the locations inferior to Aurangabad .
 2.81

Method of Sampling Used :

The method of sampling used is the “Judgment
Sampling Method”. In this method Judgment is
exercised in selecting the units and only those units,
which are most typical of the universe with regard to
the characteristics under investigation, are chosen.
The ‘Judgment Sampling Method’ is used in view of
the fact that by simple random selection a good
number of units satisfying all the characteristics
required for the study would have been missed which
would not have given a true picture for the purpose
of the present study.

Selection of Units :
(1) In the absence of an exhaustive list of the
registered small-scale units operating in
Aurangabad with the Government authorities,
the exact number of such units could not be
ascertained. Moreover it was gathered that the
number of unregistered units were either equal
to or were more than that of the registered
ones. The District Industries Centre furnished
the details of small-scale industries. From the
information so received, the table No. 1.1 is
prepared. The table shows that there were
about 3000 units operated in Aurangabad
metropolitan area. From these units 200 units
were selected for study by using judgment
sample method of selection.
2.82
 2.83

Table No. 1.1 : Small Scale Industries

Registered And
Operated in Aurangabad

Sr. Type of Industry No. of

No. Units.

1. Food Products 72
2. Cotton Textile & Textile Products 303
3. Wood, Wooden products & Wooden 234
Furniture
4. Paper & Paper Products 257
5. Leather & Leather Products 55
6. Rubber, Plastic & Coal products 143
7. Chemical & Chemical Products 216
8. Basic Metal & Alloys Foundries 55
9. Machinery, Machine, Tools, Metal 1475
parts
(Egg. Unit
10. Glass 48
11. Cement Products 58
12. Electronics 100
13. Miscellaneous Industries viz. 300
Utensils
14. Printing - Press Industries. 100

3416

Source: District Industries Centre, Aurangbad

Criteria For Selection :-

(1) Only the factory units were chosen for the
purpose of the present study and the servicing
repairs and others were excluded.

(2) Only the units availing facilities from the

Nationalized Banks, MDC and Industrial
Financing Institutions were taken for the
purpose of study.
 2.84

(3) The following criteria were applied while

choosing the units for the study survey:

(a) Investment in Plant and Machinery not

exceeding Rs. 80 lakhs

(b) The Large scale of production.

(c) The large or varied type of securities

offered.

(d) The multiple types of banking facilities

granted.

(e) The continuity of business at least for the

last five years preceding to the date of
survey i.e. May, 1999.

(f) Type of product manufactured

The above criteria have facilitated to study SIUs

having the multi-dimensional financial investment or
involvement giving rise to increasing the number of
problems.

Peculiarities of the Units Selected :-

 2.85

Table No. 1.2. : Classification of the Small Scale

Units
Selected for study

Sr. Types of Industry Number of % to

No. Units total
selected for
study

1. Light Engineering Industry 30 15

2. Electrical & Electronics 35 17.
5
Industry
3. Chemical Industry 28 14
4. Printing Press Industry 10 5
5. Other Industry 0 0
(i) Plastic Industry 15 7.5
(ii) Cotton Industry 15 7.5
(iii) Tube-Tyre Industry 16 8
(iv) Furniture Industry 27 13.
5
(v) Cement-Pipe Industry 7 3.5
(vi) Pharmaceutical Industry 10 5
(vii) Job Work Industry 7 3.5

All Totals 200 100

See Table No. 1.2, it shows the classification of

the units which are chosen for study purpose. Under
various categories of industry the various types of
running units were chosen by omitting or adding the
Nos. of units to bring the total to various units of
various categories of industry in order to have a
comparative study of all the industries.
 2.86

Hypothesis, Assumption and Method of Data

Collection
The need for the present field survey was felt
mainly to verify the following hypothesis

‘Bank loans, Institutional loans, Private loans and

Owned capital and other financial resources are
available to Small Scale Industrial Units(SIUs) in
Marthwada and they have been properly and
effectively utilised and managed by them for their
industrial and business activities without any
problem.’

The following were the assumptions include

constraints of the survey for testing the hypothesis: -
(1) Judgment sample method is used for selecting
units.

(2) The units surveyed consist of small industrial

concerns as defined in Appendix.

(3) Most of these units do not maintain systematic

and adequate records. The records maintained
are also not absolutely accurate. In case of any
doubt arising as to the correctness of the
records, the owners were asked repeated
questions by indirect means e.g. if the annual
sales figures as given by the units was doubtful,
the monthly sales were called for to testify the
reliability of the data supplied by such units.

(4) In some cases the entrepreneurs were very

much eager to list out the various problem
faced by them, but they were reluctant to
provide detailed statistical information required
on their capital or production structure. A few
 2.87

questionnaires were to be rejected after filling in

the details, since there were apparent in
consistencies in the information supplied by
these units.

(5) The information about the assets structure was

assumed to be fairly reliable.

(6) The financial information pertains to a period of

the three accounting years. i.e. 1996-97, 1997-
98 & 1998-99. from which at the most places of
thesis, a triennial average is articulated for the
purpose analysis.

(7) It was found that the units were either unwilling

or not able to provide the ex-factory value of the
output. Hence from the sales figures, all
expenses were deducted to arrive at the Gross
Profit before tax. It was also difficult to collect
the figures of taxes paid by the units and only a
few units could give this information. The
reason was for not furnishing the figures of
taxes paid and those units selected were scared
to disclose this information for the fear that
Income Tax authorities may trouble them after
wards. Hence the profits taken for the purpose
of the present study were before tax.

(8) After surveying the industrial development and

changes for its development, it has been found
that small-scale industries are not fully
developed.

(9) There is no scarcity of labour, which is primarily

necessary for industrial development in
Marathwada.

(10) The number of commercial and financial

institutions in the Marathwada is not enough to
provide loan to the small-scale industries. If
such loan suppliers are encouraged at open
 2.88

their branches in the district it could help to

grow industries in the region.

(11) If the commercial banks, Nationalized banks

provide loans to the small-scale industries, this
money should be channeled to industrial
development and for this management should
be active. In some SIUs because of inactive
management, the financial aid could not be
used properly for even the purpose of
development.

(12) If the employer - employee relationship is

cordial, that will help to grow the small-scale
industry. If it is not so, the loan provided by
banks is not properly used and consequently it
affects manufacturing.

(13) To grow cordial atmosphere it is necessary that

there is a proper divisions among the workers
otherwise development cannot take place.
Even though there is enough supply of loan.

(14) Some times small-scale industries have to face

many difficulties to obtain the loan from banks.

(15) If the banks procedure of loan supply and its

interest rates were encouraging to the
industries it would certainly help the fast
development of the industries.

(16) Aurangabad district and especially Aurangabad

and its periphery are having seventy to eighty
percent industrlization of what is in Marathwada
because the govt. And other promoting
agencies like MDC since 1975 have made focus
of industrial development towards the
Aurangabad and around while industrial
development of other areas had late start
somewhere in post nineties. As a result the SIUs
in Aurangabad District are better placed and
exposed to all the managerial and financial
 2.89

problems for their development while SIUs from

the rest of Marthwada are much away from that.
As the incidence of this it is thought to study
SIUs from Aurangabad District to visualize the
problems in financial management; the similar
problems in SIUs from the rest part of
Marathwada (Excluding Aurangbad Dist.) are
thought to be more intense. It is like that to
study better business venture located in
Aurangabad and visualize the variables or
deviations of non better SIUs, located elsewhere
i.e. outside Aurangabad and within Marathwada.

However some industries in rest of Marthwada

could thrive as they used the financial resources for
their development.

The units were visited and a questionnaire

prepared for the purpose of the present study was
filled in by the method of personal interview with the
owners or managers of the units. The questionnaire
prepared for the survey sought to give information
from the selected units for three years i.e. 1996-97,
1997-98, and 1998- 99. The factual data was
collected from the records produced by the units. I.e.
the Profit and Loss Account and the Balance Sheet;
while the questions, which were of general nature,
were asked directly and their opinions, views and
suggestions were noted. In spite of their
preoccupation with their busy routine, the
entrepreneurs interviewed gave adequate
information without much reservation. Subsequent
visits were made with prior appointments to get
 2.90

further data required and not supplied in the previous

meetings and certain classification were sought for
wherever necessary.
 2.91

Appendix I
Changes In The Definition of Small
Scale Industries By the Government
From Time to Time :
The definition of Small Industries is an important
aspect of Government policy as it identifies target
groups. These is not legal or a single, clear cut
definition of what constitutes small industry many
countries. In fact, firms, may be classified as their
small, medium or large depending upon various
criteria the most common of which are employment
size, value of total assets, and type of activities. In
some instances, the classification may also be based
on sales or output. The first official criterion for Small
Scale Industries dates back to the second five year
plan when it was in terms of gross investments in
land, building, plant and machinery and the strength
of the labour force. Subsequently, on the
recommendation of the federation of Association of
Small industries of India (FASLL) an apex level
organization of Small Scale Industries, setup under
the aegis of the Ford Foundation term, only
investment, in Fixed Assets in Plant and Machinery
whether held in ownership terms or by lease or by
hire-purchase, instead of fixing the limit on overall
investment, was considered for granting the status of
a SSI unit. From time to time, there have been many
 2.92

changes in the ceiling limits of investment in Plant &

Machinery.
It is interesting to see the changes in the
definition of Small Scale Industries since 1955. The
Concept of Small Scale Industries has been in vogue
for the last about two decades or so. Earlier we used
to have a composite group of rural and cottage
industries which included a variety of industries
ranging from bee-keeping and lakhs cultivation to
hand spinning and weaving to Sandal Wood and ivory
Carving, manufacturing of Catlerge, locks, iron safe
etc.

The first attempt to Study the position, Problems

and prospects of village and Small Industries at the
national level was made by National Planning
Committee (N.P.C.) set up by the Indian National
Congress in 1938 under the Chairmanship or Pandit
Jawaharlal Nehru. Recognising their importance on
Rural and Cottage Industries under the Chairmanship
of Shri S.C. Das Gupta, the sub-Committee submitted
an interim report along with the notes and
memoranda. Shri K.T.Shah, well known economist,
was the General Secretary of the National Planning
Committee. Prof. K.T. Shah noted that no satisfactory
definition of Small Scale Cottage and Rural Industries
had been attempted by any authority in the country.
After assessing the various aspects of the situation
bearing the peculiarities of our history in mind, he
 2.93

suggested a generally acceptable definition for this

group as a whole. He realized, however, that it was
not exhaustive and it sometimes overlapped the
definition suggested by him as under :

“A small scale or cottage Industry may be

defined to be an enterprise or series of operation
carried on by a workman skilled in the craft on his
own responsibility, the finished product of which he
markets himself. He works in his own home with his
own tools and materials and provides his own labour
or at most the labour of such members of his family
as are able to assist. These workers work mostly by
hand labour and personal skill, with little or no aid
from modern power driven machinery and in
accordance with traditional techniques. Such
supplementary energy as is provided by animal
power may add to the economy and efficiency of the
industry. He works finally for a market in the
immediate neighbourhood that is to say in response
to known demand with reference to quality as well as
quantity. [Govt. of India Rural and Cottage Industry
N.P.C. series, P.No. 24-25.]

The above method of considering this question

leads us again to over lapping. Specific cases or
industries have to be considered separately in order
to determine whether they should be considered
large scale, small scale or cottage. In regards to
 2.94

cottage industries, the governing characteristics, it

should be remembered, are the non-use of
mechanical power and they should be carried on in
the vicinity of the abode of the worker. It is
conceivable, however that cheap electric or other
power may be used in the cottage.[Ibid, Rural and
Cottage Industries National Planning Committee
Series P. No.53.]

It may be seen that our 1 st prime Minister of

India, Pandit Jawaharlal Nehru was clear his mind that
cottage Industries should be treated as two separate
entities and that the latter would necessarily overlap
both with the farmer and the large scale industries.
The small industry sector was, in his mind the middle
sector which may employ others and may use power.
Mahatma Gandhi and his followers also favoured this
concept of all small scale industries.

As a matter of fact, these industries do not

strictly fall into any water – tight definition. They are
conglomeration of industries with varying levels of
investment, technology, sales of production and
forms of organization. Such terms as “Small
industries”, “Cottage industries, handicrafts”, and
“Village industries”, are used often loosely to convey
the nature and scale of these industries. By and
large these terms are used to distinguish them from
“large scale industries which are characterized by the
 2.95

use of large amounts of resources, large production

and capital intensive techniques. The small and
cottage industries use small amounts of resources
under take production on a small scale and are
largely labour intensive.
 2.96

(i) Definition in 1955 :-

In defining them different criteria have been use
in different countries. Even in our own country, these
definition have been given differently at different
times. One criterion has been to define them in
terms of the number of persons employed. Use in
Germany and Japan, this criterion was made the
basis of the first definition of small scale industries.
A unit employing less than 50 persons and using
power or less than 100 persons without the use of
power and with capital assets not exceeding five lakh
rupees was deemed small scale unit.

(ii) Definition in 1960 :-

The second criterion adopted in India in 1960
delimits the size of industries in terms of capital
investment alone. Later modification of the definition
in 1960 “The celling of Rs. 5.00 Lakhs in case of small
scale industries was raised to 7.5 lakhs (irrespective
of the number of persons employed) were treated as
small scale units (i.e. those supplying components
etc. to the large scale industries) the limit was a
little higher at ten lakhs Rupees. Capital investment
for this purpose means investment in plan and
machinery only”. Land and factory buildings are
excluded and rightly so because of wide variation in
the price of land at different places.
 2.97

(iii) Definition in 1974 :-

“The ceiling of Rs. 7.50 Lakhs of investment in
plant and machinery was enhanced to Rs. 10.00
Lakhs in case of small scale industries and in case of
ancillary industries engaged in certain types of
manufacture/servicing etc. The limit was increase to
Rs. 15.00 Lakhs [Economic Times, 11 Nov., 1974
P.No.3.] (as already explain in the proceeding paras)

(iv) Definition in 1980 :-

The government of India has accepted the
revised definition in 1980 and in view of this
representation by small units, and in order to boost
their development and ensure their growth, the
government raised the level of investment in tiny
units, small scale industries and ancillaries as under

(1) “The limit of investment in tiny units

has been increased from Rs. 1 Lakh to
Rs. 2 Lakhs”.

(2) “The limit of investment in small scale unit has

been raised from Rs. 10 lakhs to Rs. 20 Lakhs,”
and

(3) “The limit of investment in the ancillaries has

been increased from Rs. 15 lakhs to Rs. 25
Lakhs.”

(v) Definition in 1985 :-

In exercise of power conferred by sub-section
(1) of Section 29B, read with Section 11 B of the
Industries (Development and Regulation) Act, 1951,
 2.98

(65 of 1951), the Central Government hereby makes

the following further amendments to this Ministry’s
notification No. S.O. 98 (E) IDRA/ 29B/7311, dated the
16th Feb. 1973, namely : In the said notification :
(i) For the heading “Small Scale units”, the
heading “Small Scale industrial
undertaking shall be substituted and
under the heading so substituted in
item no.1 for the expression Rs. 20
lakhs, the expression Rs. 35 lakhs shall
be substituted.

(ii) For the heading “Ancillaries” the heading

“Ancillary Industrial Undertaking shall be
substituted and under the heading so
substituted in item No.2 for the expressions Rs.
25 lakhs, the expression Rs. 45 lakhs shall be
substituted”[Maharashtra Chamber of
Commerce Bulletin, Nasik, 1985 P.-1]

(vi) Definition in 1990 :-

“The limit of investment in Plant & Machinery
were increased from Rs. 35 lakhs to Rs. 60 lakhs for
Small Scale Industries and from Rs. 45 lakhs upto Rs.
75 lakhs for ancillary or export oriented units”.

(vii) Definition in 1991 :-

“The limit of investment in plant & Machinery
were increased from Rs. 2 lakhs upto Rs. 5 lakhs
including service enterprises are grouped for ‘Tiny
Industries’ (located in villages and towns with
populations not exceeding 50,000) and it would not
be change in the definition of small Scale & ancillary
unit.
 2.99

(viii) Definition in 1995 :-

“The limit of investment in Plant & Machinery
were increased from Rs. 60 lakhs upto Rs. 80 lakhs
for Small Scale Industries and Rs. 75 lakhs for
ancillary. And with investment in plant and
machinery upto Rs. 5 lakhs including service and
enterprises are grouped as ‘Tiny Industry”.

(ix) Definition in 1997 :-

“An industrial undertaking which is engaged in
the manufacturing, processing or preservation of
goods and in which investment in plant and
machinery (original cost) does not exceed Rs. 30
Crores. These would inter-alia, include units engaged
in mining or quarrying servicing and repairing of
machinery. ( Proposed to be reduced to Rs. 1 Crores).

Ancillary Industries :
“An Industrial undertaking which is engaged in
the manufacturing or production of parts,
components, sub-assemblies, tooling or
intermediates or the rendering of services and which
supplies at least 50% of its production or services to
one or more other industrial undertakings and whose
investments in plant & machinery does not exceed
Rs. 3 Crores (original cost) whether held on
ownership terms or on lease or on hire purchase.
 2.100

Note : No SSI or Ancillary unit shall be subsidiary or

owned or controlled by any other industrial
undertaking.
 2.101

Small Scale Service/Business Enterprises

(SSSBEs) :
Are those having investment in Fixed Assets
(excluding land & building) upto Rs. 25 lakhs and
registered as such are also classified as SSI for the
purpose.

Tiny Sector Unit :

Any industrial concern with which the
investment in plant & machinery does not exceed Rs.
25 lakhs irrespective of the location of the unit.

Cottage Industry :
Industries in which fixed capital does not exceed
Rs. 25000/- (Some states have revised upto 60000/-)
and the number of persons employed is less than 9.

Household Industry :
Cottage industry in which at least one member
of the family is actively engaged in production
activity.

Artisan :
Rural craftsman possessing manual skill in
operation of small tools and machines, either in self
employment or working for another artisan for
earning one’s livelihood.

Craftsman : (Handicraftsman)
 2.102

Craftsman producing articles by skill of the hand

and a special location acquired over a period. A
handicraft article to be distinct from rural craft must
undergo at least one operation/process involving skill
of hand. They cover artistic/utilitarian handicrafts.

Decentralized sector :
A sector of economy in which articles of
common/local use are produced locally, utilizing by
and large locally available natural resources and
human skills. It includes artisans, Khadi and village
industries. Handlooms, sericulture, wire etc., which
have been categorised as “Village Industries” under
the government of India’s New policy of August,
1991.

Unorganised units/informal sector :

Units which are not registered/foot loose units.

Village Industry :
KVIC units located in areas upto 20,000
population and in which capital investment is less
than Rs. 50,000/- per person employed.

Woman Enterprises :
Age those Small Scale units where one or more
women entrepreneurs have not less than 51%
financial holding.

Rural Industry :
 2.103

An activity in which predominant manpower

resides in the rural areas and local resources are
used to transform products into finished goods.

“Rural Area” as defined by NABARD :

The area comprised in any village including the
area comprised in any town, the population of which
does not exceed 50,000.

Rural Non-Farm Sector :

RNFS is defined as those enterprises and artisan
activities which could be classified as household,
decentralized, tiny and small scale enterprises
involved in production/manufacturing processing
preserving, storing and marketing of goods and/or
engaged in services and agro processing having a
bearing on providing employment and incomes to
persons residing in rural areas.

This change in definition market an important

turning point in the programmes of Small Scale
Industries, for after the change, a number of workers
and undertake a greater volume of production with
the same resources in equipment and capital outlay.
The revised definition also covered labour – intensive
establishment of a large size. Thus in the course of
52 years after independence, the definition of a Small
Scale Industries has been modified various times.
First it deleted the employment factory from the
 2.104

point of view of promoting the official programme

under successive plan periods. Second, it doubled
the fixed capital by redefining it to include machinery
only in a phased manner. This change was
necessitate by the need to offset the higher cost of
machinery arising out of rising prices and to offer
greater opportunities to small scale enterprises.

Any definition of small scale industry should, for

practical purposes include rural artisan, cottage
industries, village industries etc., which have an
investment of Rs. 2 lakhs in machinery and
equipment in a rural and semi urban areas. Small
scale industries in metropolitan cities should be
treated on par with other ancillary units. Thus is the
only golden means by which the living standards of
the rural masses and the urban poor can be
improved and a healthy balance brought about
between rural and urban development.

Registration Procedures of Small Scale Industry

:-
Under the Factories Act all manufacturing units
are required to register themselves with the Central
Government if they
(a) Employ more than 50 workers and use electric
power.

(b) Employ more than 100 persons but do not use

power. In addition, Small scale industries also
get registered with SIDO to benefit from
 2.105

Government incentives. In fact most of the

industries that benefit from Government
incentives are not small in terms of
employment.3

Small scale units and Ancillary units are

exempted from licensing provided that the following
condition are satisfied :
(i) The undertaking should not belong to one or the
other following categories :

(a) Undertakings covered by the section 20 (a)(c) of

the MRTP (Monopoly and restrictive Trade
Practices) Act, 1969 i.e. undertaking whose
assets of inter-connected undertakings are
not less than Rs. 200/- million.

(b) Dominant undertakings covered by

section 620 (B) of the MRTP Act.

(c) Undertaking belong to foreign

companies.

(ii) The items of manufacture involved should not

relate to one or the other following categories :

(a) Industrial listed in schedule ‘A’ of the Industrial

Policy Resolution 1956.

(b) Specific industries subject to special

Regulation.

However the entrepreneurs, in their interest,

should register their units with the directorate of
Industries Registration entitles the unit to obtain all
facilities and assistance from Government.
 2.106

References :-

1. Wilkison & P.L. Bhandarkar, Methodology &

Technique of Social Research, Himalayan
publishing House, 1984, P-94.

2. Ibid, P-95.
 2.107

Chapter – II

Development of Small Scale

Industries(SIUs) and their Finances

− Importance of small scale

Industries in India.

− Important Types of Industries.

− Small Scale Industries under

British rule.

− Small Scale Industry as

complementary to Large Scale
Industry.

− Survival of Small Scale Industry.

− Problems of Small Scale Industry

− Remedial Measures.

− Government Policy

− Emerging Dimension of Financial

needs of SIUs- small Industry
Structure & growth- Dimension of
Finance Demand From Small Industry
in the Liberalisation period – Financial
Infrastructure for Small Industry
Development – Conclusion.
 2.108

Chapter – II

Development of Small Scale

Industries(SIUs) and their Finances

1. Importance of small scale Industries in India

:
Small scale industry plays an important role in
Indian economy, by generating employment and
avoiding concentration of economic power. It is
grouped under the general heading of Village and
Small industries (VSI). In Industrial Policy Resolution
1956. It is sub-divided into eight sub-categories; viz.
Khadi, village industry, Handlooms, Sericulture,
Handicrafts, Coir Small Scale industries, and
Powerlooms. Of them, first six belong to traditional
industries and latter two, the modern technologies
and are mostly urban oriented. Traditional industries
are mostly rural and semi-urban in character.

The small scale industry is defined in terms of

capital investment. The unit having capital
investment upto Rs. 60 lakhs is said to be small scale
industrial unit. If it is ancillary unit supplying
components to the large scale industry and export-
oriented unit, the limit of capital investment is Rs. 75
lakhs. The Tiny sector industrial unit needs capital
investment upto Rs. 5 lakhs. This limit of capital
investment covers only investment in plant and
machinery. Land and factory building are excluded.
 2.109

This small scale industrial sector is important as

it generates employment next to agriculture. It has
foreign exchange earning capacity. It can be useful
for the decentralization. It is labour intensive
production unit.

Types of Small Scale Industries.

In each country, small scale industries are given
encouragement so that these flourish and necessities
are met from within the country. These industries
are of different types and they may briefly be
discussed as under.

Cottage Industries : These industries do not

need much capital or space. Usually a craftsman
works with the help of family members at their
residence or the members of the family assist the
craftsman in his work. Once the goods have been
produced, the craftsman himself manages to sell
them in the local market. In the small scale and
world, Japan and cottage industries play a very
important role in its national economy. The greatest
advantage of cottage industries is that it generates
employment. The family members engage
themselves in their industries usually in their spare
time.

Small Scale Industries : Small Scale

industries are the nerve center of a nation. These
 2.110

industries need small capital, machine and space. In

it there is great respect for oneself to be self
employed. The contacts between the management
and the employees are personal on the other hand.
Large scale industries are usually faced with
problems of employer-employee relations. Thus it is
difficult to install large scale industries due to
shortage of capital and of technical experts.

Private Sector Industries : It is kind of

industry owned by few individuals with their own
capital. They manufacture the commodities required
by local market. They want maximum profit in such
an industry. Profit or loss is that of the individual or
individuals who have set up the industry. Such
industry is known as partnership firm.

Public Sector Industry : But today many

states feel that private sector industries do not take
social needs into consideration. It is also felt that
these industries exploit their employees. Accordingly
in many states in the world have set up important
industries. The money needed in setting up such
industries is provided by the state. The profit or loss
in running such industries is borne by the society as a
whole. An industry which is exclusively run,
managed and controlled by the state is known as the
public sector industry.
 2.111

Joint Sector Industry : In such industry the

capital and control are neither exclusively in the
hands of the state nor that of the private individuals.
But in it both the state and the private individuals
combine together. In such an industry usually the
share capital and investment of the state is more
than that of the private individuals. It gives the
former a weightage or an upper hand over the
former.

In short classification of industries can be

summarized as under :

(a) Cottage industries are those in which

much capital or space is not required and
in it much of manpower is not wasted.

(b) Small scale industries need more

capital and space as compared with
cottage industries and less in comparison
to large scale industries.

(c) Large scale industries need

considerable space and money, in it quite a
good number of people are employed.

(d) An industry which is controlled by few

people is called private sector industry.

(e) Public sector industry is one which is

set up by the state for meeting social
needs of the people.

(f) An industry in which both the state as

well as private people combine together is
called joint sector industry.
 2.112

Small Scale Industries Under British Rule.

From the early days, even from the days of the
Mughal period India was famous for her
craftsmanship. As early as the 17th century Indian
cotton goods found a ready market in Europe and
South-east Asian countries. After 1707, as there was
political chaos and confusion in the country, the
British established mastery over the whole country.
The industries of 18th century may be grouped under
(i) rural industry (ii) urban industry. Villagers
worked in their cottages, which were the centers of
rural and agricultural industries. They generally
looked after local needs, which were such utility
goods as earthenware, coarse cloth, baskets, etc.
These rural industries were primitive, lacked
specialization, were traditional and not affected by
the outside world. As a contrast, urban industries
were more closely organized. They manufactured
luxury goods such as gold and silverwares, and also
silk and woolen fabrics and calico to serve wider
foreign markets. Guilds or middleman managed the
urban industries. They look after the quality of the
work and the welfare of its members.

But the supremacy of Indian handicrafts

declined because of certain technological,
economical and political developments. The
Industrial Revolution in England was one the main
cause for this decline. The application of mechanical
 2.113

power to the manufacturing Industries helped

England to produce goods cheaply and displace
Indian products in foreign markets and later on even
in the home market. The expansion of transport
facilities also helped British industry. But industrial
development in India was deliberately discouraged
to suit the British economy. India’s internal economy
was upset by British imperialism. Indian industries
decayed. It was difficult to set up new industries
suitable to the altered times, for want of knowledge
and capital on the part of the Indians. The British
Industry, specially the mills, developed while Indian
manufactures declined. India was the main market
for British manufactures, She exported only such raw
materials as cotton, silk, hides, oilseeds, jute and
dyes tuffs, which were necessary for the progress of
the Industrial Revolution in England. India, in fact,
entered upon a period of de-industrialization and
increased her dependence on agriculture. Other
cause also hampered the development of Indian
industry. The decline of the handicraft industry, too,
was nearly complete by 1888. This plunder of India
continued till the middle of the 19th century,
preventing our own industrial development.

Small Scale Industries the Indian after

Independence
The small scale industry has employment
generating capacity without adding significantly to
 2.114

cost of production. This can be achieved by

reserving the industry for the cottage and small scale
sector. The government appointed an expert
committee to identify provisions in tax laws which
had an influence on the employment of labour. The
government had adopted labour intensive method of
production.

The government intended to increase

investment in cottage, village and small scale
industries along with other supportive policies like
increased areas of reservation for these industries.
The share of industrial production contributed by the
small scale sector has to be indicated declining trend.

In India there is very wide scope for of village

industries, Total employment provided by this small
scale industry increased form 47 lakhs in 1950 to 188
lakhs in 1990-91. The total production was of the
volume of Rs. 167000 crores in 1990-91. Fifty
percent of production in manufacturing sector comes
from small scale industry. It produces new products
like electronics, plastic non-edible oil etc. 45 percent
of production in consumer electronics, 75 percent
production of instrumentation.

Small Scale Industry as complementary to

Large Scale Industry.
 2.115

Small scale industries are not dependent on

Government assistance. Most of them owe their
origin to the spurt in the demand of their products
either in the local market, the neighbouring or distant
markets, or in a combination of markets.

The initial investment of these small units

comes mainly from within. Most of small
entrepreneurs invest their own funds or borrowed
funds mainly from relatives, friends and professional
lenders, as well as from banks and Government
channels.
The small units depend more on their own fund
and borrowed funds from non-banking and non-
Government sectors because of the fact that
institutional lenders like banks and Government
financial corporations are generally reluctant to
advance money to these small units.

These small units are not in a position to offer

the guarantee required by the banking sector. Even
when small loans can be raised from Government
agencies, the procedure is so clumsy that most of the
entrepreneurs, hesitate to make use of these
facilities.

The shortage of the right type of raw materials

at standard prices has affected the entire industrial
sector. Because of their smallness and weak
 2.116

financial position, small-scale industries have to

utilize the services of middlemen to get raw
materials. Their meager resources induce small
industrialists to use cheap and inferior materials,
which naturally affects the quality of their finished
products. Moreover, the irregular supply of certain
raw materials adversely affects their production
programmes.

Technology is the base of all industries. The

growth of small scale industries in India has not been
very satisfactory despite the various provisions for its
promotion in the Industrial policy of the country. One
of the major handicaps of the small –scale sector is
the absence of the latest technology which alone can
ensure quality and a high rate of productivity. The
small industrialist, therefore, should acquire modern
technology, It help him to remain in the market. He
can use it to improve the quality of his products, that
may lower the cost of production, and reduce the
price. The customer will be benefited.

The small entrepreneur should take a lead in

research and development, which may not always be
very expensive. Even without the facility of a
sophisticated laboratory and gadgets, by using his
intellectual capabilities and utilizing the knowledge
gained by others, it is possible for him to stumble
 2.117

upon some new ideas, provided that he is

development-oriented and its capable of innovation.

Marketing is one of the obstacle blocks for small

scale industries. The many problems which they face
in marketing their products are enumerated below :
(i) Lack of standardization.

(ii) Poor designing.

(iii) Poor quality

(iv) Lack of quality control.

(v) Poor finish.

(vi) Lack of precision

(vii) Poor bargaining power.

(viii) Lack of service after sale.

(ix) Scale of production.

(x) Brand preferences.

(xi) Distribution contacts.

(xii) Lack of knowledge of marketing.

(xiii) Competition.

(xiv) Ignorance of potential markets.

(xv) Unfamiliarity with export activities

procedures and market know-how.

(xvi) Financial weakness.

 2.118

Survival of Small Scale Industry :

The survival of the small-scale sector in India
can be attributed to following reasons :

The small scale unit requires small capital

layout. At the same time, it provides more
employment than the large scale sector, where the
units are highly capital intensive and highly
mechanized. The average investment per worker in
the small scale industry is Rs. 5,800/- as against Rs.
40,000 in the large-scale sector. Second a small-
scale unit does not require highly sophisticated
technology. It can therefore be useful in backward
areas where the people have yet to be trained to
meet the challenge of sophisticated technology.

The development of the small-scale sector

facilities decentralization and the dispersal of
industrial activities, which is an imperative for a vast
and developing country like ours. The policy-makers
have laid increasing emphasis on the development of
the small-scale sector and recommended a number
of concessions to encourage such units in the
backward areas of the country. State and Central
Governments, too, have given the maximum
encouragement to this sector to promote more
employment and increase production.

Benefits of Small Scale Industry :

 2.119

The small-scale industries play a vital role in the

economic growth of developing countries. The
benefits of small scale industries are as under .

(i) Utilization of Resources : Small –scale

industries facilitate the tapping of resources which
otherwise would remain unused. These resources
include entrepreneurship, capital, labour and raw
materials. They can mobilize rural savings which
may otherwise remain idle, or which may be spent on
luxuries or channeled into non-productive ventures.

(ii) Employment generation : Since they are

fairly labour intensive, small-scale industries create
employment opportunities at a relatively low capital
cost. In India, there is the basic problem of absorbing
the surplus manpower in non-agricultural jobs and
providing additional employment opportunities for
the increasing population.

(iii) Generation of foreign exchange : Small

scale industries facilitate substantial foreign
exchange savings and earnings. A wide range of
consumer and simple producer goods, now being
imported, can be economically produced
domestically on a small-scale basis as long as
adequate facilities are provided.

(iv) Diversification of industrial structure :

Small scale industries contribute significantly to the
 2.120

strengthening of the industrial structure, for many

more articles can be produced more economically on
a small scale then on a large scale.

(v) Entrepreneurial development : Small-

scale industries serve as seedbeds of
entrepreneurship. They serve a developing economy
not only by their output of goods but by functioning
as a nursery of entrepreneurial and managerial
talent. This role of small-scale industries is of
decisive importance in any economy, where the
industrial structure consists of a few large numbers
of traditional industries such as artisans, handicrafts
and cottage industries, on the others.

Remedial Measures :
If the problem of small scale industries are
solved, they may have bright future.

Firstly, those small scale industries should be

selected for development which hold out promise of
further growth. Small scale industries producing
certain goods should be organized neatly. Such
goods cover traditional commodities, artistic
handicrafts, ivory products, jewellery. Some goods
are demanded in local markets. They need to be
produced by small scale industry.

Secondly, small scale and cottage industries

should be organized on co-operative basis. Most of
 2.121

the small entrepreneurs face the problems of finance,

inputs, marketing etc. They face these problems as
they work individually. If they are covered under
industrial co-operatives these problems will not be
there.

Thirdly, the production methods should be

modernized in small scale industries for their
development. These small industries may come
together to establish a common research institute to
develop modern methods for production. It is
necessary that the usefulness and profitability of the
use of improved methods and technology be
demonstrated to them, so that they have direct
knowledge of their successful application.

Finally, a competitiveness must be raised in

large scale and small scale industrial products. The
concessions given to small scale industries must be
linked with their performance. The infant industry
argument is favourable to promote small scale
industries in the beginning. But this need not be a
permanent feature.
****
Emerging Dimensions of Needs for Finance to
SIUs :
Achieving international competitiveness being
the prime objective of Indian industrial liberalization
since 1991, enhancing small industry
 2.122

competitiveness should be the core objective of small

industry promotion. Accordingly, Government of India
has been laying emphasis on providing financial and
technological support to SSI, among others, in the
90s. This is done through the initiation of various
measures, the most significant being the setting up
and promotion of SIDBI.

The increase in the competitiveness of small

industry will be decisively determined by the
availability and quantum of finance. The demand for
finance implicit as well as explicit by small industry
will be substantial, considering its size, structure,
growth pattern, need for its restructuring and
technology development1.

How small industry demand for finance will be

different in the next decade as compared to the
present one? What are the different dimensions of
small industry demand for finance? What are its
implications? With the current financial
infrastructure be sufficient to meet the demand? Is
there any need for a new strategy? This part of
chapter attempts to address these issues, with a
backdrop of India’s small industry structure and
growth in the 90s.

Small Industry Structure and Growth in the 90s

:
 2.123

Small industry in India is a vast heterogeneous

sector. It comprises tiny household enterprises, on
the one hand, and modern small scale factories,
using the state-of-the-art technology, on the other.
Broadly, small industry for 2000-10 can be divided
into two sub sectors 2:

(1) Organized sector which includes

registered small scale factories, and

(2) Unorganized sector which, in turn,

consists of unregistered workshops and
households industries.

The growth of small industry for 2000 – 10 must

be viewed in terms of both the sub sectors :
organized an un-organized sectors. But there is no
single data source which comprehensively covers the
entire small industry sector, particularly the
household sector on a regular basis. Therefore, the
growth of small industry is generally analyzed in
terms of statistics provided by the Small Industries
Development Organization (SIDO), but it reflects only
a part of the small industry sector.

In order to present a broader picture of small

industry growth, particularly the unorganized sector,
the statistics of National Sample Survey Organization
(NSSO) for the unorganized sector for 1989-90 and
1994-95 have been used in addition to SIDO
statistics.
 2.124

When industrialization was launched in 1991,

there were widespread apprehensions and concern
that it would adversely affect the functioning and
sustenance of small enterprises. Therefore, it was
anticipated that the growth of the sector will
experience a sharp decline.

But contrary to all apprehensions, small industry

grew unabatedly in the early 90s. The growth of
units as well as employment was impressive in terms
of SIDO statistics, which is assumed to represent
modern SSI. The unorganized sector, on the other
hand, as represented by N.S.S.O. estimates, declined
in terms of units but given in terms of employment
(Table 2.1)
 2.125

Table 2.1 : Small Industry Growth : 1989/90-

1994-95
(Lakh Nos).
Year SIDO Statistics* N.S.S.O. Estimates
Units Employme Units Employme
nt nt

1989-90 18.2 119.60 153.4 296.29

3 9
1994-95 25.7 146.56 145.0 332.03
1 4

Compound
Average 7.12 4.15 -1.13 2.3
Rate of
Growth

*It may be noted that these statistics are not

mutually exclusive and there will be overlapping, at
least, in terms of unregistered workshops/non-factory
establishments.

Source 1. Prasad, C.S. and K.C. Kaushik, “Fifty

Years of Small Scale Industries in India,”
s:
Laghu Udyog Samachar, Volumes XXI &
XXII, No. 6 to 5, Jan.-Dec.,2001,p.23.
2. N.S.S.O. : Sarvekshana, Volume XIX,
No.1, 64th Issue, July-September, 2001,
Government of India, New Delhi.
3. N.S.S.O., Unorganised Manufacturing
Sector in India, Its Size, Employment and
Some Key Estimates, N.S.S.Fifty first
round, July 2001-02, Government of
India, New Delhi, August 2001.

Within the unorganized sector, household industries

both units and employment –declined absolutely.
Whereas unregistered workshops – both units and
employment-increased significantly (by 6.75% and
 2.126

15.56% respectively.) Thus it is due to the sharper

decline of household units and significant growth of
unregistered workshop employment that unorganized
sector’s units declined whereas employment
increased (Table No.2.2)

On the whole, there appears to be a change in

the composition of India’s small industry sector in
favour of relatively modern, “larger”, units, in the
90s. This is in tune with the overall industrialization
process observed elsewhere 3.

Thus, it is in the context of India’s industrial

liberalization and changing composition of small
industry that the dimensions and needs of finance
from small industry needs to be probed.
 2.127

Table 2.2 : Growth of Unorganized Manufacturing 1989/90-1994-95

Year Household/Own Un-registered Workshops/ Total Unorganized

Account Enterprises Establishments Manufacturing
Units Employmen Units Employmen Units Employmen
t t t

1989- 1,37,2320 2,45,15,402 16,26,241 51,13,709 1,53,49,441 2,96,29,111

90 0

1994- 1,22,49,70 2,26,62,000 22,54,400 1,05,40,800 1,45,04,100 3,32,02,800

95 0

Source : 1. N.S.S.O. : Sarvekshana, Volume XIX, No.1, 64th Issue, July-September, 1995,
Government of India, New Delhi.

2. N.S.S.O., Unorganised Manufacturing Sector in India, Its Size, Employment

and Some Key Estimates, N. S. S. Fifty first round, July 1994-June1995,
Government of India, New Delhi, August 1998.
 3.1
28
Dimensions of Finance Demand from Small
Industry in the Liberalization Period4
Since quantifying the demand for capital from
small industry is an extremely difficult task in view of
ties heterogeneity, the dimensions are discussed in
the form of identifying areas/motives requiring
finance and their relative importance.

Broadly, credit demand of small industry can be

divided into two :
(1) Working Capital Demand, and
(2) Investment Demand.

While the growth of working capital demand is

directly related to the growth of small industry
sector, what is of more significance in the liberation
period is investment demand. Investment demand
can be subdivided into several categories :

1. Replacement of obsolete machinery or

Technological Up-gradation and Modernization

2. Expansion of the Unit by adding plant and

machinery to produce more

3. Quality improvement

4. New Ventures/diversification

5. Labour Saving Devices

6. Research and Development to constantly

upgrade the competitiveness of the unit.
 3.1
29
7. Environment related investments (industry
specific).

The importance of each of these will vary from

one sub-sector to another and from time to time.

However, of all, technology up-gradation and

modernization will be the most significant factor
contributing to the increase in investment demand
from small industry in the next century. Of course,
as of now, technology up gradation and
modernization needs of small industry may not be
accounting for a significant share of the total demand
of the sector for finance. Also, whatever demand for
funds for technology up-gradation may be coming
primarily from the factory sector and to some extent
from the workshop sector. And this demand is bound
to increase in the medium to long-run, a considerable
share of which will emerge from the factory sector.
In the long-run, the workshop sector’s demand is
expected to diminish significant in view of its
transformation into the factory sector. The demand
of the household sector may be only negligible, be it
in the short-run or long-run.

The second most important demand for finance

will be that of expansion. The gradual growth of
firms from small to medium and medium to large is a
significant contributor to the process of industrial
development the world over (Staley and Morse, 1965,
 3.1
30
Anderson, 1982). Though in India, till recently, small
firms did have advantages in remaining small, the
gradual shift in the emphasis of small industry policy
from protection to competitiveness (Bala
Subrahmanya, 1998) will prompt many a firm to grow
gradually to take advantage of the economies of
scale. Further, as seen in the previous section, within
the small industry sector, composition is changing in
the 90s, in the form of faster growth of larger
enterprises.

The gradual growth or expansion of enterprises

can be seen not only in the factory sector but more
importantly in workshop and household sectors as
well. This will be true in the short-run as well as
medium-run. But in the long-run, the absolute
decline of household sector and the relative decline
of workshop sector will result in a decline in the
investment demand for expansion emerging from
these sub sectors. The decline of these sub sectors
itself could be partly due to their
transformation/expansion in the organized sector and
partly due to their failure to cope up with the
competitive pressures from the organized sector.

In fact, in Korea expansion and modernization

together accounted for more than 50 per cent of the
total investment demand of small and medium
industries (SMI) for finance in the 80s, i.e., when the
 3.1
31
Korean economy was undergoing industrial
restructuring (Asian Development Bank, 1987).
In the 90s, there has been an increasing
awareness of quality, among others, due to
liberalization and globalization. As a result, many a
firm is going for ISO certification. To improve
standardization and quality in small industry,
Government has introduced subsidy to encourages
small industry units to acquire ISO certification
(Financial Express, 1996). The demand for finance
for quality improvement will be steady and
substantial in the short-run, medium-run and long-
run from the factory sector while it will not be that
significant from the workshop sector. The concept of
quality will not be crucial in the household sector.

As far as diversification is concerned, it may not

be noteworthy either in the short-run or in the
medium-run. Whereas in the long-run, a section
successful entrepreneurs of small factories may go
for diversification. But such a demand is unlikely to
come from the traditional counterparts. Similarly,
labour saving will not be a prominent issue at least,
in the short-run for the factory sector. But the
medium to long-run, some of the factory units may
go for labour-saving investments.

As of now, Research and development has not

been significant in the small industry sector, at least
 3.1
32
explicitly. However, in the future, there is a
likelihood of many small factories going for setting up
R & D facilities within their units to constantly
upgrade their competitiveness. This demand will
only be confined to the factor sector. In Korea, R & D
facilities accounted for a meager 0.2 per cent of the
total investment demand of Small and Medium
Industry (SMI) Sector in 1982 but it went up to 1 per
cent by 1986 (Asian Development Bank, 1987).

Lastly, the environment related investments will

be restricted to specific industries such as chemicals
and leather. It may be negligible now but will
increase in the future from small scale factories.

Thus, on the whole, the investment demand for

finance from small industry will increase enormously
in the coming century. A substantial part of the
demand will emanate from the factory sector,
particularly because of technology up gradation and
modernization, expansion and quality improvement.
But equally significant will be the transformation
demand of the unorganized sector- workshops and
household industrial and their subsequent entry into
the factory sector. Though R & D is not yet
significant, the competitive pressure and the urge to
grow will prompt many small factories to go for
setting up their own R & D facilities explicitly. In the
 3.1
33
process of all these, some of the small industry units
will grow into medium/large scale units.

But considering the dimensions of investment

demand for finance, it will be essential to develop an
appropriate financial infrastructure for small industry
development in the future.

Financial Infrastructure for Small Industry

Development :
The existing financial infrastructure for small
industry is presented in Table 2.3. While each of
these institutions/ banks have specific roles in terms
of meeting the need of finance of small industry,
among them it is SIDBI which has been playing a
major role in terms of meeting the diversity of
investment demands for small industry development.
However, considering the dimensions of investment
demand which is likely to emerge in the near future,
there is an absolute necessity for promoting
specialized institutions/ agencies for overall small
industry development, like in Japan and South Korea
5
.

Considering the emerging competition in the

light of industrial liberalization, technology and
quality have been identified as the two prime areas
of concern for small scale entrepreneurs (NCAER,
1993). Therefore, promoting small industry
 3.1
34
development through modernization and technology
up gradation is a major challenge to be faced by the
Policy Makers. Though SIDBI does provide financial
assistance to this, there is a need for an exclusive
financial institution to deal with the problem-small
industry Technology Finance Corporation (SITFIC).
The SITFIC can promote the development of new
technology by financing research and development,
initial commercialization of new technologies and
inventions, and upgrading of manufacturing
processes of small scale factories and workshops.

Also, there is a need for financing the expansion

and transformation of “small-size” household and
workshop enterprises. Such
expansion/transformation may emerge in the form
of :

(i) Expansion and modernization of

existing units by youngsters who have
inherited the units from their elders,

(ii) Starting of new enterprises by those

who have had prior job experience in a
similar industry, and

(iii) Technical qualified youngsters from a

family of entrepreneurs starting new units
(by using superior technology available
domestically or externally).

The major objective of such an institution (Small

Industry Development Investment Corporation) is to
 3.1
35
facilitate the expansion and transformation of “small-
size” workshops/ household enterprise into modern
factories.
 3.1
36
Table 2.3 : Financial Infrastructure of Small
Industry
Bank/Institution Area of Assistance
1 Commercial Banks- Finance-Working Capital
exclusive Small + term loans
.
Industry Branches

2 State Financial Finance-Terms loans, Soft

Corporat-ions (SFCs) loans for technology up
.
gradation and
modernization,
Rehabilitation of sick
units.

3 National Bank for Refinance facilities for

Agriculture and Rural rural artisans, village and
.
Development cottage industries.
(NABARD)

4 Regional Rural Banks Credit support to small

and co-operative Banks industry particularly
.
village industries and tiny
units.

5 National Small Supply of machinery on

Industries Corporation hire-purchase basis and
.
(NSIC) and State Small provision of technical and
Industries Development consultancy services
Corporation (SSIDCs) among others.

6 Venture Capital Funds/ Risk Capital to Small

Companies Industries
.
7 Small Industries All round support : direct
Develop-ment Bank of and indirect finance,
.
India (SIDBI) – State technology up gradation
level branches and and moderniza-tion,
Small Industry cluster quality improvement,
branches marketing support
through exhibitions, etc.
 3.1
37
Source : Reserve Bank of India : Collection from Report
of the Committee to Examine the
Adequacy of institutional Credit to the SSI
Sector and Related Aspects, Mumbai, 1992.
The scope of National Research Development
Corporation (NRDC) may be widened. Apart from
commercialization of new technologies, NRDC may
undertake equity investments and provide
managerial assistance to entrepreneurs who have no
previous industrial experience but show enough
technological innovation potential. This.

Conclusions :
Industrial liberalization has made enhancement
of competitiveness crucial for the development of
small industry. Further, the changing composition of
small industry in the 90s indicate that the sector is
undergoing transformation in the form or relatively
faster growth of the non-household manufacturing
sector. Therefore, technology up gradation and
modernization, and expansion/ transformation of
traditional small industrial unit will gain ground in the
future. These together will primarily lead to a
considerable increase in the investment demand of
small industry for finance.

Also, the trend of setting up of their own R & D

facilities will add to the increase in investment
demand. Quality improvement, diversification,
 3.1
38
labour saving and environment related investments
will be the other dimensions of investment demand6.
To meet the diversity of investment demand
requirements, it is essential to broaden the financial
infrastructure for small industry development.
Exclusive financial institutions like SIDBI, are required
such as Small Industry Technology Finance
Corporation, Small Industry Development Investment
Corporation, and Deposit Insurance and Credit
Guarantee Corporation (DICGC), in addition to
widening the scope of National Research
Development Corporation (NRDC). These steps
would enable the development of an appropriate
financial infrastructure which, in turn, would
contribute to the overall development of a
competitive small industry sector in India.
 3.1
39
References :
1. Financial Express, “Incentives for SSIs with ISO
Certificates”, News Item, February 7, 1996, PP
22-38.

2. Nagoaka, Sadao, Overview of Japanese

Industrial Technology Development, Industry
Development Division, World Bank, March 1989,
PP 47-87.

3. National Council of Applied Economic Research

(NCAER) : Structure and Promotion of Small
Scale Industries in India- Lessons for Future
Development, Project Report, December 1993,
PP 88-112.

4. Prasad, C.S. and K.C. Kaushik, “Fifty Years of

Small Scale Industries in India”, Laghu Udyog
Samachar, Vol, XXII, No.6 to 5, Jan-dec.1997,
pp.5-23.

5. Rural Planning and Credit Department, Report

of the Committee to Examine the Adequacy of
Industrial Credit to the SSI Sector and Related
Aspects, Rural Planning and Credit Department,
Reserve Bank of India, Mumbai, 1992, PP 16-44.

6. Staley, E., and R. Morse, Modern Small Industry

for Developing Countries, McGraw Hill Book
Company, New York, 1965, PP 34-96.
 3.1
40

Chapter –III

Conceptualities of Financial
Management in Proposed and
Established SIUs

− Introduction

− Finance Management

− Objectives of Financial
Management

− Importance of Financial
Management

− Contribution of Finance Function

in SIU

− Financial Planning & its need

Financial Plan by SIU

(a) Initial Financial Plan for a

new Project.

(b) Financial Plan for Expansion

of established SIU.

− Theories of Capitalization,
over/under capitalization, causes of
over capitalization of SIUs, effects of
over capitalization, causes of under
capitalization.

− Some other key issues.

 3.1
41
Chapter –III

Conceptualities Financial Management in

Proposed and Established SIUs

Introduction :
Financial management is the life blood of any
business. It is rightly termed as the science of
money. Industry or Business need finance for the
production of goods and services as well as their
distribution. The efficiency of production and
marketing operations of industrial unit is directly
influenced by the manner in which the financial
management of the enterprise is performed by the
entrepreneur. Finance Management assumes an
important role in the industrial unit and it should be
given equal importance, as with production and
marketing management. Under the systems
approach we have an integration and co-ordination of
these three vital sub-systems of industrial unit going
hand in hand and offering jointly ways and means to
accomplish the profit or survival goal of the
enterprise, along with productivity and satisfaction.
This chapter endeavours to bring out significant
variables of financial management in SIUs from
Marathwada. In order to substantial aerial
observations, an experience survey of SIUs was
conducted to collect data on practicalities of financial
management.
 3.1
42
Finance Management
Finance Management of any SIU concern to
administrative areas or set of administrative
functions in an industrial unit which relate with the
arrangement of cash and credit so that the industry
may have the means to carry out its objectives as
satisfactorily as possible." (Howard & Upton:
Introduction to Business Finance.) While going
through the exercise of financial management a
particular entrepreneur may or may not aware of
theory of financial management. It has been said
that an entrepreneur takes money to make money.
This is not true. The statement needs correction on
practical ground as “If entrepreneur has money, and
he manages it properly, he will make more money”.
This means management of finances by SIUs
entrepreneurs is necessary for enhancing money or
liquidity.

Wheeler (Business An Introductory Analysis)

defines industrial finance as "that industrial activity
which is concerned with the acquisition and
conservation of capital funds in meeting the financial
needs and overall objectives of industrial enterprise."
Capital funds refer to the money available to
industrial from the money and credit markets.
Entrepreneurs under survey viewed their financial
management by giving importance to the factors
mentioned in Table No. 3.1
 3.1
43
Table No. 3.1 : Entrepreneurs, Opinions about
the factors
influencing financial
Management

Factors influencing Level of Consideration as (in

%)
Financial Management High Medium Low Not at
all
Rational use of working 30 34 20 16
or circulating capital

Procurement of 12 16 22 50
finances at lower rate
of interest

Utilisation of finances 24 16 24 36
at appropriate time

Protection of capital or 24 16 24 36
stopping its erosion

Distribution of earnings 26 24 24 26
for meeting expenses

Utilization of profits for 26 24 22 28

business

Maintaining the 24 26 24 26
liquidity

Trading Equity 24 26 24 26

Retaining profit in 24 26 24 26
business

Source : Field Survey

Objectives of Financial Management:

 3.1
44
Funds are obtained for investment in industry.
Entrepreneur protects and conserve these funds and
make 'maximum use of such funds. There are twin
objectives, which he keeps in mind i.e. profitability
and liquidity of his funds. These, though are
conflicting, entrepreneur has to secure the balance
and optimise the utilisation his funds. The major
objectives for SIUs owners in his finance
management entails the following :

1. Procurement of money needed by industrial

unit;

2. Keeping and increasing the invested money

through sound financial policies and
programme; and

3. Generating in-come or profit for the enterprise.

4. Rational financial planning, forecasting of cash

receipts and disbursements-cash

5. Raising of funds, either equity capital or fixed

interest capital which includes both partner
share capital and loan capital (securing of
funds);

6. Optimum use and allocation of funds

(administration of funds); and

7. financial controls (budgets and other controls).

The wise and integrated approach in financial

management by an entrepreneur alone can
accomplish both productivity (maximum wealth) and
satisfaction.
 3.1
45
During the experience survey the questions were
asked about awarness of the above ( 1 to 7)
finance factors, it is found that very few can think
in logical way. They are warried to meet out
current payment in cash. Rational financial
planning, forecasting of cash, optimum use and
allocation of funds, and such other facts are
beyond the reach of many. They think for quick
receipts and their utilisation for survival of
business.
Fig.1. Finance Management Model for SIUs in
Marathwada
The Core of Industrial Unit
Finance

(Close Relations Between Sources

of Funds and Uses of Funds

Sources of Uses of Funds

Funds (Sources (Management of
of Assets) Assets

Ownership Creditor ship Management Management

Resources Resources of Circulating of Fixed
Assets Assets

1. Internal 1. Short- 1. Keeping the 1. Owning

Free Term revolving
Reserve Loans 2. Renting
s 2. Acceleratin
Depreci 2. Long- g 3. Leasing of
ation Terms Fixed
Loans 3. Use of Assets
2. External 3. Debenture consumer
Share s credit
Capital
4. Public
Deposits
 3.1
46
5. Trade
Credit

Comments :
1. Problems of raising capital funds and problems
of managing assets are the two sides of the
same coin, and that have to be faced by SIU
entrepreneur

2. While raising additional capital from different

sources there are seven aspects demanding
careful consideration by SIUs entrepreneurs :

1. cost of raising capital :

2. compulsory periodical cash payment

for the use of capital;

3. period for the use of capital;

4. control to be exercise;

5. restrictions on managerial freedom;

6. collateral security-pledge/ mortgages;

and

7. convenience in securing funds.

When asked about the awareness of these, (1 to

7 ) the large number of sampled entrepreneurs
seemed unaware of the same.

Financial Management is an applied branch of

general management of SIU. It looks after the
finance function of the SIU. It is a sub-system of the
SIU, inter-related very closely with production,
marketing and personnel functions.
 3.1
47

Finance Manager or Entrepreneur is the

custodian of SIU funds. He has to plan, organise and
control the finances of the enterprise. The chief
duties of financial manager are, however, planning
and control of finances. Planning is the key to sound
financing and control will ensure the realisation of
the above mentioned major objectives of the finance
function.

Financial manager is called upon to take three

major decisions :
1. investment decision ; e.g., capital budgeting or
financial plan :

2. financing decision or formulation of the best

financing mix or capital structure of the
enterprises; and

3. Profit sharing or using decision or profit policy.

Financial management involves the
implementation of these three major decisions.
The decisions are inter-related and Financial
manager or entrepreneur has to implement
jointly. Together, these vital decisions
determine the value of the SIU to its partners
and investors. Financial manager makes use of
analytical tools in the analysis, planning and
control of the enterprise involving funds.

Importance of Financial Management :

Prof. Soloman says that financial management
is an integral part of overall management rather than
merely a entrepreneur activity concerned with fund
raising operations. At present, a financial manager
 3.1
48
(may be owner himself) occupies a central position in
any SIU and financial management involves the
application of all managerial functions such as
planning, organising, direction, and controlling in the
finance function-sine quo non of industrialisation.
 3.1
49
Fig. 2. Profit Planning and Control by SIU
Entrepreneur

Manipulation of

Processing
Planned Planned Out
Inflows flows
(Inputs) (Output)

Co-Ordination

Enterprises Operation
People 1. Planning Decisions Product
2. Activating Decisions s
Capital 3. Control Actions Service
4. Follow - Up s
Materia Social
l

(Costs) (Revenues)
Profit

(Return on Investment)
Note : Entrepreneur of SIU can manipulate
1. controllable variables and plan for the non-
controllable variables to achieve long range
objective, viz., Return on investment.

2. Controllable variables for any SIU

entrepreneurs are, e.g., sources and amount
of capital operating costs, selling and
advertising budgets, cost of research,
number of employees, etc. While Non-
controllable variables are industry sales,
competition, product lines, national income,
population, Govt. Policy, taxes etc.
 3.1
50
Any entrepreneur of SIU has to observe the
financial planning and policies with following specific
consideration:

1. Fair return on capital invested in business.

2. plough back of profits for growth and expansion.

3. Planning, directing and controlling the use of

financial resources in order to ensure optimum
efficiency of operations and establish cordial
relations with financiers, suppliers workers and
members.

4. Co-ordination of operations of different areas of

SIU.

5. Control through appropriate measures to secure

financial discipline in the use of available
financial resources.

A SIU enterprise as a system has a dynamic flow

of funds represented by the funds-flow cycle.
Entrepreneur is in charge of efficient planning and
control of the cycle of flow of funds-inflow and
outflow of funds. There are three responsibilities of
the SIU entrepreneur in connection with direction of
the flow of funds as per plan :

1. The appropriate magnitude or volume of funds

needed for efficient operations (capitalisation);

2. The wise allocation of financial resources to

particular assets - fixed and current;

3. The fund raising activities-short-term and long-

term liabilities and their composition.
 3.1
51

Note The second and the third function are

: expected to maximise wealth of the SIU
without, of course, sacrificing other interests
e.g., employees, consumers and the
community. Minimising cost of production by
adding to pollution (social cost) is naturally
undesirable.

Contribution of Finance in SIU :

There is an unavoidable time-interval that
envisaged by SIU between planning a product, its
production and completion of its sale. Hence the SIU
entrepreneur while managing finance has to take
care the following factors :-
1. Discovering ideas for a product planning and
development with the help of marketing
research.

2. Procuring finance - cash and /or credit.

3. Acquiring fixed assets-bought/hired.

4. Acquiring current assets, e.g., raw materials,

fuel, supplies, etc. on credit

5. Ensuring the release of goods to the market as

per marketing plans

6. Arranging the flow of material, (from the raw

state to till the disposal of finished goods,)

7. Arranging physical and financial controls such

as production control, inventory control, cost
accounting and so on.

8. Arranging the finances for production,

marketing, physical distribution, personnel,
receipt of payments.
 3.1
52

9. Throughout the whole period of funds-flow cycle

or manufacturing cycle, Arranging the payment
to suppliers and employees.

10. Arranging the payment to partners, and for

taxes.

During the survey of SIU entrepreneurs it is

found that most of the entrepreneurs are unaware of
all the factors about finance as discussed
theoretically. However in practise, the entrepreneur
gets acquitance with finance function as per need &
utility. Such situation may lead funds locks up and
cash shortage. The theoretically Funds flow within
the SIU may be visualized with the help of Fig.3.
 3.1
53
Fig. 3. Funds Flow within the SIU
2
Work In
Progres
s

Finished
Goods 3
Inventor
y
Labour
Expenses

Accrued 1
Selling and Wages Net Raw
Administrativ And Other Fixed Material
e Expenses Expenses Asset s
s

Payment of
Credit wages and Purchase Sales
Sales Expenses of Asset of
Asset
Trade
Credit
Accounts Bad Debt Bills
Payable
Receivabl Loss
es

Cash Collections
Sales Cash
Fun Payment
4
d For
Purchase

Investment Payment of LC:N

Dividend Loan
s

Shareholde Debi
rs t

(1), (2) (3) and (4) represent circulating assets.

 3.1
54
Input-Raw materials, work-in-progress, labour, and net fixed assets :
Output-Finished goods ultimately paid for in cash
Sales price minus all cost = profit
In short, funds-flow cycle as describes the
management of fixed capital and working capital by SIU
entrepreneur.(see fig.3.)
 3.1
55
Financial Planning :
"Planning is a managerial function involving
from among alternatives, selection of the enterprise
objectives, policies, procedures and programmes"
(Kooatz and O'Donnell). This definition is further
supported by W.H. Newman's statement that
"planning is deciding in advance what is to be done;
that is, a plan is a projected course of action."

Financial plan provides a vivid picture of inflow

and outflow of money-sources of funds and uses of
funds. It deals naturally with the function of finance
or the financial system of SIU. It includes the
determination of the SIU's goals, policies and
procedures in the financial sphere.

Needs of Financial Planning in SIU :

(1) Financial planning eliminates waste of
resources resulting from complex nature of modern
business. This is done by providing policies and
procedures which bring out a closer co-ordination
between the various functional areas of SIU such as
production and marketing.

(2) Plans are based on accurate forecasts of

future trends. Intelligent forecasting and planning
prepare the SIU to face the future and many
unprofitable ventures can be eliminated. Objectives,
 3.1
56
policies and procedures are based on the forecasts,
e.g., sales or demand forecasts.

(3) Detailed financial plan can be

communicated to all managers at different levels of
SIU management so that an entrepreneur can
establish integrated approach to financial policies,
procedures and programmes to realise prescribed
common goals.

A SIU financial plan is expected :

(1) To lay down short-term and long-term
financial objectives. Long-term
objective is, of course, to increase the
productivity of other factors of
production, e.g., men, machines and
materials. The short-term financial
objective is naturally survival or
financial liquidity.

(2) To formulate financial policies. They act as

guides to all actions dealing with purchasing,
administrating and disbursing of the funds of
business enterprises. Financial policies of SIU
may be regarding :

(i) use of capital,

(ii) source of capital,
(iii) protection of capital,
(iv) distribution of earnings-problems dealing
with cash flow.

(3) Formulation of financial procedures.

 3.1
57
There are a series of steps (each step is a
method) to execute the financial policies. Financial
policies and procedures by SIU simplify
administration, assure better co-ordination with the
finance needs and also with other functional areas.
They improve SIU performance. SIU can have
consistent actions. SIU can also have better control
and higher work efficiency. SIU Financial plan must
provide flexibility. An economy is dynamic Changing
conditions may insist on the revision of SIU
objectives, policies and procedures. Flexible financial
plans of SIU will not allow its our market share to go
down. On the other hand, it can maintain or even
improve, its market standing with reasonably elastic
financial plans. Such planning in finance will not
create serious Financial difficulties.

The field survey observation & brings out the

fact that in majority of SIUs from marathwada that
there was no financial planning and its absence has
given to many problems. The following observation
will make the fact clear:-
(i) There was a waste of resources due to ever
changing economy and Govt. policy.

(ii) The non-co-ordination of various functional

areas created over lopping and inadequacy of
funds.

(iii) Funds for production and funds for marketing

were never in co-ordination with funds realized
after marketing.
 3.1
58

(iv) There was absence of communication of

financial matters to different levels of
supervisors & managers and which resulted in
mis-management/non-coordination.

(v) There was no understanding of short Term &

long term financial objectives.

(vi) Facts pertaining to Rational use of Capital,

protection of capital, smooth cash flow, were
found overlooked and the same resulted into
funds shortages.

(vii) Financial matters were kept secret by owner

and the same could be obstacle in settlement
after demise of owner.

(viii) There was no proper financial procedure &

forecasting.

Financial Plan by SIU:

Let us now concentrate on the initial financial
plan to secure capital for a new SIU project by
entrepreneur as well as subsequent financial plan to
obtain further capital for SIU expansion. The actual
financial needs of a SIU regardless of its size
normally involve two type of capital : (1) Fixed
capital, and (2) Working capital.

Fixed capital, is money invested in fixed assets

to be used by SIU over a long period of time. It is the
core of the SIU business, the main bearing round
which the circulating capital revolves. It is necessary
for SIU to acquire fixed assets such as land, building,
 3.1
59
machinery and equipment, furniture and fixtures, etc.
These permanent assets constitute the total
permanent capital structure and fixed capital is of a
long-term nature more or less sunk permanently in
the SIU business. It is not returnable to the
entrepreneur or investors on demand.
 3.1
60
Working capital for SIU is needed to invest in the
stock of raw materials, stores and finished products,
loose tools, spare parts and marketable securities
and in cash. It help to SIU for granting credit to
customers to meet day-to-day administrative and
other expenses such as wages and salaries, repairs
and renewals, etc. Working capital becomes part of
the funds used up and replaced in the normal
operating cycle of SIU business. Hence, it is also
called circulating capital.

The financial plan to provide the initial capital is

usually prepared by the SIU promoters on the basis
of the initial financial requirements of a new venture.
It determines both, capitalisation as well as capital
structure of the SIU. In the case of a new SIU, a
capital plan is based on the estimates prepared by
the entrepreneur or experts relating to the various
costs at the time of launching the SIU business.

A financial plan for a new project of SIU covers

the following expenses :
(1) Cost of fixed assets.

(2) Cost of working capital requirements to run the

business.

(3) Promotion expenses.

(4) Organisation expenses.

 3.1
61
(5) Cost of establishing the SIU business from the
time company being operations until its income
is sufficient to meet the expenses.

(6) Cost of raising initial capital such as brokerage,

underwriting commission, cost of printing,
advertising and issue of prospects, etc.,

(7) Cost of goodwill patents, etc.

(8) Provision for contingencies.

When enquires made with SIUs entrepreneurs

with regard to above almost more than two fifth
entrepreneurs did not have knowledge of these( 1 to
8).

Over look to Essentials of Sound Capital Plan by SIU

Entrepreneurs:
The field survey brings out the fact that the
majority number of SIU entrepreneurs unaware of
essentials of sound capital plan. The observations
pertain to that is categorically discussed as ahead :-

1. Estimates of Financial Needs : SIU

Promoters by & large do not have accurate estimates
of financial needs of various components of the
capital plan & the estimates of capital expenditure
for launching an enterprise. Their Capital plan did
not provide adequate fixed capital as well as working
capital. They made their capital plan by adopting
trial & error method. The same was happened to be
obstacled to smooth cash flow.
 3.1
62

2. Flexibility : SIU entrepreneurs do not keep

financial/ flexibility or elasticity. They could not
provide adequate amount for contingencies to meet
unforeseen events boldly. In the initial capital plan, a
separate provision is required for contingencies,
whereas in the capital plan for expansion there is a
need to provide for liberal depreciation, liberal
ploughing back of capital, secret reserves,
conservative dividend policy and so on. Under
inflationary conditions, SIU entrepreneur have to take
into consideration of the rising costs and provide for
such unforeseen additional costs. But same was not
attempted by many SIUs.

3. Optimum Use of Funds : The financial

manager or entrepreneur of SIU of the enterprise
does not evolve necessary measures to secure
intensive and optimum utilisation of available
financial resources and he failed to ensure scientific
management of fixed assets as well as working
capital. Only few wise SIU entrepreneurs ensured
maximum profitability. In the capital plan of a SIU,
there was no proper balance between fixed capital
and working capital as well as between owned capital
and borrowed capital. Under normal circumstances
owned capital should be at least 50 to 60 per cent of
the total capital requirements indicated by the
 3.1
63
capital plan. However, the same was absent in
majority number of SIUs.

4. Liquidity : The capital plan of many SIUs, did

not provide necessary financial liquidity and this is
possible only when SIUs have adequate net working
capital which is represented usually by own share
capital, reserves and long-term loans. In this regard
there is no judicious compromise between
profitability and liquidity and liquidity is found to be
sacrificed for the sake of temporary profitability. The
cardinal principle for successful financial planning
dictates that the capital be obtained as cheaply as
possible, but consistent with safety. This fact is not
understood by SIUs entrepreneurs.

5. Mode of Finance : The pattern of capital

structure is also to be determined under SIU capital
plan. In Marathwada, SIU entrepreneur have only
one class of security such as equity or own shares.
He should have two classes of securities such as
equity shares and partner shares. But the same is
absent in majority number of SIU. SIUs does not
keep a combination of share capital and loan range
capital in the capital structure.

Normal proportion in the initial capital plan is :

equity share capital 60 per cent, partner share
 3.1
64
capital 20 per cent, loan capital for a new SIU 20 per
cent.

Normal proportion in the capital structure of an

established business enterprise while preparing
capital plan for growth or expansion is : equity share
capital 30 per cent, free reserves 20 per cent,
partner share capital 20 per cent, bonds, and loans
30 per cent.

An established concern should have normally 50

per cent risk capital and 50 per cent renter capital on
which a corporation is required to pay fixed interest
or fixed dividend.

All these norms are not found absent in almost

all the SIUs.

6. Simplicity : A good capital plan should

preferably provide simple financial structure so that it
is easy to manage and one may not have
unnecessary varieties in the types of securities. This
is principle is not observed by SIUs entrepreneurs.
Their finances are intermingled with future realization
of debtors or hinged on credit.

7. Planning Foresight : The SIU entrepreneurs

do not have vision and foresight for scope and scale
of operations of a business. Similarly, they do not
have intelligent forecasting of various contingencies
 3.1
65
and essential liquidity which is usually reflected in
the current ratio, i.e., ratio between current assets
and current liabilities; Normally current ratio is 2:1

8. External Influences : External influences

have frequently given less or no recognition while
preparing the capital plan either for a new SIU or for
an existing SIU desires further expansion. These
external influences are :
(a) Money market conditions - These determine the
choice or type of SIU finance needs,

(b) State of trade - business cycle.

(c) Attitude of investment market - Sometimes

investors may be preferring debentures;
sometimes investors may be preferring equity
shares or preference shares.

(d) Government taxation policy,

(e) General level of interest rates- when interest

rates are rising, loan finance is undesirable
because it involves heavy burden of interest
charges.

In the initial capital plan greater emphasis of

SIUs is on ownership capital, while in the subsequent
capital plan they (SIUs) have greater emphasis on
borrowed capital, if SIU is well-established having
stable earnings and assured profits, such SIU may
have cheaper loan capital and it can resort to 'the
trading on the equity' as much as possible. But a
new SIU cannot think of relying on the loan capital to
 3.1
66
a greater extent. By and large SIU entrepreneur has
less reliance on owned capital and more on borrowed
capital. They accustom to trade on equity.

In devising the capital structure by the proposed

SIU; the following shortfalls are noticed :-

(i) Inflated estimation capital expenditure without

caring business objectives.

(ii) No Provision for meeting un-for seen liabilities,

expansion, depreciation, conservative liberal
ploughing back of profit, for bad debts, secret
reserve, working capital etc.

(iii) In appropriate Balance between fixed & Working

Capital as well as between owned capital &
borrowed capital.

(iv) Overlook to liquidity of capital with procurement

capital at reasonable cost along with safety.

(v) Keeping abnormal proportion in capital plan

(vi) Maintenance of complicated financial structure

(vii) Keeping ratio between current Assets & Current

Liabilities frequently more than 2:1.

(viii) Unawareness of External Environment like state

of trade, Attitude of Investment market, General
level of Interest Rates, Govt taxation, Govt.
Policy & so on.

Looking to the defective capital plans of new

SIUs, the following model plan is suggested
 3.1
67
A Model Capital Plan of a New SIUProject (Rs. 1
Crore, Initial Capital)

Capital Outlay Sources of Finance

(Uses) (Rupees in (Rupees in Lakhs)
Lakhs)

1 Fixed Capital 40 1. Subscription from 25

. Marathwadian
Promoters, their

2 Working Capital 20 connections and

foreign
Collaborators, if any

3 Cost of Promotion 10 2. Local financiers in 40

. and Organisation the Open

4 Cost of 10 3. Bank Loans 10

. Establishing a Including Short and
Going Concern Medium-Term
Loans

5 Cost of Raising 10 4. Long-term Loans 25

. Capital form the from Financial
open Market Institutions for the
Balance
6 Provision for 10
. Contin- gencies

Total Capital 100 Total Resources. 100

Outlay

Source : MDC Guidelines on ‘starting a new enterprise, PP

33-35,
1999.
 4.1
68

Estimated Capital outlay of New SIU

Provision for Contin

gencies
10%

Cost of Raising
Capital form the
0%
open Market
Fixed Capital
10%
40%
Cost of Establishing
a Going Concern
10%

Cost of Promotion Working Capital

and Organisation 20%

10%

Estimated Sources of Finance of New SIU

Subscription from
Marathwadian
Promoters, their
Long-term Loans connections and
from Financial foreign
Institutions for the Collaborators, if
Balance any
25% 25%

Bank Loans
Including Short and
Medium-Term
Loan Local financiers in
10% the Open
40%
 4.1
69
(b) Financial Plan for Expansion of Established
SIU (Further Capital for Growth) :
An established SIU has two types of resources to
provide the growth finance :
(i) Internal Resources :
(1) Depreciation account for 30 per cent growth
finance: (2) Reserves and surplus accounting for 20
per cent growth finance. Thus, a SIU from
Marathwada can finance expansion and growth from
the resources generated from within in the form of
depreciation and retained profits reinvested in the
business to the extent of 50 per cent of the growth
finance. Internal resources provide the SIU
independence from the money market and capital
market institutions and the normal or steady growth
of any SIU can be easily financed from the internal
resources. This is considered as a sound principle of
financial management.

(ii) External Resources : An established SIU in

Marathwada is capable of taking full advantages of
trading on the owned capital or equity. It is wise to
borrow, if the borrowed funds can earn more than
those funds cost by way of interest. To borrow at 15
p.c. per annum to finance SIU which has prospects of
30 per cent earning, is a profitable proposition. The
difference between the two, is 15 per cent, which
may be enjoyed by the entrepreneur and may get
rising incentives. Just how much trading on the own
 4.1
70
capital is proper depends upon what constitutes a
proper capital structure. When, for example, is the
proportion of debt to equality too high ? The answer
depends mainly on the income on SIU investment. If,
for 12 per cent rate on borrowed fund, SIU has
substituted 12 per cent borrowings from, friends
shares, the effect on the own capital’s return would
be the same, except there would be less risk. If
entrepreneur feels that he can easily earn more on
the loan capital than it pays out in the form of fixed
interest on debt, a entrepreneur can probably borrow
and continue to do so. However, the entrepreneur
has to ensure a reasonable debt, he can probably
borrow and continue to do so. But, he has to ensure
a reasonable debt-equity ratio to secure the financial
stability and solvency of the SIU. The normal equity-
debt ratio is 3:2. Under owned capital equity share
capital of entrepreneur and free reserves are
included.

Established SIU can easily secure borrowed

funds or debenture capital by public issue.
Debentures constitute the best source of additional
capital because the SIU can offer assets for
mortgage, it has stable earning power and growth
prospects, it has also a good market reputation. The
SIU can also secure necessary long-term loans from
the special institutions. Thus, the SIU has two
alternatives to raise loan capital : (1) Debenture
 4.1
71
issue. (2) Long-term loans. It is however, observed
that in Marathwada there are almost rare incidences
of raising loan capital through debentures but long
term loans are frequently obtained from the financing
institutions.

When the needs of growth capital be

considerable, say, Rs. 1 crore., a SIU has the
following sources :

1. Depreciation and free reserves,

2. loans from banks and finance corporations,

3. further collection from partners and

4. issue of convertible debentures partly as

rights issue to members and partly by
prospectus. Let us assume that a SIU
needs Rs. 100 crores. It can raise Rs.
37.50 Lakhs through free reserves and
depreciation. it may have loans from
banks and finance corporations to the
extent of Rs. 12.50 Lakhs. It may have Rs.
50 Lakhs. as convertible debenture issue
as Rights Issue to members. The model
Financial Plan for growth may be as
follows:-
 4.1
72

Capital Outlay (Uses) Sources of Finance

(Rupees in Lakhs) (Rupees in Lakhs)

1 Additional Fixed 62.5 Depreciation 18.75

. Capital 0

2 Additional Working 25 Free Receives 18.75

. Capital Loans from Banks
&

3 Cost of Raising 7.50 Financial 12.50

. Capital Institutions

4 Contingency 05 Convertible (7 50.00

. Provision year) Debenture
issue
(Right Issue)

Total Capital 100 Total Resources. 100

Outlay

Note :
1. The present equity share capital is Rs.
30 Lakhs.
2. The free reserves are Rs. 30 Lakhs.
3. There is no loan capital and proposed
loan capital for further expansion is Rs. 05
lakhs (convertible debentures) and Rs.
12.50 M. from banks and Finance
Corporations.
4. Debt : Equity ratio of 2:1 is permitted.

Source : This model is derived after consulting

experts and
SIU entrepreneurs.

(iii) Capitalisation
A.S. Dewing says, "the term capitalisation or the
valuation of capital includes the capital stock and
 4.1
73
debt." Attention is focused on the quantitative
aspect only. In this sense, it includes ownership
capital and the borrowed capital as represented by
long-term indebtedness. Surplus in the business in
the form of free reserves is also considered as an
integral and expected part of capitalisation.

There are ( for SIU ) three ingredients of

capitalisation:-
(1) The owned.

(2) The value of debt outstanding.

(3) The value of surpluses-capital or

earned surpluses not meant for
distribution.

Frequently the term capitalisation is now taken

as synonymous with capital structure or financial
plan and has quantitative as well as qualitative
connotations.

In the formulation of a financial plan of a SIU,

entrepreneurs has to make the decision relating to
the total amount of securities to be created.
Capitalisation indicates the total par value of the
outstanding amount of securities in the form of
owned capital, debenture capital and the face value
of other long-term obligations. Short-term loans or
temporary bank loans are usually excluded from the
capitalisation.
 4.1
74
Capitalisation = Ownership capital + long-term
loan capital or
= Share Capital + free reserves +
debenture
capital + long-term loans
Theories of Capitalisation :
There are two concepts of capitalisation :
1. Cost Theory of Capitalisation : The value of a
SIU is determined by the sum-total of various
estimated costs. In financing SIU, funds must be
provided for the following purposes. (a) To finance
acquiring of fixed assets, i.e., investment of plant and
equipment. (b) To supply working capital i.e.,
investment in liquid or current assets. (c) To defray
the costs of organising. (d) To cover the cost of
establishing the business.

The cost concept is usually favoured as a basis

of capitalisation of a newly started concern. The
cost concept is not satisfactory in the case of a
growing concern. The principal objection to the cost
concept is that capitalisation amount will not change
with the changes of earning power of the SIU. hence,
it cannot reveal the true worth of the SIU. The true
worth of SIU is judged by its earning power rather
than from the capital investment, e.g., some assets
may be obsolete and the earning power may fall, but
such a fall will not reduce the book value of the
investment made in the SIU.
 4.1
75
2. Earning Theory of Capitalisation : The true
value of the SIU depends upon two factors :-
(a) The earning power or capacity; and
(b) Earnings every year.
Capitalisation of a SIU, i.e, the determination of
the amount of securities to be created is not arrived
at on the basis of cost concept. Capitalisation should
be based on the earning power. In other words, the
process of capitalisation begins with an estimate of
the future earnings of the SIU. No one puts money
into a SIU without expecting return on it in the shape
of dividend or interest. The value of a SIU is
determined by its ability to earn return on capital
invested. The higher the rate and regularity of its
earnings, the greater the value of SIU and the greater
the amount of capital which may be safely invested
in it. Another way of saying the same thing is that a
SIU is worth that amount upon which a fair return
may be realised.

Over/Under-Capitalisation :
Over-capitalisation : When a SIU is consistently
(regularly)unable to earn the prevailing rate of return
on its outstanding securities (considering the earning
of similar companies in the same industry and the
same degree of risks involved), it is said to be over-
capitalised.
 4.1
76
Under-capitalisation : A company is under-
capitalised when its actual capitalisation (i.e. total
long-term resources) is lower than its proper capital
as warranted by its earning capacity.

Causes of Over-Capitalisation of SIUs :

1. Promotion with inflated assets. Book value of
SIU more than its real value.

2. High promotion expenses, high remuneration of

promoters; high price of goodwill etc.

3. Floatation of SIU in inflationary period and when

boom subsides, earnings fall, leading to over
capitalisation.

4. Inadequate owned capital, defective financial

plan, chooser of capital becomes beggar of
capital, top heavy borrowing; high interest
charges, shareholders starved due to falling
dividends, falling market value of business.

5. Defective depreciation policy, affecting

adversely company's efficiency and leading to
low profits - Depreciated assets.

6. Manipulation of accounts to inflate profits and

declare liberal dividends and no retained profits.

7. High taxation policy.

Effects of Over-Capitalisation :
(A) Effects on the SIU :
1. Low dividend rates,

2. Low market price of SIU and loss of investors

confidence.
 4.1
77
3. Manipulation of accounts to show prosperity on
paper.

4. Inadequate provision for depreciation,

replacement and reserves.

(B) Effects on the Partners

(1) Depreciation in business value (2) Low,
uncertain and irregular income. (3) Low loan value
of shares (4) Unhealthy speculation and exploitation
of real partners.
(C) Effects on Society :
When a SIU is over-capitalised, it tries to increase the
prices and reduce the quality of products. But to
adopt both these practices, SIU has to face one great
difficulty and there is keen competition in the
market. There is fear that sooner or later the SIU
may have to face liquidation. SIU may lose on both
fronts due to lower dividends on lower business value
in the market. Not only are the creditors of the SIU
adversely affected but the workers also lose their
employment. A bad ethical atmosphere is created in
the society and the whole economy may suffer from
depressing effect. An over-capitalised SIU likes to
effect economy by wage cuts and it may have to face
strikes and labour unrest. Over-capitalisation also
leads to wastage and mis-application of scarce
financial resources of the society. The cure for an
over-capitalised SIU is reorganisation of capital
structure, if necessary, with reduction of business
 4.1
78
capital. Otherwise, sooner or later, the SIU may have
to face insolvency and liquidation.
 4.1
79
Remedies for Over-Capitalisation :
(1) Redemption or repayment of loans.
(2) Reduction in the rate of interest on loans.
(3) Reduction in the rate of profit sharing.
(4) Reduction in business capital.

All these steps may be a part of re-organisation

of capital to restore balance to its capital structure.

Causes of Under-Capitalisation of SIU :

(1) Under-estimation of future earnings by accident.

(2) SIU floated in recession find themselves under-

capitalised during prosperity because they have
unexpected increase in earnings.

(3) Conservative dividend policy adopted by the

entrepreneur providing liberal depreciation,
liberal retained profits and emphasis on self-
financing for growth-Appreciated assets.

(4) Latest process of production and techniques,

rationalisation, scientific management, finance
out of past savings, maximisation of productivity
and efficiency, increase in profits.

(5) Built-up secret reserves.

Effects of Under-capitalisation :
(1) Higher dividends on owned capital.

(2) High prices of business.

(3) Cut-throat competition due to new

rivals.

(4) Liberal depreciation provision.

 4.1
80
(5) Demand for higher wage and bonus
by employees.

(6) Demand for lower prices by

consumers.

Remedies of Under-capitalisation : (1)

Capitalisation of reserves and issue of bonus shares.
(2) Sub-division of share capital. (3) Increase of
issued capital.

Capital Structure
According to Gerstenberg capital structure
*[*The term capitalisation is synonymous with capital
structure or financial plan. Hence, requisites, of
sound financial plan or capital plan are equally
applicable to sound capital structure.] or financial
structure of a SIU is the make-up or form or
composition of capitalisation i.e., the type of
securities to be created and the relative proportion of
each type of securities in the total capitalisation.

The ratio between the various types of

securities in total capitalisation is called capital
gearing-the ratio of fixed income securities
(Preference Shares and Debentures Loans) to the
total capital. Capital gearing is high if the proportion
of non-equity capital is relatively high. Capital
gearing is low if the ratio of non-equity capital to
equity capital is relatively low.
 4.1
81
Under low gearing of financial leverage SIU has
greater proportion of equity capital. under high
gearing or financial leverage SIU has relatively
smaller proportion of equity capital and larger
proportion of fixed-income securities.
(Rs. In lakhs)
Sources of A. SIU . B. SIU.
Finance Low gear High gear

1. Equity share Rs. 350. Rs. 200.

capital

2. Preference share Rs. 050. Rs. 100.

capital

3. Borrowed capital Rs. 100. Rs. 200.

500 500.

Source : A model is visualized with the help of expert.

Most of the SIUs in Marathwada prefer or adopt

high geared capital structure to meet inadequacies of
funds.

Some Other Key Issues :

Mode of Finance :
While devising a sound capital structure, SIU
has to lay more emphasis on the pattern of the
capital structure, i.e., the relative importance to be
given to the ownership resources or creditorship
resources. In general the determinants of mode of
finance are :
 4.1
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(1) the volume of earning expected.
(2) Stability of earnings.
(3) Predictability of earnings.

When is Loan Finance (or Debenture Capital)

Desirable?
If anticipated earnings are well above interest
and sinking fund needs, the earnings are stable,
certain and regular and the success of the SIU is
assured, the SIU can certainly resort to loan or bond
finance. These conditions are usually specified for an
established SIU and hence, in the capital structure of
SIU, the proportion of borrowed capital to owned
capital may be substantial; but for a new SIU bond or
debenture capital is undesirable because earnings
are irregular or uncertain, goodwill is absent and
borrowing may involve considerable financial burden.
A new SIU is unable to pledge or mortgage its assets
right from the beginning. Bonds are preferred when
future earnings are certain, stable and regular.

When is Partner Share Capital Welcome in the

Capital Structure ?
If the success of the enterprise is reasonably
assured and certainty of earnings is not too high, a
SIU can secure partner share capital. Partner shares
are suitable when the earnings are irregular but on
an average SIU has a fair margin over the partner
dividends. Returnable or Redeemable partner share
 4.1
83
capital is always welcome in the capital structure of a
SIU and it is considered better than that of debenture
capital, because there is no problem of mortgage of
assets and payment of dividends is not compulsory.
Returnable shares are considered good substitutes of
borrowed capital from financing Institution.

When is Equity or Owned Share Capital

Desirable ?
If earnings of the SIU are highly unpredictable,
irregular, uncertain and fluctuating, equity or owned
share capital is always desirable. For a speculative
business, risk of loss is considerable, SIU has no
immediate prospects of profitability. Hence, such SIU
can raise only owned share capital. An equity or
owned share of a prosperous SIU is better than a
partner share of a doubtful SIU or a borrowing from
money lender. Hence, in the final analysis much
depends upon the financial position of a SIU and its
earning power. Bonds and partner shares have a
greater appeal to the conservative investors and
institutional investors like banks, insurance company,
provident funds, etc., who may be legally debarred
from going in for equity shares, Bonds and partner
shares have also a special appeal in a deflationary
period. If investors demand safety, regularity and
security of income and capital, bonds and partner
shares are suitable, in our capital structure. Partner
shares depend upon financial position, and earning
 4.1
84
power of the SIU. Bonds and loan capital depend
upon financial position, earning power and security
offered by the SIU.

Owned or Equity shares are usually good during

an inflationary or prosperous period because SIU has
rising dividends and rising market value of business.
Equity or owned shares alone are entitled to
participate in the prosperity of SIU and owned shares
of a growing SIU are always viewed prestigious in the
market at a considerable premium. Thus, the choice
of investment depends upon the volume, stability
and predictability of earnings and the securities on
the basis of these three criteria will have to evolve a
suitable proportion of variable income securities
(equity shares) and fixed income securities
(debentures and partner shares).

For a new SIU it must have 70 per cent owned

capital, and the balance, i.e., 30 per cent, may be in
the form of partner share capital and loan capital. In
the case of an established SIU, demanding growth
capital for further expansion, we have risk capital,
i.e., equity share capital plus free reserves near
about 50 per cent and the renter capital, i.e., partner
shares, debentures and loans about 50 per cent of
the total capital. The pattern of capital structure is
usually the optimum combination of owned capital
and loan capital.
 4.1
85

Determinants of Capital Structure in SIU :

Factors determining the capital structure or
capital gearing or the proportion of securities or the
factors affecting the composition of capitalisation in
SIU are as follows -

1. Trading on the Owned Capital :- Advantage

of trading on the owned can be taken by an
established SIU having stable earning power, assured
cash inflow, large capital assets and high goodwill. If
these conditions are satisfied, an existing SIU can
secure growth capital by resorting to trading on the
equity and in the capital structure of such a SIU shall
have greater and greater proportion of borrowed
capital. Of course the equity debt ratio should be 1:2
and the earning interest ratio should be 2:1 to ensure
financial stability and liquidity. When net fixed
assets exceed net worth, SIU must have additional
equity capital.

2. Nature of Enterprise : A manufacturing SIU

has higher degree or risk of failure and competition
to be faced from the rivals. It has to rely more on
owned capital. A public utility SIU is relatively stable
and free from competition. It can rely more on the
renter capital i.e., partner shares or borrowed capital.

3. Object of Finance : If is a productive purpose

and additional liability can be honoured out of
 4.1
86
enhanced earnings, borrowed funds will be welcome.
On the other hand if it is non-productive object, e.g.,
betterment expenditure, share issue or retained
earnings should be preferred.

4. Control in Management : Distribution of

voting control is another important factor while
devising a capital structure of a SIU. The promoters
usually want to retain effective control over affairs of
the new SIU. Therefore, a part of the capital issue
may be in the form of partner shares which are non-
voting shares. Existing members of SIU may also
desire to retain control of the SIU while planning for
further expansion. Therefore, partner shares, bonds
and loans and self-financing assume considerable
importance as sources of finance for expansion,
because these are very useful to avoid sharing of
control. If the existing SIU wants to bring about
further issue to present members, the SIU has to
offer further shares to the present members on a pro
rata basis, primarily to maintain the distribution of
voting control same even after a further issue of
capital.

5. Attitude of the Investment Market. If

investors demand preference shares, SIU may issue
the partner share capital. The capital structure will
have to be tailored to the moods and attitudes of
investors prevailing at the time of issue of capital.
 4.1
87
Different types of securities have different selling
points and satisfy different demands of investors.

6. General Level of Interest Rates : If the

interest rates are too high for instance under the
current economic situation, borrowing is costly and
redeemable partners shares may also be costly.
Under such conditions, SIU has to think of issuing
convertible partner shares or convertible loans with
lower dividend or interest rates. SIU may also
increase equity shares. Under tight money market
condition self-financing for growth is always
preferable. As a last resort, SIU may have to
postpone its plans of expansion.

7. Business Cycle : In the boom period of

prosperity, SIU has owned capital in capital structure
while during recession or depression, SIU has to give
preference to the borrowings. The state of the
market affects not only the choice of the type of
security to be issued, but also the interest rate on
borrowings, the fixed dividend rate on partner
shares, and the price that will be secured by owned
capital.

8. Government Taxation Policy : Interest is

considered as deductible expenditure in the income
tax law. In order to take advantage of this
concession, corporations are tempted to resort to
 4.1
88
borrowing instead of share capital. Dividends are not
considered deductible expenses and they are paid
out of profits after tax.

9. Period of Finance : For short-term as well as

for medium term finance, bank loan is the best
source of finance. But for long-term or permanent
finance the SIU should rely either on retained profits
ploughed back into the business or it can issue
redeemable partner shares or debentures. Owned
share capital can be enhanced if the SIU is under-
capitalised. If we want temporary increase in the
share capital, redeemable partner shares are
suitable.

Broadly speaking, in the capital structure of a

new SIU in unproved field, the major source of
finance will be owned share capital. Existing SIU with
unstable earnings will also have to rely more and
more on owned shares. If a SIU wants to avoid
dilution of control, partner shares or debentures will
constitute a major source of finance. Well
established SIUs having stable earning and assured
profits can certainly have cheaper loan capital during
prosperity and trading on the equity to the maximum
extent. The best time for the floatation of SIU and
raising of funds is a boom or period of prosperity.
 4.1
89
In short : The safety ratios to be maintained for
sound capital structure for SIU are :

(1) Equity-debt ratio 1:2. (2) Earnings-interest

ratio 2:1 (3) Profit during lean years 1½ times the
interest charges. (4) Total loan capital on mortgage
not exceeding 50 per cent of the depreciated value
of assets covered by mortgage. (5) Total long-term
debts under normal circumstances shall not exceed
the net working capital, i.e., excess of current assets
over current liabilities. (6) Current ratio, i.e., current
assets divided by current liability should be 2:1. (7)
Acid-test ratio, i.e., quick ratio, is determined by
dividing 'quick assets,' i.e., cash marketable
investments and book debts, by current liabilities. it
is a better measure of liquidity and it should be 1:1
Desirable Capital Structure (Rs. In Lakhs)
New Company Initial
Capital
Equity Capital 70% Rs. 140.
Preference 20% Rs. 40.
Capital
Loan Capital 10% Rs. 20.

Total 100% Rs. 200

Later
Stage
Existing Growth Capital
Company
Equity Capital 30% Rs. 120.
Free Reserves 20% Rs. 80.
Preference 20% Rs. 80.
Capital
Loans and Bonds 30% Rs. 120.
 4.1
90

Total 100% Rs. 400

Source : Field Survey

When above logic tried to reconcile with some

SIUs in Marathwada, the following facts are noticed.
(i) In want of market for the product, the SIUs have
to hold huge finished stocks in an anticipation of
demand which leads to interlocking of working
capital.

(ii) Earnings are fluctuating, and at down level; the

same increase fund scarcities and overdues.

(iii) The low or no profit potential forces to borrow

from money lender or such other persons at an
exhorbitant rate of interest.

(iv) Most of the units at the verge of sickness are

unable to practise capital plans which are
referred earlier as desirable.
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91

Chapter – IV

Management of Working Capital by

SIUs

− Introduction

Gross Vs. Net Working Capital

− Fixed Capital Vs Working Capital

− Objectives of Working Capital in SIU

− Factors Determining Requirement of

Working Capital

− Concept of Operating Cycle

− Practical Problems in Managing

Working Capital
 4.1
92
Chapter – IV
Management of Working Capital by SIUs

Introduction :
Current assets are assets convertible into cash
within one year. Management of working capital
usually involves management or administration; i.e.,
planning and controlling these current assets, namely
cash and marketable securities, accounts receivables
and inventories, and also the administration of
current liabilities.

Cash and credit in the SIU is comparable to the

blood of the human body. Like blood, finance gives
life and strength, i.e., profit and solvency to SIU.
Financial management is called upon to maintain
always the right cash balance so that flow of funds is
maintained at a desirable speed not allowing any
slow downs or, stoppages. Thus, the enterprise can
have a balance between liquidity and profitability.
Planning and control of working capital naturally
centres round sound cash planning which includes
setting of cash policies and procedures, and the
control over cash and credit. Cash is of course the
major and very sensitive component of working
capital.

Working capital or circulating capital in SIU

indicates circular flow of cash (cash –flow cycle), i.e.,
 4.1
93
a sort of a revolving fund starting with cash used to
pay for raw materials, labour and operating expenses
and when finished products are ready for sale, the
cash is recovered through sale of these goods (on
cash or on credit). Thus, we have a circular cash-flow
from cash to inventories to receivables and back to
cash. For SIU, there are two concepts of working
capital.

1. Net Working Capital : It represents the

excess of total current assets over total current
liabilities. It is a qualitative concept indicating the
soundness of current financial position. It is of major
importance to investors and lenders. On the basis of
this concept, the SIU management will also get an
idea about the ease and cost of raising working
capital. Net working capital is measured by the
current ratio, viz., Current assets/Current liabilities.
Normally, the current ratio should be 2:1. A larger
ratio indicates greater solvency and vice versa. Of
course, excessive current ratio in SIU would point out
poor financial planning and it would reduce income.
In case of more than 2/3 SIUs under study have with
excessive current ratios.
Net working capital
= Current assets – Current liabilities
= (Cash + marketable securities + accounts
receivables
+ notes and bills receivable + inventories)
 4.1
94
Minus
(Accounts payable + notes and bills payable +
expenses
+ temporary loans)

2. Gross Working Capital : It is also called the

circulating capital. It is equal to the total sum of
current assets only and it may represent both owned
capital as well as loan capital used for financing the
current assets.

Creditors
Cash
Fund
Debtors

Raw Materials
Components
And Supplies

Finished
Goods

Work-in
Progress

Fig. 1. Financial Circle. (Operating Cycle of a

Business)
The concept of gross capital is a financial
concept whereas that of net concept is an accounting
concept. SIU is interested more in the amount of
current assets with which it has to operate. If it can
balance receipts and disbursements perfectly, the
business would operate with maximum efficiency. To
the management of a company, the source of the
 4.1
95
working capital-owned/borrowed resources- is
immaterial. However, in an ever-changing economy,
it is very difficult to secure perfect equilibrium
between inflow and outflow of cash. Hence, it is the
objective of sound financial management to always
maintain enough supply of working capital. However
most of the SIU are unable to maintain enough
supply of working capital.

Gross Vs. Net Working Capital :

1. The net concept indicates the margin of
protection pointing out financial soundness to the
creditors and investors, e.g., the increase in bank
loan in SIU cannot increase net working capital but
increase in retained profits and share capital of SIU
can increase the net working capital. The gross
concept of working capital i.e., the total sum of
current assets, satisfies the feature, viz., if fixed
assets are equal to fixed capital, current assets of SIU
logically is equal to working capital because both are
partly borrowed and both yield profit over and above
interest cost. Under the gross concept of SIU working
capital, every increase in borrowing by SIU will
increase the gross working capital, whereas
according to the net concept of the working capital,
there is no change in working capital, even though
there is an increase in borrowing by SIU.
 4.1
96
2. The net concept of working capital for SIU is
qualitative, indicating its ability to meet its operating
expenses and current liability. The gross concept of
working capital for SIU is quantitative, pointing out
the total amount available for financing the current
assets.

3. The net concept of working capital is suitable

for proprietary SIU such as sole owner and
partnership where ownership, capital and
management are united. But the gross concept is
very suited to Joint Stock SIU where ownership is
separated from management and control. Hence,
ownership of fixed or current assets is not important
as in the past. Financial manager of SIU is not
interested about ownership or creditorship sources of
capital. The financial manager of SIU is concerned
only with the total current assets as they constitute
the total funds for operating the SIU. A SIU company
is not interested in the source of finance. To the
management the purpose is more important than the
source of finance. Hence, gross working capital is an
objective concept for SIU company management. In
determining the amount of working capital, a SIU
company must consider many factors in addition to
the current ratio particularly while testing the
adequacy of working capital of a growing SIU. We
cannot have standard and uniform current ratio for
all SIUs because liquidity requirements are not the
 4.1
97
same for all SIUs and they may change from month
to month or year to year. The liquidity needs also
depend on the type of SIU business. However,
management should ensure reasonable margin of
current assets over current liabilities to assure
payment of dues punctually. A SIU company must
have adequate cash to meet day-to-day needs, to
pay loan instalments and interests periodically and to
discharge the several obligations as they arise, e.g.,
dividend payments, taxation, etc. Working capital is
the life stream of a SIU company sustaining and
nourishing the enterprise. It is also a source of profit.

Fixed Capital Vs Working Capital :

It is said that if fixed assets constitute of SIU
fixed capital, current assets also should constitute
capital or working capital.

In SIU business we have two categories of

assets :
1. Fixed Assets : They are land, plant, machinery,
furniture, fixture and such other durable assets often
called permanent assets.

2. Current Assets : They are circulating assets such

as cash, accounts, notes and bills receivables,
inventories, marketable securities as temporary
investment of surplus funds. Inventories include raw
materials, parts and components, work-in-process,
consumable stores and finished goods.

Fixed assets of SIU are not convertible into cash

within one year. They fall within the area of fixed
 4.1
98
capital and capital budgeting. Current assets of SIU
are convertible into cash within one year and they
fall within the area of cash budget and working
capital. There are two points of differences between
fixed capital (fixed assets) and current capital
( current assets). One is durability of economic life
and the second is divisibility. Investment in SIU
current assets is more divisible than investment in
fixed goods or assets.

The capital invested in fixed assets by SIU is

always referred to as fixed capital. The capital
invested in the current assets by SIU is termed
current capital. If we consider gross concept of
working capital, we do have similarities between
fixed capital representing fixed assets and current
capital being counterpart of current assets. But if we
define working capital as difference between current
assets and current liabilities, i.e., net concept, our
statement pointing out similarities between fixed
assets (fixed capital) and current assets (current
capital) is not true.
Note : The primary distinction between fixed and
current assets is
that the fixed assets are fixed or permanent in
character while
the current assets are constantly changing in
form (revolving
character).
 4.1
99

Inventories
Services &
Production Credit Sales

Work-in Cash
Operations Process Receivables

Sales

Operating
Expenses Cash Collections
1. Material Cash Fund
1. Labour
2. Overhead Expenses

Fig. 3. Cycle of Circulating Capital of Working Capital of SIU

(Assets Changing in one form to another in business.)
Note : (1) From cash to inventories.
(2) From inventories to __ Cash
A/c. Notes, Bills receivables.
(a) From Book debts to Cash and so on.
(b) Fixed assets are service assets facilitating the
flow of circulating assets.
(c) There are a few other inlets-sources of funds
to cash not shown e.g. depreciation, retained
profits and sale of assets.
 4.2
00

Chart SIU Working Capital

(Types and Sources)

Regular, Permanent Variable Working Capital

Working Capital
- Minimum current finance - Seasonal, special current finance
Source Source
Share capital Bank credit
Debenture capital Trade credit
Long-term loans Discounting bills, notes, hundies
Public deposits/loans Factorising of book debts
Sale of unwanted assets Hire purchase and sale
Reserves Public deposits/loans
Private loans Private loans
Lease (Land/Machinery) Indu. Deve. Bank

Fig. 4. Types and Sources of Working Capital in SIU

Notes : 1. Current assets may be really fixed assets

in the sense that they never disappear from the
balance sheet.
2. Working capital finances marketing, i.e., purchase
and sale of inventories and all other associated
marketing functions and services.
3. Public deposits/loans offer attractive interest, 15
p.c. per year. They are unsecured loans for one to
three years. They are a good source of working
capital in India. They are now controlled by the
Reserve Bank of India.

Working Capital and Debentures : At present a

SIU company has at its disposal debentures as a
better source of finance, better than public deposits
or preference shares, for financing permanent part of
working capital on a long-term basis. Interest rate on
public deposits and debentures is now similar, 15 p.c.
Investors would prefer their investment in
debentures instead of public deposits due to
following advantages : 1. Debentures are fully
 4.2
01
secured by mortgage on fixed assets. 2. They are
listed on the stock exchange and hence they have
marketability and liquidity 3. They may have buy-
back provision. 4. They can act as security for
borrowing. 5. They can have convertibility privilege.

Objectives of Working Capital in SIU :

(1) The SIU wants maximum productivity and
profits in the employment of capital. This is possible
by striving to maintain a correct ratio between
working capital and fixed capital. (2) The SIU has
another objective and that is to maintain a smooth
and rapid flow of funds in order to enhance the
efficiency of working capital or profitability of the
firm. (3) If cash receipts and cash outlay
synchronise, there is no need to maintain a cash
reserve in SIU. In business, it would be a miracle to
have perfect coincidence and co-ordination between
receipts and payments. Hence, SIU must have
sufficient cash reserve to meet all normal as well as
abnormal cash needs.

Management of Working Capital by SIUs :

Some Other Issues
Fixed capital determined production – capacity
of a business. Management of working capital is
crucial for utilization of capacity, which facilitates
realization of profit. Preponderant in the capital-
structure, working capital is also volatile and as a
 4.2
02
result it requires constant monitoring. Therefore, a
major part of time and is engaged by SIU towards
energy is engaged by SIUs towards management of
working capital1.

There are two kinds of working capital2. Gross

working capital is the sum of current assets which
sustain the operations of the business. Net working
capital is the surplus of current assets over current
liabilities and in other work it is that part of the long-
term funds which is used for financing of current
assets. Management of the business will be more
interested in the adequacy of gross working capital of
current assets for maintaining the pace of production
and sales while short-term creditors pay more
attention to the net working capital of a business or
long-term funds, available for repayment of short-
term dues. Even though liquidity of the business is
very important for the image and success of the
business, adequacy of current assets and efficiency
of their management are more crucial for the
ultimate success of the business which includes
liquidity too.

Factors Determining Requirement of Working

Capital3
There are so many factors that determine the
requirement of working capital of a particular SIU.
Each factor influences in its own way in determining
 4.2
03
the need of the working capital of the SIU. It differs
from firm to firm and according to the nature of the
business. However, in this chapter some of the
above factors are discussed.

(i) Nature and Size of SIU Business

Trading and financial firms have a very less
investment in fixed assets but require a large sum of
money to be invested in working capital. Retail
stores, for example, must carry large stocks of a
variety of goods to satisfy varied and continuous
demand of their customers.

The size of SIU business also has an important

impact on its working capital needs. Size may be
measured in terms of the scale of operation. A SIU
with larger scale of operation will need more working
capital than a small firm4.

(ii) Manufacturing Cycle

The manufacturing cycle of SIU starts with the
purchase and use of raw materials and completes
with the production of finished goods. Longer the
manufacturing cycle, larger be the firm’s working
capital requirements 5.

(iii) Business Fluctuation

Most SIU experience seasonal and cyclical
fluctuations in the demand for their products and
services. These business variations affect the
 4.2
04
working capital requirement, specially the temporary
working capital requirements of the firm. When there
is an upward swing in the economy, sales will
increase correspondingly, the firm’s investment in
inventories and book debts will also increase 6.

(iv) Production Policy

A steady production policy of SIU will cause
inventories to accumulate during the off-season
periods and the SIU will be exposed to greater
inventory costs and risks. Thus, if costs and risks of
maintaining a constant production schedule are high,
the SIU may adopt the policy of varying its
production schedules on accordance with changing
demand. Those SIUs, whose productive capacities
can be utilized for manufacturing varied products,
can have the advantage of diversified activities and
solve their working capital problems. They will
manufacture the original product line during its
increasing demand and when it has an off-season,
other products may be manufactured to utilize
physical resources and working force. Thus,
production policies will differ from firm to firm,
depending on circumstances of individual firms.

(v) SIU’s Credit Policy

The credit terms to be granted to customers
may depend upon norms of the industry to which the
SIU belongs. But a firm has the flexibility of shaping
 4.2
05
its credit policy within the constrains of industry
norms and practices. The SIU should be discretionary
in granting credit to its customers.

(vi) Availability of Credit

The working capital requirements of SIU are also
affected by credit terms granted by its creditors. A
SIU will need less working capital if liberal credit
terms are available to it.

(vii) Growth and Expansion Activities

The working capital needs of the SIU increase as
it grows in terms of sales or fixed assets.

7
(viii) Profit Margin and Profit Appropriation
A high net profit margin contributes towards the
working capital pool. In fact, the net profit is a
source of working capital to the extent that it has
been earned in cash. The cash profit can be found by
adjusting non-cash items, such as depreciation,
outstanding expenses, accumulated expenses and
losses written off, in the net profit. But, in practice,
the net cash inflows from operations cannot be
considered as cash available for use at the end of the
period. Even as the company’s operations are in
progress, cash is used up for augmenting stocks,
book debts or fixed assets.

(ix) Price Level Changes

 4.2
06
Generally, rising price level will require a SIU to
maintain higher amount of working capital. Same
levels of current assets will need increased
investment when prices are increasing.

(x) Operating Efficiency

The operating efficiency of SIU relates to the
optimum utilization of resources at minimum costs.
The SIU will be effectively contributing to its working
capital if it is efficient in controlling operating cost.

(xi) General Type of Business :

A SIU undertaking manufacturing and trading
require large working capital. Only Industrial SIU
may require relatively lower working capital.

(xii) Size of the Business Unit :

The amount of working capital depends directly
upon the volume of business. The greater the size of
a SIU business unit, the larger will be the
requirements of working capital.

(xiii) Terms of Purchase and Terms of Sale :

Use of trade credit may lead to lower working
capital, while cash purchases will demand larger
working capital. Similarly, credit sales will require
larger working capital, while cash sales will require
lower working capital.

(xiv) Turnover of Inventories :

 4.2
07
If inventories are large and their turnover is
slow, we shall require large capital but if inventories
are small and their turnover is quick, we shall require
lower working capital.

(xv) Process of Manufacture :

Long period, complex and round about process
of SIU production will require larger working capital,
while simple, short period process of production will
require lower working capital.

(xvi) Importance of Labour :

Capital intensive SIUs, i.e., mechanised and
automated industries, will require lower working
capital, while labour intensive SIUs will require larger
working capital.

(xvii) Proportion of Raw Material to Total Costs :

If SIU’s raw materials are costly, it shall have
larger working capital while if raw materials are
cheaper and constitute a small part of the total cost
of production, SIU shall require lower working capital.

(xviii) Cash Requirements :

If a SIU has demand for larger cash needs, we
shall have larger working capital, e.g., at the time of
dividend payment, taxation, interest charges, wages
and salaries, we require enough cash. There is a
close connection between the profit policy and the
working capital. If a SIU has shortage of working
 4.2
08
capital, it may have to skip payment of cash profits
or reduce the profit distribution rate or issue
ownership stake (stock).

(xix) Seasonal Variations :

During the busy season, a SIU business requires
larger working capital while during the slack season a
SIU requires lower working capital. Usually the
seasonal or variable needs of working capital are met
by SIU by temporary borrowing.

(xx) Banking Connections :

If the SIU has good banking connections and
bank credit facilities, it may have minimum margin of
regular working capital over current liabilities. But in
the absence of the availability of bank finance, it
should have relatively larger amount of net working
capital.

(xxi) Growth and Expansion :

For normal rate of expansion in the volume of
business, SIU may have greater and greater
proportion of retained profits to provide for more
working capital; but for fast –growing SIU it shall
require larger and larger amount of working capital.
A plan of working capital should be formulated with
an eye to the future as well as present needs of a
corporation. Permanent working capital must be
secured on a long –term basis.
 4.2
09
Concept of Operating Cycle :
Management of gross working capital of current
assets is sought to be measured with the help of
operating cycle of working capital.

Cash plays a vital role in lubricating business

operation. It is needed to buy material inputs and
incur other expenses in course of business operation.
The outflow of cash that occurs in course of business
operation is recovered when sale-proceeds are
realized. The cash which is thus recovered is used
again on raw-materials expenses etc., and thereby, a
cycle is created. In this cycle cash becomes raw
materials, work-in progress finished goods in storage
and sundry debtors before it resumes the form of
cash. The flow from cash to suppliers, inventories to
receivables and back in to cash is called the
operating cycle. Four distinct components of the
operating cycle are 8:

1. Raw material cycle,

2. Conversion cycle,

3. Storage cycle, and

4. Collection cycle.

Duration of the components to operating cycle

is measured in terms of number of days. When
average stock of raw materials is divided by average
consumption of raw materials per day duration of
 4.2
10
gross material cycle obtained. Subtraction of
duration of trade-credit from gross raw-material cycle
yields net raw material cycle. Duration of trade
credit is equal to average balance of sundry creditors
divided by average amount of credit purchase per
day. Conversion cycle is the quotient of average
stock of work-in-progress divided by average daily
consumption of work-in-progress. Storage cycle is
obtained when average stock of finished goods is
divided by average cost of goods sold per day.
Collection cycle is equal to average balance of sundry
debtors divided by average value of credit sales per
day.

Practical Problems in Managing Working

Capital :
1. Terms loans are sanctioning by certain financial
agencies to acquire plant and machineries.
They are not issuing working capital loans. The
SIU owners have to approach commercial and
other private banks for working capital. In this,
there is a gap between the need and the actual
sanctioning of loan. This arrangement creates
lot of time gap and this delay causes more
failures in new business ventures.

2. Term loans are purely for establishing fixed

assets. Some time, due to delay in getting
working capital, business people are forced to
 4.2
11
divert some fund allotted for purchasing
machinery etc. to acquire current assets. This
will result in either reduction in production or
quality due to non availability of machines etc.

3. Some entrepreneurs may spend more in

furnishing the office, residence and on personal
conveyance, which in paucity of funds for
managing daily operations.

4. Improper inventory management may cause

more accumulation of stocks on hand. Major
share of working capital may be locked up in
stocks.

5. Lack of proper stockist, and marketing network

may also cause problems in working capital.

6. Policy of purchasing raw materials on cash and

selling the products on credit will certainly affect
the liquidity position of the firm.

7. Wrong estimation of requirement of working

capital and delay in making arrangement for
getting the working capital will also cause
problem.

8. Delay in issuing working capital from the

financial agencies due to non-availability of
required documents, security etc., will certainly
 4.2
12
affect the business. This is the major problem
faced by small business managed by untrained
managers.

9. All management functions are carried out by

single or two persons in small business. They
do not devote much time on this matter. They
have to depend on the information’s given by
their office staff. This may lead to wrong
financial planning.

10. Another major problem is high rate of interest.

Quick disposal of loan is available from private
money-lenders at higher rate of interest. In
order to get rid of financial crisis, business
people get into the clutches of private money-
lenders. Most of them may not be in a position
to get out of the clutches of private financial
agencies. Most of the small firms practically
working to pay the interest for the loan
obtained.

11. Government fiscal policy, import export policy,

will also affect the financial position of the
business. Change of policy may either affect
the business or cause delay in getting loan from
the banks.

Suggestions for Effective Working Capital

Management :
 4.2
13
The following suggestions are made to
overcome the problems in managing working capital.

1. No diversion of fund from one head to other

head.

2. Follow scientific inventory management.

3. Seek the help of trained financial managers.

4. Adopt credit purchase and cash sales.

5. Delays the bills payable.

6. Expedite bills receivables.

7. Reduce the value of current assets at all time.

8. Increase the marketing network.

9. Use own fund or go for zero capital as for as

possible.
 4.2
14
References :
1. Weston, J.F. and Brigham, E.F., Essential of
Managerial Finance, The Dryden Press Hindsdale
Illinois (Ved), p.173.

2. Gitman, L.J., Principles of Managerial

Finance, Harper & Row, New York (1976), P.150.

3. Smt. K.V., Management of Working Capital,

West Publishers, 1974, p.7.

4. Mayer, R.C., et al., Contemporary Financial

Management, Wets Publishing Co., 1980, p.562.

5. Richards, V.D., and Laughlin, E.J., A Cash-

Conversion Cycle Approach to Liquidity Analysis,
Financial management, (Spring, 1980), pp. 32-
38. Also see Moyer et al., op.cit., pp.562-63.

6. Ramamoorthy, V.E., Working Capital

Management, IFMR, Madras, 1976, p.11.

7. Weston, J.Fred and Eugene, F. Brigham,

Managerial Finance, Illinois, Dryden press, 1975,
pp.123-124.

8. Reserve Bank of India Bulletin, “Finances of

Medium and Large Public Limited Companies,
Various issues.
 5.2
15
Chapter – V

Borrowings, Subsidies, Incentives

&
Hire Purchasing

− Problems of Borrowing

− Multiplicity of Documents

− Inspection

− Security

− Valuation of Security

− Advance Against Pledge

− Advance Against Receivables

− Multiplicity of limits

− Delay

− Repeated Visits

− Repayment

− Corruption

− Subsidies – Maharashtra Act to

State Aid to Industries – Interest
Subsidy – subsidy for special purposes
– subsidies to Rural Industry

− Incentives – Income tax

Concession exemption from payment
of central excise duty – capital
subsidies in backward areas
 5.2
16

− State Government Assistance –

Interest free loan-subsidy in
electricity tariff for power based
industries exemption from electricity
duty-exemption / Refund of Octroi-
Terminal tax.

− Investment loan for priority

industries

− Cost of feasibility report loan

subsidy special incentives for rural /
village industries concession to
engineers concession to non to non
residential Indians

− Concession to Rate of interest

Incentives an evaluation

− Machinery on Hire purchase.

(Note : This chapter has main concern to speak

about the sample units in universe and about
Maharashtra. However Punjab state a most
advance state is referred in the draft for
substantiating the inferences drawn from the
universe under study.)
 5.2
17
Chapter – V
Borrowings, Subsidies, Incentives & Hire
Purchasing

Problems Of Borrowing :
From the foregoing, we find that many of those
who applied for loans, could not secure them; many
did not even apply for them. The SIU entrepreneurs
told us about the problems of applying and getting
loans. We discuss these below.

Lack of Information :
It was found during the course of the survey
that smaller SIU in the small-scale sector were not
aware of some of the loan schemes, particularly that
of the Maharashtra Finance Corporation. In our
sample, 50 per cent of the SIU entrepreneurs did not
know that the banks could give them financial
assistance. Hence wider publicity might be of use. It
is notable that the Corporation did increase the
expenditure on advertisement and publicity.

Condition of Loans :
Applications had to be submitted on prescribed
forms. However the forms were not available at the
District Industries Centre. Sixty two of the
entrepreneurs in the sample had purchased these
from a non-officials. An important problem regarding
loans from the Maharashtra Financial Corporation
 5.2
18
was that the lower limit of a loan was Rs. 20,000.
Thus tiny units which needed a small loan were not
benefited by the Corporation. In our sample, none of
the low-investment units applied for a loan. Further,
the loan was granted for fixed assets on the condition
that the bank also sanctioned credit for working
capital. Therefore, a unit was required to pursue
both the agencies simultaneously. In this connection,
the Working Group on Small-Scale Industries
recommended that for artisans and very small units,
loans up to Rs. 25,000 should be sanctioned as
composite loans whether for equipment finance or
working capital or both1. In Maharashtra, the scheme
of composite loans was approved at the 15th meeting
of the Board of the Maharashtra Financial Corporation
on December 12, 1996. Under the scheme, 110
applications were rejected by March 1999 on the
basis that the loan applied for was less than Rs.
20,000.

Multiplicity of Documents :
Entrepreneurs found it difficult to fill up various
forms required for seeking credit assistance. They
often paid for getting the forms filled up, besides
spending a lot of money on the preparation of
required legal documents such as affidavits. Even
with expenditure of money, it was sometimes difficult
(as stated by 18 entrepreneurs) to get the project
report and other documents prepared. For a loan
 5.2
19
from the Banks or Maharashtra State Financial
Corporation, there were eleven documents to be
furnished with application besides depositing the
imprest money. Finding revenue records for the last
30 years for verification of security and getting
permission from the competent authority under the
Urban Land (Ceiling and Regulations) Act, 1976 to
mortgage land and buildings with the Corporation
were other problems. While on the
recommendations of the High Powered committee for
examining Bank Credit problems of small Scale
Industries, and on the advice of the Reserve Bank of
India, banks had adopted simple application forms for
2
credit facilities up to Rs. 25,000, but the problem of
multiplicity of documents regarding term loans from
the banks or Maharashtra Financial Corporation was
still there.

Inspections :
In connection with loans (routed through) from
the Department of Industries, 30 of the 39 applicants
stated that the Inspector harassed them at the time
of verification of particulars of the unit and even
later. According to the Rules, the Director of
Industries or officers authorized by him, were to
inspect the premises, books, machinery, stocks,
shares and other belongings connected with the unit
in respect of which the loan was to be granted. To
ask for a loan from the Department of Industries was
 5.2
20
thus to invite an army of Inspectors. For a loan from
the banks against stocks, monthly statements of
stocks were to be sent which was again a problem for
small-scale units.
 5.2
21
Security :
Conditions regarding security had been
liberalized by the Department of Industries; however,
those of banks and the Maharashtra State Financial
Corporation constituted the most important bottle-
neck according to the entrepreneurs, without
exception. They found it difficult to offer registered
mortgage of all the existing and future fixed assets of
the concern to the Corporation. Though the High
Powered Committee had recommended that banks
should not insist upon collateral and no worthwhile
proposal should be turned down merely for want of
collateral, yet banks insisted on it. The Banking
Commission also found the security orientation in the
making of bank loans3.

Valuation of Security :
Another problem mentioned by the
entrepreneurs concerned the valuation of security.
In the Maharashtra Financial Corporation or
commercial Banks the valuation of old plant and
machinery was made after deducting depreciation at
the income-tax department rates from the price
mentioned in the suppliers invoice, and for non-
standard fabricated machinery, the assessor’s
valuation was taken; this did not take inflation into
account and hence resulted in under valuation. The
valuation of new machines did not include freight and
 5.2
22
erection charges which in some cases formed a
substantial part of the cost of machinery.

As regards banks, entrepreneurs said that the

margin between the value of the security and the
loan was very large particularly if the former
consisted of raw-materials or finished stocks.
Commercial banks other than the State Bank group
retained a margin of 30 to 40 per cent and it
increased all the more on account of the way
material was evaluated. Stocks of raw –materials
were valued at the market price or controlled price,
whichever was lower. This would have no adverse
effect if materials were available at controlled prices.
However, often small entrepreneurs had to purchase
80 to 90 per cent of their requirements at black-
market prices which were much higher than
controlled prices. Thus if the controlled price of iron
sheets was Rs. 2,700 per metric ton and the market
price Rs. 4,200, the banker would value the stock of
iron-sheets at Rs. 2,700 and would sanction a loan of
Rs. 2,025 under the liberalized scheme by retaining a
margin of 25 per cent on the controlled price. Thus,
the effective margin for an entrepreneur who had
actually purchased iron-sheets from the market
amounted to more than 50 per cent. It was fairly
well known that wider disparities existed between the
fair and the market prices of most of the industrial
raw-materials such as iron, lead, zinc and copper.
 5.2
23
This obviously had an adverse effect on the
borrowing capacity of small entrepreneurs. Similarly,
a margin of 30 to 40 per cent was required against
finished stocks which were valued at the cost of
production. This also affected the borrowing capacity
of the small entrepreneurs. They maintained that the
finished goods ought to be valued at wholesale
prices.

The Bank officials were of the view that the

entrepreneur did not state the wholesale prices
correctly. Also, acceptance of black-market prices
would put a premium on black-marketing. The
problem thus was ultimately one of trust and morals
in an under developed country.

The High Powered Committee and the Working

Group of Small-Scale Industries with special
reference to District Industries Center, recommended
that a flexible approach towards margin
requirements particularly for smaller units and
technically qualified entrepreneurs should be
adopted.

Advance Against Pledge :

The working capital provided by commercial
banks to small-scale entrepreneurs was usually on a
pledge basis. The sock of raw materials or finished
goods pledged by the entrepreneurs remained in the
 5.2
24
physical possession of the bank, and the
entrepreneurs had to spend a great deal of time and
energy in getting the stocks deposited and released.
The Standing Committee on Credit Facilities had
recognized this problem in 1969 and had
recommended that loans to small units should be
granted against security available with them and the
4
balance should be extended by way of clean loans;
however, the recommendation had remained
unimplemented.

Advances Against Receivables :

In small scale units, receivables constituted a
large segment of gross working capital but banks
showed reluctance in financing receivables5.
Whatever little facility was available in this regard
was in the form of overdraft against bills on
Government departments. The facility was not
available against open credit sales. The customers of
the small-scale sector were often not well-disposed
toward the use of bill mechanism for commercial
transactions as it involved financial commitment to
pay the amount on specified dates. Under such
circumstances, the small-scale entrepreneurs could
not borrow against the security of bills from debtors.

Multiplicity of Limits :
Under the current practice, different limits
existed for purchase of raw-materials, retention of
 5.2
25
finished stocks and supply of goods on credit.
Multiplicity of limits caused hardships when there
were seasonal variations in demand and supply. In
order to solve this problem, the State bank
introduced a Special Hypothecation Scheme under
which an integrated credit limit to meet the various
needs of entrepreneurs was sanctioned and the
collateral was left to the possession of the borrower.
This facility was available for credit limits up to Rs. 1
lakh, which was too low.

Delay :
The grant of a loan was made in two stages-the
sanction and the disbursement. Sanctions were
often accorded after long delay and disbursement
also took a few months. Of the 28 entrepreneurs
who got loans through the Department of Industries,
only two managed to get in less than a month, nine
in six months and seventeen in more than six
months. For one units, it took as many as four years
to get the sanction. This problem of delay had been
faced all over India. It was estimated that for a Bank
loan up to Rs. 10000, the time taken was at least
three months and a half. More time was taken in the
case of bigger loans. For a loan between Rs. 100000
and Rs. 5,00000 the time taken was about nine
months6. In a study of Vidharbha also inordinated
delays had been found7.
 5.2
26
Inordinate delay in sanctions and disbursements
was also reported by the entrepreneurs in case of a
loan from the Maharashtra Financial Corporation.
They stated that the units whose applications were
found to be in order received the sanctions after five
to six months. Of 77 units which got advances from
banks, eight secured these in a week, 21 in a month
and 48 in more than six months.

The Working Group on State Financial

Corporation considered the delay in term loans as
inevitable, because greater risks were involved in
term loans which were to be dealt with by special
skills. It was more difficult to estimate a borrower’s
credit worthiness 10 or 12 years ahead than over a
short period of 6 or 12 months. The factors relevant
to credit-worthiness were substantially different over
long period.

Reasons for the delay were discussed by the

Maharashtra State Financial Corporation in some of
its annual reports. It was said that some times the
funds had to be withheld even after being sanctioned
because the applicant’s credit-worthiness was
considered to be doubtful. If the title to the land was
not clear additional documents had to be drawn up
and executed. Some times the properly pledged was
not in the name of the borrowing concern but the
personal names of partners or others. In such cases,
 5.2
27
the Corporation had to make the owners mortgage
the deed. There were instances where essential
documents were either missing or had not been
executed at all8. An important cause of delay in
sanctioning loans was the appraisal of technical
feasibility of a project. Non-literate entrepreneurs
were often unable to present the technical feasibility
report as required by the Corporation.

Officials of the Maharashtra State Small

Industries Corporation dealing with Marathwada
stated that irregularity in the receipt of funds from
the Government for Marathwada was the main cause
of delay in sanctioning the seed money. The funds
for Marathwada were received by the Corporation
regularly only for four years. In 1997-98 the number
of application received was large but no funds were
provided by the Government. In 1998-99 Rs. 10
lakhs were provided and many applications had to be
kept pending for paucity of funds. In 2000-01, there
was a provision of Rs.5 lakh but actually Rs. 2 lakh
only were provided.

Bank managers form Aurangabad stated that

the entrepreneurs did not maintain proper books of
account regarding sales, profit, stock, capital assets
and liabilities, in the manner desired by the banks9.
Further, they did not present the project report in the
form required, hence additional information had to be
 5.2
28
elicited for evaluating the viability of a project and
verifying the particulars of the units, which caused
delay. Sometimes the loan asked for was beyond the
power of the branch manager and the application
had to be referred to the regional or head office of
the bank where it took time.

The High Powered Committee and the Working

Group on Small-Scale Industries with special
reference to District Industries Centre recommended
that branch managers should be vested with
adequate discretionary powers for ensuring that 60
to 80 per cent of the credit decisions were taken at
the branch levels itself and that all the financial
institutions should ensure that loans up to Rs. 2 lakh
were decided within four weeks and above Rs. 2 lakh
within eight to nine weeks10.

Repeated Visits :
Thirty-five of the 39 entrepreneurs who applied
for a loan to the Department of Industries said that
they had to visit the District Industries Centre many
times ( an entrepreneur, even mentioned fifty visits)
before they could secure a loan. In the bureaucratic
set-up as it existed, the applicant had to meet and
bribe the official at every step- the receipt clerk, the
inspector, the officer and the issuing clerk. In a
small-scale unit, the entrepreneur had often to play
multiple roles as entrepreneur, manager, worker and
 5.2
29
messenger. Even one trip to the District Industries
Centre requiring absence from work for three to four
hours cost him a lot and he preferred to borrow from
private sources at a higher rate of interest.

Problems of Repayment :
Financial difficulty was stated to be the main
obstacle in the way of repayment of loans. The
entrepreneurs who sought loans from the
Department of Industries pointed out that a problem
was created by the requirement of utilizing the
amount of loan under the State Aid to Industries Act,
within two months of its disbursement. The period
was one year if the loan was sought for the purpose
of construction of the buildings. In Some cases,
entrepreneurs could not utilize funds in such a short
period due to non-availability of construction
materials or raw-materials.

Officials of the Department of Industries

attributed the problem of overdues mainly to the
lower rate of interest and the liquidation of units.
They stated that the rate of interest being low under
the State Aid to Industries Act, entrepreneurs did not
bother much for repayment. Further, the loan
became unrecoverable from units which went into
liquidation. The officials of the Maharashtra State
Small industries Corporation Limited stated that in
case of seed money loan, 80 per cent of the amount
 5.2
30
due for repayment was under default. The main
reason for this was that no security was demanded
against the loan; hence the loan could not be
recovered as an arrear of land revenue as was the
case under the State Aid to Industries Act, 1935.

Corruption – Economic and Political :

In our sample, of the total of 28 entrepreneurs
who secured loans from the Department of
Industries, 15 declared that they had paid bribes, six
that they had used political influence and two that
they had depended upon kinship with officials for
obtaining loans. The amount of the bribe varied with
the position of the official in the hierarchy. An
Inspector had to be paid Rs. 1000 to 2000 and a clerk
(who processed the application or who issued the
cheque) had to be paid Rs. 125. The messenger also
expected from Rs.50 to Rs. 100. A jargon had grown
around this passage of money; “speed money”,
“Sewa” (service) and “tea” were some of the terms
used for consideration money. The smaller
entrepreneur was likely to be hit harder. An artisan
entrepreneur of Paithan stated that his loan had been
pocketed by the Inspector himself and that he had
been asked to repay it. About 75 percent of the
entrepreneurs stated that the treatment depended
upon whether one had the patronage of influential
persons. It was found that even the addresses of
some of the units which had obtained loans were not
 5.2
31
available in the records of the Department. Two
inter-related factors leading to non-payment of loans
were faulty maintenance of records and bribery. The
entrepreneurs who received loans from the
Maharashtra Financial Corporation stated that they
had to bribe the revenue officer for getting the
revenue records verified for the last thirty years and
also to bribe the officer under the Urban Land
(Ceiling and Regulation) Act for seeking the
permission to mortgage property. For loans from
banks, only three per cent of the entrepreneurs
stated that they had paid bribes.

Some of the officials of the District Industries

Centre corroborated the statement relating to the
payment of bribes. However, they claimed that they
accepted bribes not for doing the work but for
expediting it. The officials justified these on grounds
of low salaries and argued that Inspectors had to
maintain a good standard of living to be effective.
High officials of the Industries Department said that
District officials were sometimes bribed to misplace
the records (files) relating to certain loans. Some
high officials of the Maharashtra State Small
Industries Corporation stated that while the
Corporation was in law an autonomous business
undertaking of the State Government, in practice
decisions within the Corporation were influenced by
 5.2
32
politicians and that about 50 per cent of the loans
had been advanced under pressures.

Conclusion :
The units which we studied were not joint stock
companies and faced financial difficulties. The
Maharashtra State Small industries Corporation
provided seed money to engineer entrepreneurs. In
July 1980, the programme was transferred to the
District Industries Centre with enlarged scope; all
entrepreneurs with units located in areas with a
population of less than 50,000 would be eligible. The
State Bank’s scheme of providing equity was merely
on paper. Smaller units found it difficult to secure
loans also. The procedural and administrative
problems of obtaining credit were such that 19 per
cent of the sample entrepreneurs were not even
willing to apply for it. Only during 2000-01 28
entrepreneurs secured loans from the Department of
Industries and 6 from the Maharashtra Finance
Corporation. Banks were the most important source
of credit. Seventy-seven percent entrepreneurs
secured loans from banks. The problems of
borrowing related to lack of information about
availability, condition of loans, multiplicity of
documents, requirement of security, procedural
problems, delay and repeated visits to the agencies
and corruption. All these added up to an obstacle
which was more formidable for the small-scale units.
 5.2
33

The financial problems faced by small

entrepreneurs has attracted the attention of the
Administrative Reforms Commission and the Small-
Scale Industries Board11. both of them recommended
the setting up of a separate apex credit institution12.
The other view, taken, for example by the
International Perspective Planning Team, the Banking
Commission and the Working Group for Small-Scale
Industries was that the existing system should be
refashioned13.

In any case, the need for improving the working

of the existing agencies cannot be denied; this may
make the setting up of a new agency unnecessary; at
the very least this would save the new agency from
the procedural and administrative maladies of the old
ones.

Subsidies Incentives And Hire-Purchase of

Machinery :
The object in this part is to study the financial
assistance in the form of subsidies and incentives
provided by the Union and State Governments, and
the facility of hire-purchase of machinery provided by
the National Small Industries Corporation Ltd., and
the Maharashtra State Small Industries Corporation
Ltd.,

Subsidies :
 5.2
34
The Department of Industries provided financial
assistance in the form of subsidies for helping the
growth of small-scale industries in Maharashtra (i)
under the Maharashtra State Aid to Industries Act,
1935; (ii) by subsidizing the rate of interest; and (iii)
for special purposes.

Maharashtra Act to State Aid to Industries :

Under Section 32 of the Act subsidy to a cottage
or village industry for any purpose and to any other
industry for the conduct of research or purchase of
machinery could be granted by the State
Government on the recommendation of the Board o
Industries. The rules framed under the Act provided
as follows :

1. A subsidy might be given for the purchase of

machinery or implements required for technological
development and research. The purchase of
machinery or research was to be for either of the
following purposes; (i) import substitution, (ii)
development of new items for which locally available
raw-materials could be used, (iii) fuel economy
measure, (iv) testing equipment, (v) improvement
in processes of quality control either for export or
certification by Indian Standards Institution or the
Director General of Technical Development, (vi)
improvement in product design of existing or new
 5.2
35
items, and (vii) improvement in processes for
economizing scare raw-materials.

2. A subsidy might also be given for the

development of cottage and village industries to the
following : (i) physically handicapped persons, (ii)
widows, ex-servicemen, scheduled castes/backward
classes. These person were entitled to subsidies
provided their family income did not exceed Rs. 800
per month.

3. A subsidy might also be given in backward

areas, sub-mountainous, and border areas for the
development of any kind of industry. This was,
however, to be restricted to persons whose family
income did not exceed Rs. 800 per month.

Fifty per cent of the cost of the project was to

be borne by the entrepreneur. The maximum limit of
14
the subsidy was Rs.30,000

Procedure : An entrepreneur was to apply for a

subsidy to the General Manager, District Industries
Centre, either direct or through the Block-Level
Extension Officer. The application form was
obtainable free of cost. After verification of the
particulars, the application was to be sent to the
Director of Industries who was to place it before the
Board of Industries. On the basis of the
recommendations made by the Board of Industries,
 5.2
36
the subsidy was to be sanctioned by the State
Government.

Interest Subsidy :
The Entrepreneurial Training Programme was
started by Government of India in 1971-72 to provide
employment to un-employed engineers. In 1974-75
the Union Government lunched a programme of
providing financial subsidy to these engineer
entrepreneurs for setting up industrial units. Under
this programme they were to be given a subsidy on
interest payable on loans taken by them from banks,
the State Financial Corporations and other financial
institutions15. Only those engineers who had
undergone training under the various schemes of
assistance to the educated unemployed sponsored
by the Government of India or the Planning
Commission were eligible for this assistance.

Procedure : The applicant was to apply for loans

to a bank or the Maharashtra Financial Corporation.
After the loan had been sanctioned, the applicant
was to apply for the subsidy on interest to the
Director of Industries in the prescribed form. The
effective rate of interest for the entrepreneur was to
be 7 per cent. The programme was to be operated
by the Department of Industries. In the year 1997-
99, the applications o eighteen units from
Marathwada for subsidy amounting to Rs. 4,62,000
 5.2
37
were recommended by the Director of Industries.
However, the budget allocation for our universe
during the year was Rs. 4,00,000 thus failing short by
about Rs. 60,000 of the articulated demand. In our
sample, one entrepreneur had applied for the
subsidy. The respondents complained that sanction
of the subsidy took a long time ranging from six
months to two years depending on the availability of
funds. The programme was launched under the
Employment Promotion Programme and was a
continuation of the Half-a-Million Job Programme.
Though beneficial, it had a limited scope because the
subsidy was available only to engineer
entrepreneurs.

In 1995-96, the State Government undertook

another programme to help entrepreneurs secure
loans from banks at the subsidized rate of interest.
The aim was to replace the facility of loans under the
State Aid to Industries Act by “interest subsidy”.
Under, it not only engineer entrepreneurs but all
were eligible. An applicant applied to the bank for a
loan through the District Industries Centre. The
Functional Manager, Credit interviewed the applicant
and made an appraisal of the unit based on its equity
capital sources of raw-materials and marketing. If
satisfied on technical grounds, the Credit Manager
recommended the application and the case was
sponsored for a loan to the bank by the General
 5.2
38
Manager. The loan was granted against personal
security or group guarantee. The difference in the
rate of interest charged by the bank and under the
State Aid to Industries Act was subsidized by the
Department of Industries, up to a maximum of 4 per
cent.

In our universe (Marathwada) in the year 1991-

2000, 781 units were recommended for financial
assistance for the amount of Rs. 28.9 lakh, the total
number of sanctioned applications were 421 for the
loan of Rs. 93.04 lakh. In our sample no unit had
availed of the benefit of interest subsidy.

Subsidy for Special Purposes :

The programme of providing subsidy on
purchase of generating sets was announced by the
Government of Maharashtra in 1983 “with a view to
counteracting the shortage of power and
encouraging the industrialists to purchase their own
generating sets”. Under it, a loan of 75 per cent of
the cost of a generating set was to be granted by the
Maharashtra Financial Corporation or a bank, 20 per
cent was to be given as subsidy by the Department
of Industries, and the remaining 5 per cent was to be
contributed by the entrepreneur.

Procedure : The applicant was to approach the

Maharashtra Financial Corporation or a bank for the
 5.2
39
grant of loan and subsidy; he was to purchase the
generating set within a period of two months or such
extended period as might be allowed by the Director
of Industries. The amount of subsidy was to be
channelized through the Corporation or the bank by
the Department of Industries16.

In our sample, two entrepreneurs received the

subsidy for purchasing a generator set each from the
Maharashtra Financial Corporation for their high-
investment units. They received the loan and
subsidy within two months of applying. Smaller units
could not purchase a generating set because of its
high operational cost and their low production.

Subsidy to Rural Industries :

In pursuance of the Rural Development
Programme announced in the Industrial Policy
Statement of 1978 a subsidy was to be granted to
rural industries. In 1999-2000 applications of five
units of our universe for subsidy amounting to a total
of Rs.26,000 were forwarded to the Director of
Industries, by the General Manager. However, the
amount disbursed was only Rs.15,000 since this was
the provision in the Budget. A subsidy to rural
industries was significant for the growth of these
industries and thus for diversification of industrial
sector. However, the budget allocation for the
purpose was less than the articulated demand.
 5.2
40

Incentives :
The Government provided fiscal and monetary
incentives to promote the establishment of new
industries and to encourage expansion in established
industries. Some additional incentives were provided
to the small-scale sector. Incentives were also
provided to encourage the locational dispersal of
industries in rural and backward areas. We shall deal
with these one by one.

The incentives offered by the Central

Government were : income-tax concessions,
exemption from excise duty and the capital subsidy
in backward areas.

Income-Tax Concessions :
Under the Income-tax Act, 1961, new industrial
undertakings were exempt from payment of income-
tax on their profits up to 6 per cent annum of the
capital employed. The concession was available for a
period of five years from the accounting year in
which the undertaking started its production.
Further, small-scale units which began manufacturing
activity after 30 September 1977 in any rural area
were entitled to claim a deduction of 20 per cent of
profits from the gross total income for ten years
beginning with the assessment year in which the unit
started production. One of the conditions, besides
 5.2
41
others, was that only those units which employed ten
or more workers in a manufacturing process
requiring the aid of power, or 20 more workers
without the aid of power, were eligible.

Under Section 32(1) of the act, an industrial unit

was entitled to deduction of depreciation out of the
net profits at the prescribed rates on building,
furniture, plant and machinery. In 1996, another tax
concession by way of investment allowance was
introduced. Only small-scale units were eligible for it.
It was allowed at the rate of 25 per cent of the cost of
new machinery or plant.

In our sample, only 34 units were eligible for the

5-year tax holiday, because the other units did not
fulfill the requirement relating to the number of
workers. None of the rural industries fulfilled this
condition. The benefit of deduction of depreciation
was availed of by the eligible units. In our sample,
42 entrepreneurs installed new machinery and they
availed of the investment allowance.

Exemption from Payment of Central Excise

Duty :
Under rule 8(1) of the Central Excise and Sales
Act, 1944, the Central Government might, from time
to time, exempt any excise able goods from the
whole or any part of duty leviable on such goods. To
 5.2
42
encourage small producers, differential excise duties
were prescribed by the Government. In certain
cases, producers manufacturing excisable items were
totally exempted from duty and in certain other
cases, a reduced duty was charged as compared to
other units manufacturing similar excise goods above
a certain fixed value.

A majority of the entrepreneurs stated that they

“had to maintain” false accounts of sales and
production to avoid payment of excise duty.

Capital Subsidy in Backward Areas :

This benefit was available to units located in
district declared by the Government as backward.
Districts in Marathwada were backward and hence
they were eligible.

State Government :
The Government of Maharashtra announced a
package of incentives for industries, after the
formation of the reorganized Maharashtra. These
incentives were announced as part of the New Policy
of Industries Development17, and were aimed at
“attracting industry to a few selected Focal Points of
growth, sustaining and developing industries in
selected cities and development of industries in the
State as a whole”18. In 1973, a few more incentives
were announced, and the rules governing old ones
 5.2
43
were changed. In 1998 the Maharashtra Government
issued an Industrial Policy Statement providing for
further incentives. These were to be available to
units set up after April 1990 in Focal Points19,
Industrial Areas, Industrial Estates, backward areas,
sub-mountain areas, Bet areas20, and to those set up
by qualified engineers. Industries of all sizes could
avail of them. These are being discussed below.

Interest-free Loan :
The most important of the incentives was the
interest-free loan in lieu of the refund of sales tax.
The Government had announced in 1966 that
purchase and sales tax including inter-state sales tax
would be refunded by the Director of Industries to
new and expanding units located in Focal Points for
five years from the date of registration as follows :
(i) Refund of purchase tax on raw-
materials and components in respect of
purchases made anywhere in India.

(ii) Refund of sales-tax on finished

products sold directly to consumers;

(iii) Refund of inter-state sales-tax

recovered on inter-state sales21.

In February 1993, the Government announced

that an interest free loan in lieu of refund of sales tax
would be granted to new and expanding industrial
units in five annual installments. The concessions
 5.2
44
were also available to the existing units provided the
following conditions had been fulfilled :
(i) The unit had doubled its capital
investment ;

(ii) It had undertaken expansion involving

a capital investment of Rs. 5 lakh or more ;

(iii) Only industrial units having an

existing capital investment of Rs. 1 lakh or
more were eligible.

According to the Maharashtra Industrial Policy

Statement of March 1998, the incentives was to be
granted to new industries set up in the State on or
after April 1, 1993. An interest-free loan was
admissible to a unit registered as a dealer under the
Maharashtra General Sales Tax Act. A unit not
covered under the Act was eligible if its turnover
exceeded Rs. 40,000 per annum.

Procedure : An entrepreneur was to apply to

the General Manager, District Industries Centre, in
the prescribed from (B-1) every year. The application
was to be accompanied with : (i) an affidavit
declaring that property to be mortgaged was free
from all encumbrances and that the applicant had a
clear and saleable title to the property, (ii) the
balance sheet, and profit and loss account relating to
that financial year, duly verified by a Chartered
Accountant (except for tiny units exempted by the
Director), (iii) an attested copy of the constitution of
 5.2
45
the firm or an affidavit to the effect that the applicant
was the sole proprietor of the firm, (iv) attested
copies of purchase documents relating to the
purchase of new plant and machinery or used
machinery. The application was to be submitted to
the General Manager, District Industries Centre, who
was to sanction the loan under authority delegated to
him by the Director, or forward the application to the
Director for loans beyond his competence. The
admissible amount was to be calculated as a
percentage of the fixed capital investment or sales of
the units, and was to very positively with the
backwardness of the area of its location. The loan
was to be granted against mortgage of immovable
property, the value of which was not to be less than
125 per cent of the amount of the loan. It was
repayable in three annual equal installments within
13 years. In case of default, penal interest at 16 per
cent per annum was to be charged.

Since the loans were related to capital

investment or sales, the units with higher investment
would naturally get more of them. However, what is
interesting is that they received preferential
treatment also. If funds were lacking small
entrepreneurs, were kept waiting. Thus, at the
beginning of 1979 all the 72 pending applications
were those of small entrepreneurs, none of large
ones. In our sample, two units applied for the loan
 5.2
46
but it was sanctioned to one only. The loan
sanctioned for one year was Rs. 25,000. The other
entrepreneur maintained that he fulfilled all the
conditions; the concerned officer had asked him to
donate Rs. 10,000 to the ruling party for elections but
he had offered only Rs. 5,000.

The programme had given rise to high

expectation among entrepreneurs. However, the
achievements fell far below these. There was
generally a lack of funds. The programme had been
restricted mainly to new units and specified areas, an
exception being made in favour of technically
qualified entrepreneurs. Political and other pressures
also influenced the grant of loans.

Subsidy in Electricity Tariff for Power-based

Industries :
Power-based industries were to be granted
subsidy equal to 25 per cent of the power tariff. It
was admissible for a period of five years from the
date of power connection. An entrepreneur was to
apply in the prescribed form (C) to the Director of
Industries through the General Manager of the
District Industries Centre. The application was to be
accompanied with attested copies of all receipts and
bills for which the payments of electricity tariff had
been made. This concession was first announced in
1966 ; applications were also received. However, the
 5.2
47
State Government did not entertain any claim for
many years because of the paucity of funds. In 1978,
Government of Maharashtra announced the incentive
again. There was a clause that the industries to
which it was available would be notified later but this
notification had not been made by the end of 1981.
However, some of the large-scale units went to the
court to claim this concession and the Government
agreed to fulfill its commitment with regard to
applications.
 5.2
48
Exemption from Electricity Duty :
This was to be allowed to a unit for a period of
five, six, eight and ten years in areas groups I, II, III
and IV respectively22. An entrepreneur has to apply to
the General manager in the prescribed form (D). The
General Manager was to verify the facts given in the
application and forward it in the prescribed forms (E)
to the Chief Electrical Inspector.

The Chief Electrical Inspector was to issue the

Exemption Order and forward it to the concerned
Sub-Divisional Officer of the Maharashtra State
Electricity Board. In case the unit had already paid
the duty, its refund was to be allowed by the Sub-
Divisional Officer by adjustment in future electricity
bills. Seventy eight units had been granted
exemption in Maharashtra till March 1980. In our
universe, only for units and in our sample, one unit
had availed of the facility. The entrepreneurs stated
that they did not want to undergo the procedural
formalities to secure a small benefit.

Exemption / Refund of Octroi / Terminal Tax :

Exemption from the levy of octroi/terminal tax
or alternatively the refund of the amount paid by a
unit was to be allowed for a period of five, six, eight
and ten years for area groups I, II, III and IV
respectively. In Maharashtra, only one large-scale
 5.2
49
unit availed of the facility. In our universe none of
the entrepreneurs availed of this exemption. .

Investment Loan for Priority Industries :

Investment loan was to be granted to priority
industries23 to supplement the promoter’s
contribution for the purchase of land, construction of
factory building and purchase of plant and
machinery. The loan was to be equal to the amount
of interest-free loan to which the unit would be
entitled. A project report was to be prepared by a
consultant on the panel approved by the Director.
The entrepreneur was to apply in the prescribed form
(H) to the Director of Industries. The application was
to be accompanied with the following (i) a copy of
the project report, (ii) an attested copy of the
constitution of the firm or an affidavit to the effect
that the applicant was the sole proprietor of the firm,
(iii) documentary proof regarding acquisition and
possession of land acquired for the project, (iv) an
attested copy of the confirmation of the order for
machinery placed by the firm with the suppliers
along with copies of letters of credit in the case of
imported machinery, and (v) certificate from a
registered architect regarding progress of
construction of the building.

In our sample tiny units were eligible but it was

difficult for them to complete the formalities such as
 5.2
50
getting the project report and the certificate of a
registered architect. None of the entrepreneurs
applied for the loan.
 5.2
51
Cost of Feasibility Report :
In 1966 the State Government announced that
50 per cent of the cost of the feasibility report
prepared by approved consultants would be paid by
the Government to be converted into equity capital if
the project was established. In 1978 the Government
announced that this assistance would be given in the
form of a loan at the rate of interest fixed by it for
loans under the State Aid to Industries Act. The
amount of loan admissible was 75 per cent of the
cost of feasibility report up to a maximum of Rs.
75,000. In case the cost of the report was not
considered reasonable by the Director, he might
determine the reasonable cost. The amount was to
be recovered in five annual installments. An
entrepreneur was to apply for the grant of loan to the
Director in the prescribed form (I). The application
was to be accompanied with a copy of the feasibility
report and original receipt of payment to the
consultant.

During six years (1974-1980) only five units in

Maharashtra had received the loans amounting to Rs.
64,000. The whole of this amount went to the large
and medium-scale industries. Small-scale units could
not afford to pay for feasibility studies. In our sample
none of the entrepreneurs got a feasibility report
prepared even though it was required for applying to
banks or Government Corporations for loans.
 5.2
52
Land Subsidy :
Subsidy was allowed to a unit in respect of
developed plot allotted to it in Focal Point, Industrial
Area, Industrial Estate or Industrial Colony. It was
also provided to entrepreneurs who purchased
undeveloped land sold by the Government. The
amount of subsidy was 75 per cent of the portion of
price of plots in excess of ceiling price payable by the
allottees. The balance of 25 per cent would be borne
by the entrepreneur. Only those entrepreneurs who
purchased the plot/land after April 1, 1978, were
eligible. In case of developed plots, it was allowed to
those entrepreneurs who had paid the full price of
plot. Small entrepreneurs were not able to make the
full payment in one installment. By March 1981, no
entrepreneur in Marathwada had availed of the
subsidy.

Special Incentives for Rural/Village Industries :

Through the Industrial Policy Statement of 1978,
the Government of Maharashtra announced that
various schemes and programmes would be recast so
as to give a thrust to industry by a network of rural,
village and small industries, and to cover all villages
in the coming five years. In order to achieve this
objective and to develop and promote village
industries, the State Government announced a few
special incentives to be given to the rural/village
industries. The special incentives were to be
 5.2
53
available to units whose capital investment on
machinery and plant did not exceed Rs. 1 lakh and
which were set up in Focal villages selected under
the programme. These incentives were 15 per cent
cash subsidy on capital investment, grant of
exemption from electricity duty, subsidy for purchase
of improved tools and machinery, loan at
concessional rate of interest and interest free loans.
In our sample, there was no unit located in Mini
Industrial Estates, Maratheada, rural industries were
apparently not functioning well as is indicated by the
fact that all mini Industrial Estates from Maratheada
are not functioning.

Concessions to Engineers :
Degree and diploma holders in any branch of
engineering or technology were eligible for all the
incentives and concessions extended by both the
Union and State Governments for setting up a unit
anywhere in the State provided they retained 51
percent interest in the new undertaking. Such
persons were also granted certain additional
concessions such as preference in the supply of
machinery on hire-purchase by the Maharashtra
State Small Industries Corporation, out of turn power
connection, allotment of land on a priority basis,
exemption from payment of earnest money on plots
allotted to them in industrial areas or colonies,
exemption from octroi, terminal tax and electricity
 5.2
54
duty, and subsidized electricity rates. The
Government of Maharashtra also provided sheds to
the educated unemployed on a lease basis for setting
up small-scale industries. There were three engineer
entrepreneurs in our sample. All had their units at
the Focal Points. One entrepreneur had availed of
interest-free loan and exemption from electricity
duty.

Concessions to Non-Resident Indians :

The special facilities and incentives available to
non-resident Indians included the following :
(iii) import of machinery up to a value
(CIF) of Rs. 25 lakh purchased out of the
applicant’s own foreign exchange savings
abroad without going through import
licence formalities; only the customs
clearance permit was necessary for this
purpose;

(iv) import of permissible raw-materials

and components for meeting the
requirements for one year up to Rs. 10
lakhs purchased out of the applicant’s own
foreign exchange earnings abroad;

(v) priority in allotment of plots and in

issuing letters of indent for land where
regular allotment was delayed;

(vi) assistance to get applications to the

Government of India for import of
machinery and raw-material expeditiously
processed;
 5.2
55
(vii) higher level of concession than those
to which they were entitled on the basis of
the backwardness of the area.

There were no non-resident Indians in our

sample.

Concession in Rate of Interest

Small entrepreneurs were provided loans at
concessional rate of interest. Banks charged
differential rate of interest depending on the amount
of the loan. The Maharashtra Financial Corporation
charged lower rate of interest from units belonging to
small-scale sector. This enabled them to get cheaper
loans.

Incentives : An Evaluation
The provision of tax exemption to encourage
investment has been questioned by some on
economic grounds. They argue that use of tax
concessions to foster and attract industry was not
justified because new enterprise was subsidized at
the expense of earlier developed business, and that
exemptions resulted in a narrowing of the tax base,
which made it more difficult to maintain
governmental revenue and the administration of tax
exemption raised difficult problems both of technique
and of honesty24. While there is partial truth in such
arguments, some concessions are necessary to help
 5.2
56
the units become viable in the initial stages of
establishment.

It was found that the objective of attracting

entrepreneurs to Focal Points had been fulfilled in our
universe. The number of applicants was more than
the number of plots. The success was apparently
due to the combined availability of infrastructural
facilities and incentives.

The data suggest that some of these incentives

were not availed of by the entrepreneurs. Poor
information regarding the available incentives and
the agencies which granted these was one of the
reasons why incentives were not availed of. Another
problem related to procedure formalities and delay.
Small-scale units could not fulfill the conditions
relating to obtaining investment loan and loan on
account of cost of feasibility report. Non-factory
units were not even eligible for tax holiday. Further,
most of these incentives were linked with the capital
investment, the amount received by large-scale
units through incentives was more. This problem
was mentioned by the Nayak Committee also, which
dealt with the incentive under the central investment
subsidy scheme25. Though, large – scale units could
not be ruled out, small units were to be given a
preference if employment generation was one of the
 5.2
57
objectives of the incentives administered in backward
areas.

Machinery On Hire Purchase :

The facility of obtaining machinery on hire-
purchase was provided by two Government
Corporation – the National Small Industries
Corporation Ltd., and the Maharashtra State Small
Industries Corporation Ltd.
 5.2
58
National Small Industries Corporation Ltd.
As mentioned earlier, the Corporation was
established in 1955 on the recommendation of the
Ford Foundation Team invited by the Ministry of
Commerce and Industry. A tangible assistance
rendered by it was the programme of supplying
machinery and equipment, particularly imported on a
hire-purchase basis.

Procedure : The application on the prescribed

form (in triplicate) was to be submitted to the
regional office of the National Small Industries
Corporation. Two copies of the application were
forwarded by the regional office to the District
Industries Centre of the concerned district. After
obtaining the comments of the Director of industries,
the application needed clearance by the State-Level
Committee and then reached the head office of the
National Small Industries Corporation. It was to be
accompanied with the prescribed fee depending on
the value of machinery applied for. Supply of
machines by the Corporation depended upon its
ability to procure these and subject to the availability
of import license and foreign exchange. After the
application was accepted, no change in the
specification, size, quality or make of machines was
generally to be allowed. All formalities regarding the
application were to be completed before the issue of
the letter of demand for earnest money. The
 5.2
59
requisite earnest money was to reach the
Corporation within sixty days of the offer. In case of
failure on the part of the applicant, the case would
automatically stand closed.
The value of the machines was to be recovered
in 9 installments in case of furnaces, boilers, cold
storages, ice-plants, chemical plants, and tyre
rethreading, canning and electroplating plants, and in
13 installments in other cases. In case of existing
units the first installment was due one year after the
delivery of the machinery. In case of new units, the
first installment was due 18 months after the
delivery. Subsequent installments were payable
every six months thereafter.

The programme would work better if greater

publicity were given wherever small-scale units were
located, condition relating to security was removed
and time-lag between receipt of an application and
actual delivery of the machinery was reduced by
expediting the application at different stages. A
study of the Corporation recommended that the
programme would be more popular if the term and
conditions under it were streamlined as follows :

Earnest money should be fixed at not more than

10 per cent and this should be collected in a phased
manner. It may be accepted in parts like 2½ per
cent with the application, 2½ per cent on intimation
 5.2
60
of acceptance of application (which should invariably
be within 45 days of the receipt of the application)
and 5 per cent at the time of placing order for
machinery. The hirer should be entitled to receive on
the initial deposit of earnest money an interest at
reasonable rate in case his application was not
processed within 45 days of the receipt of his
application subject to his complying with all
requirements; interest should accrue to him from the
date of initial deposit. On the other hand, the hirer
should deposit the final installment of earnest money
within 45 days of information of acceptance failing
which the Corporation would forfeit the earnest
money already deposited with the application26.
Interest on installments should be revised gradually
to make the programme attractive as well as
commercially viable. This should be in accordance
with the prevailing interest structure of financial
institutions. This should be different for urban small
entrepreneurs and those in the rural and backward
areas. National Small Industries Corporation and its
regional offices should have direct dealing with
entrepreneurs and they should function with
autonomy in accepting hire purchase application;
subject of course to certain guidelines, regarding
indigenous availability of machinery, overall capacity
and availability of raw material.
 5.2
61
The Working Group on small-scale industries for
the Third Five Year Plan was of the view that the
programme of supplying indigenous machinery
should be handed over to State Corporations because
this would ensure a better spatial distribution of
resources and help extend the benefit to the less
industrialized parts of the State. However, the supply
of imported machinery must remain the
responsibility of the National Small Industries
Corporation because a central organization would be
more competent to perform a number of functions for
supply of imported machinery like liaison with the
authorities responsible for the allotment of foreign
exchange, with the Development Wing of the Ministry
of Commerce and Industry which scrutinized the
import applications for machinery and with the Chief
Controller of Imports.

Maharashtra State Small Industries

Corporation Ltd. :
The Corporation supplied machinery on easy
installment’s “in order to assist the educated
unemployed to set up small-scale industries”. The
programme was introduced in 1971-72 under the
Central Government Programme of providing
assistance to educated unemployed. The
Corporation supplied plant and machinery
manufacture in the country up to the value of Rs.
25,000 to one entrepreneur. The funds for operating
 5.2
62
the programme were received from the Union
Government up to 1973-74, From 1976-77 the funds
were supplied by the State Government under the
“Employment Promotion Programme”. However, the
scheme has been discontinued since July 1980.
 5.2
63
Notes & References :

1. Development Commissioner, Small-Scale

Industries, Report of the Working Group II on
Small-Scale Industries with special reference to
District Industries Center (Delhi : Government of
India press, 1979), p.4.

2. Reserve Bank of India, Report of High Powered

Committee for examining Bank Credit Problems
of Small-Scale Industries (Letter No. DBD No.
BP.BC.94/c/464(A)78 dated 20 July, 1978 to all
Commercial Banks).

3. Government of India, Report of the Banking

Commission (Delhi : The Manager of
Publications, 1972), p.127.

4. Standing Committee on Credit Facilities, Report,

December 1969 (Development Commissioner,
Small-Scale Industries), p.33

5. Personal interview with bank-managers.

6. Dr. Kurulkar K.N., Finances for Small-Scale

Industry in Marathwada, (New Delhi : Nirmal
Publishing House, 1982), p.14.

7. H.S.Pareek, Financing of Small-Scale Industries

in a Developing Economy (Delhi : National
Publishing House, 1998), p.121.

8. Maharashtra Financial Corporation, 25th Annual

Report and Accounts p.12.

9. In our Experience Survey sample, six units had a

full time accountant each, 85 a part-time
accountant each, who worked once or twice a
week, and 26 had no accountant.

10. Reserve Bank of India, Report of High Powered

Committee for examining Bank Credit Problems
 5.2
64
of Small-Scale Industries, op.cit., p.2;
Development Commissioner, Small-Scale
Industries, (1979) op.cit., p.15.

11. Small-Scale Industries Board, 28th Meeting held

at Bhubaneswar on the 5th and 6th November,
1995 (32.Development Commissioner Small-
Scale Industries Mimeographed), p.25 ; Ministry
of Industry, 34th Meeting of Small-Scale
Industries Board of 14th and 15th February 1996 :
Agenda and Notes (Development Commissioner,
Small-Scale Industries, Mimeographed), p.26.

12. In Japan, there were at least three such

institutions while both the U.S.A. and U.K. had
one each. In our country large-scale sector had
three : the Industrial Development Bank of
India, the Industrial Finance Corporation and the
Industrial Credit and Investment Corporation.

13. Government of India (1998), op.cit., p.137;

Government of India, Ministry, of Industry,
Working Group on Five Year Plan for Small Scale
Industries (35.Development Commissioner,
Small-Scale Industries, n.d., Mimeographed),
p.24.

14. Government of Maharashtra, Department of

Industries, Brochure on Financial Assistance
(Memo, No. Plg/Pb/182/23990-A July 20, 1997).

15. Government of Maharashtra, Department of

Industries, Self-Employment and Job
Opportunities for Educated Unemployed, p.5.

16. Government of Maharashtra, Director of

Industries, Incentives offered by Maharashtra
Government for setting-up Industries in the
State (Mimeographed). p.5.
 5.2
65
17. Government of Maharashtra, the Director of
Public Relations, Maharashtra Incentives to
Industries (Faridabad : Thomson Press, n.d.),
p.1.

18. Government of Maharashtra, the Department of

Industries, Industrial Development – New Policy
of Maharashtra Government (39Maharashtra :
Government Press, 1966), p.4.

19. Focal Point means a place declared as such by

the Government and comprising of the area
notified by the Government.

20. Bet area means an area falling within three

kilometers on both sides of the banks of a river.

21. Government of Maharashtra, In the Era of

Industrialisation : Maharashtra Welcomes
Industrialists (Maharashtra : Government Press,
n.d.), p.5.

22. The areas where the incentives were admissible

were divided in four groups in descending order
depending on the extent of their backwardness.

23. A priority industry was one included in the

schedule of the rules for grant of incentives
under the Industrial Policy Statement, 1978, of
the Maharashtra Government. These industries
included :
(i) tiny units (investment on machinery
not exceeding Rs. 1 lakh) in any industry;
(ii) electronic instruments/components
(any sector);
(iii) agro-base industries (any sector);
(iv) agricultural machinery to be notified
by the State Government from time to time
(large and medium sector);
(v) cotton spinning and weaving (large
and medium sector);
 5.2
66
(vi) insecticides and pesticides (any
sector).

24. Eugene Staley and Richard Morse, Modern Small

Industry for Developing Countries (London :
McGraw-Hill Book Company, 1965), p.343.

25. Government of India, Planning Commission,

Report of Nayak Committee on Backward Area
Development Programme (1976), p.17.

26. J.D. Vermas, A Study of the Working of the NSIC

and the Suggested Changes in the Direction of
its Activities (1977 Mimeographed), pp.17-18.
 7.2
67

Chapter – VI

Institutional Finances to SIUs

− Introduction

− Procedure for Getting Financial Assistance

− Institutional Finance to Small Enterprises

− Schemes of Assistance to Small

Enterprises

− Lead Bank Scheme for Facilitating

Institutional Finance

− National Small Industries Corporation

(NSIC) Ltd.,

− Small Industries Development Bank of

India (SIDBI)

− Sources of Finance to Industrial Co-

operatives

− National Bank for Agriculture and Rural

Development

− Problems faced by Financial Institutions

− Problems Faced by the Small Enterprises

− Suggestions
 7.2
68
Chapter – VI
Institutional Finances to SIUs

Introduction :
Finance is not only the simple requirement
alone to any project but also to be considered as a
blood circulation of that project as it is required till
winding up the enterprise. One of the key problems
in this area in that the enterprise should not be over
financed as well as under finance. Due to inadequate
financial assistance, there was a big hamper to the
industrial development. However, after
independence the specialized network of financial
institutions with a fairly big capital base was
established to provide financial assistance to small
scale industries.

The assistance can be divided into three types

viz.
1. Short term These funds are required for a
period of less than one year to meet variable,
seasonal or temporary (working capital)

2. The medium term - These funds are required

for a period of five years for permanent working
capital, small expansions, replacements and
modifications and

3. Long-term finance - These funds are required

exceeding five years for providing fixed assets,
 7.2
69
for establishment of new business, long-term
expenses, modernization etc.

In our study universe almost all had long term

finance from different Institutions. However nearly
90% are in overdues as respects to repayment.

Procedure for Getting Financial Assistance :

The new SIU entrepreneurs find it difficult to get
financial assistance from the funding agencies as
they do not know the procedures. A sort of brief
guidance is very essential for them. The guidelines
are to be pointed to their purpose of assistance
needed. The following points may enlighten the new
SIU entrepreneurs to get assistance for their small
enterprises.

2. The long-term loans are required for acquiring

fixed assets like land, building, plant and
machinery, other installations, fitting, fixtures
etc.

3. The short-term loans are required as working

capital for day-to-day requirements, for
procurement of raw materials, wages for
workers, and for transport costs.

4. The rate of interest may vary according to the

category of beneficiaries/entrepreneurs(SC/ST),
 7.2
70
Ex-servicemen, physically handicapped persons
etc.

5. The promoters contribution varies from 10 per

cent to 25 per cent depending upon the
category of entrepreneurs /location of the units.

6. The security of the term loan would normally be

by mortgage of land and building and by
hypothecation of machinery and equipment
acquired through financial assistance and / or
personal guarantee / surety.

7. The collateral security limit is at the discretion

of the funding agency.

8. The repayment of loan usually be on

installments, spread over 5 to 10 years
depending upon the cash generation and the
profitability of the project.

9. A moratorium for repayment of installments of

the principal amount ranging from 12 months to
24 months is allowed from the date of the first
release of the loan. However the interest is to
be paid on quarterly basis from the date of first
release of the loan amount.

10. In respect of cases where there has been

considerable delay in implementing the project
 7.2
71
due to factors beyond the control of the
promoters, rescheduling of repayment of loan
and extension of time for repayment of interest
may be allowed on request.

11. The short-term loan for working capital is

extended for
(a) Purchase of raw materials

(b) Consumable stores/spares

(c) Ready stock in process

(d) Payment of wages

(e) Administrative and manufacturing

expenses

12. Normally the entrepreneurs approach

commercial banks for working capital
requirements.

13. The working capital facilities could be classified

as advances on

(a) Lock and key pledge of stocks

(b) Factory/Godown type hypothecation

of stock

(c) Advances against stock in process

(d) Advances against bills (when finished

goods are supplied on credit)

(e) Clear advances (contingent needs)

 7.2
72
(f) Packing credit to exporters to execute
export orders. Working capital loan is
sanctioned in the form of cash credit,
overdraft facility and bills purchase and
discounting facility.

14. The Dept. equity norm for SSI is 3:1 for Khadi
and Village Industries 9:1.

15. The promoter’s contribution is fixed in relation

to the cost of the project (based on location and
category of beneficiary)

16. The investment subsidy is available from the

State and the Central Governments.

17. The scheme of support and incentives to the

entrepreneurs are administered by the
Government and promoting Central agencies.

Institutional Finance to Small Enterprises :

Finance to small enterprises is available from
commercial banks, National Small Industries
Corporation, Small Industries Development Bank of
India, State Industries Co-operative Bank, National
bank for Agricultural and Rural Development
(NABARD), All India Boards, Commissions, and
Corporations.

Institutional finance is provided for the purposes

like purchase of machinery, raw materials and to
meet the working capital requirement.
 7.2
73

Institutional Framework :
To provide financial assistance to entrepreneurs
that Government has set up a number of special
financial institutions besides commercial banks.
They may be classified into two categories.

1. All India Financial Institutions

2. State Level Financial Institutions

The list of financial Institution and percent of

SIUs owners availing finances from them are given
against each of institution

All India Financial Institutions are :

− Industrial Financial Corporation of
India –IFCI (40%)

− Industrial Credit and Investment

Corporation of India – ICICI (12%)

− Industrial Reconstruction Bank of

India – IRBI (16%)

− EXIM Bank of India – EXIM BANK (6%)

− Unit Trust of India – UTI (6%)

− Life Insurance Corporation of India –

LIC (12%)

− General insurance of India – GIC (8%)

− National Small Industries Corporation

– NSIC (12%)
 7.2
74
− Small Industries Development Bank of
India – SIDBI (16%)

− National Bank for Agricultural and

Rural Development – NABARD (14%)

− Housing Urban Development

Corporation – HUDCO (12%)

− Housing Development Financial

Corporation HDFC (16%)

− National Co-operative Development

Corporation NCDC (14%)

− Export Credit Guarantee Corporation –

ECGC (10%)

− Khadi and Village Industries

Commission – KVIC (22%)

− Commercial Banks - SBI, IOB, CB,

PNB, UCOB, etc. (86%)

State Level Financial Institutions

− State Financial Corporation – SFCs (34%)

− State Industrial Development Corporation –

SIDCs (12%)

− Small Industries Promotion Corporation of

Maharashtra – SIPCOM (12%)

Of the above, except a few all India financial

institutions, all others cater to small enterprises.

Schemes of Assistance to Small Enterprises

and percentage of entrepreneurs availing
assistance from them are given ahead.
 7.2
75
− Technical Schemes (12%)

− Special Capital Scheme (14%)

− Seed Capital Scheme (14%)

− Composite Loan Scheme (8%)

− Disable Entrepreneurs (4%)

− Modernization (8%)

− Electro-Medical Equipment (12%)

− Nursing Home/Hospital (4%)

− Equipment Finance (42%)

− Quality Control Equipment (2%)

− Assistance to Ex-Servicemen (6%)

− Single Window Scheme (4%)

− Tourism Related facilities (4%)

− Mahila Udhyam Nidhi Scheme (4%)

− National Equity Funds Scheme (2%)

− Assistance for Marketing (2%)

− Refinance Scheme for Acquisition of ISO 9000

by SSI unit (RISO9000) (12%)

− Prime Minister’s Rozgar Yojana (28%)

− Integrated Rural Development Plant etc. (42%)

 7.2
76
Important highlights of some of the above
schemes are as follows :

Seed Capital Scheme : Assistance towards

equity on soft terms up to Rs. 15 lakhs along with
term loan for technically qualified or experienced
persons.

Composite Loan Scheme. Both equipment

finance and working capital up to Rs. 50,000 for
artisans and rural industries.

Disabled Entrepreneurs : One hundred per

cent finance up to Rs. 50,000 to disabled
entrepreneurs.

Modernisation : For replacement/renovations

of equipment for successful units which are in
existence since five year assistance up to Rs. 90
lakhs.

Electro-Medical Equipment : For qualified

doctors, private nursing homes and existing
industrial units for procurement of new machinery up
to Rs. 90 lakhs each.

Quality Control Equipment : One hundred

per cent assistance for setting up quality control
facility by existing and new SSI units up to Rs. 7.5
lakhs.
 7.2
77

Assistance to Ex-Servicemen : Term loan up

to Rs. 9 lakhs and seed capital up to Rs. 1.8 lakh for
gaining self-employment

Single Window Scheme : Both term loan and

working capital together to new tiny and small scale
industrial units up to Rs. 7.5 lakhs and Rs. 3.75 lakhs
respectively.

Tourism Related Facilities : Up to Rs. 90

lakhs available for tourism related business ventures.

Mahila Udyam Nidhi Scheme : To set up new

industrial projects in S.S.I. sector by women
entrepreneurs.

Assistance for Marketing : For sales van, not

exceeding six vans and for setting up new sales
outlets, maximum assistance upto Rs.3 lakhs and Rs.
7.5 lakhs each respectively.

Prime Minister’s Rojgar Yojana Scheme :

Both men and women, not exceeding the age of 35,
with a minimum qualification of 8th standard, having
annual income of not exceeding Rs. 24,000 and are
residing at least for a minimum period of three years
at the proposed business place can avail loan up to
Rs. 2 lakhs individually and Rs. 10 lakhs jointly to
 7.2
78
start any manufacturing/service/trade in any place in
India.

In addition to the above, a small scale

enterprise can avail subsidies, incentives and
bounties like capital investment subsidy, interest
subsidy, power subsidy, exemption from properly tax,
subsidies to artisans and traditional industries
including handlooms, incentives to Non-Resident
Indians, special incentives to women entrepreneurs,
exemption from income-tax, interest-free sale tax
loans, waivers, subsidy for buying test equipment,
subsidy for industrial housing, land and building at
concessional rates, price preference to S.S.I. units,
subsidy/ assistance for technical consultancy, subsidy
for R & D works, exemption from stamp duty,
concessional water, provision for seed capital, export
and import subsidies and bounties, allotment of
developed/constructed sheds, allotment of controlled
or subsidized raw material, subsidizing the cost of
market studies and feasibility studies or reports etc.,
which are also considered as financial assistance
from financial institutions.

Lead Bank Scheme for Facilitating Institutional

Finance :
For the purpose of facilitating institutional
finance fourteen commercial banks were nationalized
in the year 1969. Among the commercial Banks the
 7.2
79
State Bank of India pays special attention to the need
of small enterprises. A “Lead Bank Scheme” is
operated among commercial banks to co-ordinate
the funding to small enterprises at the District level.

Credit Guarantee Scheme for Small Scale

Industries :
The credit Guarantee Scheme was introduced in
the year 1960 to avoid possible losses in respect of
the loans to small scale industries. The scheme was
administered by the Reserve Bank of India initially in
22 selected districts. The scheme was extended to
the whole country in January 1963. The reserve bank
of India has been designated as the Credit Guarantee
Organisation (CGO) as the agent of Government of
India. The scheme is applied to all small scale
industrial units. The losses are shared between the
lending institutions and the Guarantee organization.
The guarantee facilities can also be availed by the
credit institutions not in the approved list of the
Reserve Bank of India provided the share of advance
is fixed at Rs. 2 lakhs. The state co-operative banks
and primary urban banks have joined the scheme.
The old scheme administered by the Reserve bank of
India till March 31, 1981 was cancelled.
Subsequently, the scheme was transferred to the
Deposit Insurance and Credit Guarantee Corporation
(DICC) in April 1981. The Corporation covers all
credit institutions under (SSI) Small Loans Guarantee
 7.2
80
Scheme 1981. The participation in the scheme was
voluntary for the credit institutions. However, most
of the institutions have to joine the scheme. Till
1998, 69 commercial banks, 160 regional rural
banks, 14 state financial corporations, 8 other State
Development Agencies and 259 cooperative banks
participated in the Scheme.

The Credit Guarantee Scheme was formulated

at a time when the banking industry excluding the
State Bank of India was in the private hand. For
making the schemes more effective the government
introduced social control measures over the banks.
Even then, there was not much change. The banks
continued to remain with hesitation in financing the
small scale industries. The small scale sector has yet
to make a mark on the industrial scene in the
country. In order to encourage the banks to
undertake financing of the small scale industries, the
Reserve Bank of India formulated the Credit
Guarantee Schemes and the Reserve Bank of India
was the Credit Guarantee Organisation. The scenario
of small scale had undergone a drastic change after
the Guarantee Organisation came in to existence.
The banks are now required to earmark a part of the
total lending for exclusive use of the priority sector of
which small scale industry is an important
component.
 7.2
81
The present situation is, the banks are no more
required to be encouraged to undertake financing of
small scale industries with help of Credit Guarantee
Scheme. Even the private banks and the foreign
banks have been given the targets for financing of
the priority sector. The scheme was in operation for
the first 20 years under the Reserve Bank of India.
The Credit Guarantee Corporation has been running
the scheme since April 1981. the Credit Guarantee
Corporation has raised the guarantee fee steeply
from 1st April 1989 in order to make the scheme more
viable. The Corporation operates five guarantee
schemes, four for small borrowers engaged in wide
range of activities and one for small industrial units.
Till the end of March 2000, the first four schemes
were guaranteed for Rs. 1,27,700 crores. About 375
credit institutions are participating in the Fifth
Guarantee Scheme. Through the fifth scheme till the
end of 2000, it was guaranteed to the tune of Rs.
1,16,830 crores.

National Small Industries Corporation (NSIC)

Ltd., :
The National Small Industries Corporation was
set up in February 1955. The Corporation was
assigned with the following functions.

(i) To secure Government orders.

 7.2
82
(ii) To provide financial and technical
assistance.

(iii) To bring co-ordination between large

scale and ancillary industrial units.

(iv) To arrange guarantee of loans from

banks to Small Industrial units.

(v) To operate the Hire Purchase scheme

on easy installments for purchase of
machinery.

(vi) To conduct intensive surveys in

backward areas.

(vii) To secure contact for small industrial

units from the Government of India
agencies under the Stores Purchase
Scheme.

The Achievements of NSIC

(i) Supply of scarce raw materials both
indigenous and imported.

(ii) Sale of products being manufactured

by small industries through marketing
development centers of the corporation.
These are now being expanded to
industrial marketing development centers.

(iii) Exports marketing of turnkey projects

and products of the small sector.

(iv) Marketing on agency basis.

(v) Internal marketing consortia

marketing

(vi) Supply of brass scrap.

 7.2
83
(vii) Exposure to the products of small
units in international and national
exhibitions/fairs.

NSIC Programmes in India

(i) Internal marketing programme.

(ii) Marketing assistance under

Government Stores Purchase Programme.

(iii) Marketing assistance programme.

(iv) Raw material assistance programme.

(v) Special export programme.

(vi) Enterprise building programme.

(vii) Marketing support programme.

(viii) Integrated marketing support

programme.

(ix) Proto type Development and training

Centre and sub centers for technical
support and technology upgradation.
 7.2
84
Small Industries Development Bank of India
(SIDBI) :
The Small Industries Development Bank of India
was setup by the Government of India in the year
1990 under a special Act of the Parliament of India as
a subsidiary of the Industrial Development Bank of
India. The authorized capital of the SIDBI is Rs. 250
crores initially and it could be increased to Rs. 1,000
crores as the need rises at any time.

The Role of the SIDBI

The SIDBI Co-ordinates the funding of the
financial institutions; and it has taken over the
responsibility of administering the Small Industries
Development Fund and the National Equity Fund.
These two funds were formerly administered by the
Industrial Development Bank of India. As many as
870 institutions are eligible institutions including
commercial banks, co-operative banks, regional rural
banks, state finance corporations, small industries
development corporation. The SIDBI has developed a
vast network of branches all over the country.

Functions of the Small Industries Development

Bank of India :
(i) The SIDBI refinances loans to the
primary lending institutions.

(ii) Discounts and rediscount bills.

 7.2
85
(iii) Extends seed capital from the
National Equity Fund and issues soft loans
from the Mahila Udyam Nidhi and Mahila
Vikas Nidhi. The seed capital scheme is
also operated through special lending
agencies.

(iv) Extends direct assistance and

refinancing facility to primary lending
institution’s which are supporting expert
organizations.

(v) Extends financial support to State

Small Industries Development Corporations
for supply of scarce raw materials and for
marketing of end products.

(vi) Extends financial support to NSIC for

implementing its schemes.

(vii) Ensures flow of finance to small

industries for technological upgradation
and modernization of existing units.
During the year 2000-01 the financial
assistance to the small-scale sector
amounted to Rs. 12,820 crores and in
1995-96 the disbursement amounted to Rs.
12,250 crores. Seventy three per cent of
the total disbursement was in the form of
refinance.

Sources of Finance to Industrial Co-operatives :

Financial assistance to industrial co-operatives
is extended as long-term finance and short-term
finance. The long-term finance is given for acquiring
permanent assets and machinery; and the short-term
finance upto 12 months is given for purchase of raw
materials and for payment of wages.
 7.2
86
The main sources are :
(i) State Government

(ii) Apex and Central Co-operative Banks

(iii) State Industrial Co-operative Bank

(iv) State Bank of India

(v) Reserve Bank of India

(vi) State Finance Corporation

(vii) Life Insurance Corporation

(viii) Commercial Banks

Governmental Assistance :
The state Government participates in building
up the share capital of the Apex societies. Loan
facilities are extended by the Government for
purchase of shares of member Co-operatives.

The State Government provides loans and

grants for building godowns, for purchase of
equipments, for meeting managerial expenses,
towards production subsidies and sales rebates.

Central Co-operative Banks :

The amount advanced by the Central Co-
operative Banks for industrial purposes Marathwada
has been less than 5 per cent of their total advances.
At present financial assistance is given to only
industrial co-operatives.
 7.2
87
State Industrial Co-operative Bank :
The State Industrial Co-operative Bank fully
caters to the needs of industrial co-operatives. In
most of the states this apex agency is available.
Individual entrepreneurs are not eligible to take
assistance from this bank.

The State Bank of India (SBI) :

The SBI finances industrial co-operatives for
working capital requirement against raw materials on
stock, finished products and bills receivable. Medium
term loans are provided by SBI for acquiring
machinery, equipment and other capital assets. In
states where state industrial co-operative banks are
weak, the State Bank of India is encouraged to
finance the industrial co-operative societies.

National Bank for Agriculture and Rural

Development (NABARD) :
The NABARD makes provision for financial
assistance to weavers co-operative societies on the
same terms and conditions stipulated to cottage and
small scale industrial units under Sec. 17(2) (bb) of
RBI Act. The assistance is routed through the State
Co-operative Banks. The NABARD recognizes power
loom units and woolen hand loom co-operatives for
financial assistance. Assistance is extended for
production and marketing activities of Weavers Co-
 7.2
88
operative Societies at a concessional rate of one and
half per cent below the bank rate.

State Finance Corporations :

The state Finance Corporations provide
medium-and long-term finance to small Industries
and industrial co-operatives.

Pilot Scheme for Handloom Co-operatives by

Government:
The Scheme was introduced in the year 1960 to
bring in a large number of handlooms under the Co-
operative Societies. The pilot scheme was intended
to study and solve organizational problems to make
adequate arrangements for supervision and audit of
handloom co-operative; to strengthen the share
capital of the co-operatives; to provide proper
representation to weavers societies in Government
assistance and the implementation of schemes of the
District Co-operative Central Banks.

The Ninety Per Cent Guarantee scheme :

The scheme was introduced in the year 1957.
Under the scheme the losses arising out of
repayment of loans are shared by the Central, State
Governments and the banks in the ratio of 50:40:10.
The maximum aggregate amount payable by the
Government of India shall not exceed five per cent of
the total funds disbursed and outstanding under the
 7.2
89
scheme in the state as on 30th June or 31st December
proceeding. The first scheme for handloom co-
operative was introduced in1957 in order to cover
ninety percent of the losses incurred by the banks.
The scheme is implemented in all the states. It
covers all advances to handloom cooperatives
coming under the Reserve Bank of India scheme for
handloom finance. The scheme does not cover the
default, but only the ultimate losses.

In the year 1961, the scheme was modified.

Under the second scheme, defaults arising from loan
provided under the guarantee scheme to the co-
operative are met. The share of guarantee of the
Central Government, State Government and the Bank
is 50:40:10. In 1962 the scheme was extended to
loans and allowances sanctioned by the State Bank
of India and its subsidiaries in areas where
cooperative banks were unable to finance industrial
co-operatives. The scheme covers all types of
industrial co-operatives. The states like Gujarat,
Maharashtra, Madhya Pradesh and Punjab were first
to take advantage of the scheme.

Problems faced by Financial Institutions in

Marathwada are in nutshell are as ahead :
The financial institutions are compelled to
extend the financial assistance to unviable projects
due to political interference.
 7.2
90
− Mismanagement, misutilisation and
diversification of funds by
entrepreneurs/financial institutions.

− Rigid rules/regulations and inadequate

guidelines of financial institutions hampering
timely disbursement and recovery.

− Instability of Governments may hamper smooth

functioning of financial institutions.

− High expenses including overheads of financial

institutions.

− Many financial institutions are target-oriented

rather than achievement-oriented.

Problems Faced by the Small Enterprises :

The problems follow the entrepreneur like a
shadow. The entrepreneur faces the problem in the
beginning and when the enterprises are alive.
Among many problems from many aspects, only
following problems pertaining to that are being faced
from financial institutions are dealt with :

− Inadequate size of loans;

− Margin money requirements;

− Insistence on collateral;

− Time taken to process loans ;

− Tight repayment schedule;

− Ignorance of procedure due to

illiteracy;
 7.2
91
− Lack of experience in formulating the
projects;

− Lack of marketing, accounting and

management skill leading to project failure
thereby inability to repay loans.

− Huge pre-operative expenses etc.

Suggestions :
The project, before approval for any financial
assistance, has to be evaluated and assisted by a
panel consisting of technocrats, management
consultants, successful entrepreneurs, legal experts
etc.
− The interference of political parties in
day-to-day activities of financial institutions
in providing financial assistance to small
enterprises has to be avoided totally.

− Adequate trained personnel are to be

employed for proper guidance to the
entrepreneurs in obtaining financial
assistance.

− Exhibiting conventional approach by

the financial institutions before sanctioning
and after disbursement of any financial
assistance to the small enterprises.

− Adequate training to the upcoming

and existing entrepreneur regarding the
availability and proper utilization of
financial assistance to the entrepreneurs.

− Relaxation of norms such as

requirement of securities other than
proposed/existing business legal
documents etc.
7.2
92
 7.2
93

Chapter VII
Facts About Financial Management of
Sick SIUs

− Industrial Sickness : An
introductory profile.

− What is industrial sicknesss

− Why units become sick

− Alarming signals of Sickness

− Main causes of Sickness

− Remedies and Rehabilitation

− Sickness in Industrial Units

inviting sickness in banks.

− Supervision of Bank Credit &

Rehabilitation of sick units for better
financial management.

− The Bankers Rehabilitation

approach for rational use of SIUs
finances.
 7.2
94
Chapter VII
Facts About Financial Management of Sick SIUs

Industrial Sickness : An Introductory Profile :

(i) Small scale industry occupies an important
position in the economy of Marathwada but the
growing sickness in small scale units has created an
alarming situation.

The growing sickness in small scale units in

Marathwada has created an alarming situation not
only for entrepreneurs but also in financial
management. Many units come up, utilise finances
both of project promoters and outsiders, struggle
through out for completion of project and its
operation, meet with financial failure and disintegrate
finally. It results in loss of finances to project
promoters, loss to financial institutions, unproductive
use of the community's scare savings and finally
adds to the already serious unemployment situation1.
Hence, it is essential to analyse the magnitude and
the causes of this sickness so as to ensure to have
proper financial management.

(ii) Industrial sickness being a financial problem

means different things to different people. A sick
unit is unhealthy unit to commonmen, a dividend
postponing unit to investors, a losing and
discouraging unit to industrialists, a doubtful debtor
 7.2
95
and a weak borrower to creditors and bankers, an
industrial problem to the Government, a victim of
technological changes to technocrats, a bad
employer to workers and a great wastage of
technical and human resources to the country. Thus
the central reason of sickness lies with the constant
inability of an industrial unit to generate an output
larger than its inputs for which operational problems
of liability, management and of past losses arise. its
internal generated surplus is inadequate to meet the
need of margin money for borrowing working capital
due to past constant loss and the unit is dragged
from bad to worse condition and at last its survival on
external funds brings gradual shrinkage and closure.

(iii) The RBI has defined a sick unit as one

which has incurred financial or cash loss in the last
year and is likely to incur cash loss in the current
year as well as in the following year. Sickness is
characterised further by a worsening debt/equity
(total outside liability/tangible not worth) ratio and an
imbalance in the financial structure such as the
current ratio (current assets/current liabilities) being
less than one2. A small scale unit is sick when the
unit accounts with the banks are irregular
continuously for six to nine months, the rate at which
the unit is eating away its capital is more than 10 per
cent per annum, there is continuing default in the
payment to the creditor and the unit has remained
 7.2
96
closed for the previous six months3. Irrespective of
size, a sick unit is one which works well below its
break-even level or which fails to generate internal
surplus on a continuous basis to meet its obligation
and depends on external funds for its survival.

(iv) Sickness of industrial units miss

management of funds may be inherited, achieved or
thrust upon them. The born sick units have inherited
inability of financial operation. The units which
achieve sickness are unhealthy units due to bad
effect of internal causes after few years of operation
of the units are affected by external problems, the
sickness is said to be thrust upon them.

The inherited reasons of sickness are lack of

experience and faulty financial planning of project,
4
lack of capital, distorted capital structure . Cost
escalation due to delay in project commissioning,
lack of marketing5, wrong location with inadequate
infrastructural service6, deficient financial planning,
excessive capital used in fixed assets, obsolete
technology, absence of market and inadequate
market analysis. Such inadequacies will not extend
reasonable survival prospect right from its existence.

The internal causes for which sickness is

achieved by the units are bad financial management
due to inexperienced and inefficient management
 7.2
97
personnel, unplanned expansion, stock
mismanagement due to bigger inventories, more
credit purchases, more expenditure due to
unproductive fixed assets and function, inadequate
collection of receivables, defective buying of poor
quality assets and raw materials, more replacement
due to poor maintenance, lack of scheme of
modernising technology and absence of industrial
relations etc. These causes make the unit gradually
sick and turn the concern economically non-viable.

The external causes are not within the control of

the sick units. Such causes are shortage of power
and energy, disrupted supply of raw materials,
artificial economic constraints, unrealistic and erratic
pricing policy and unsuitable and inadequate delay
by financial and governmental agencies in extending
help and deficiency of demand in the market.

(v) The latest approach of RBI to diagnose

industrial sickness has two criteria. They are :
(1) Cash losses of the previous year, the current
year and anticipated for the next year and

(2) the deteriorating bebt equity ratio. According to

the study group of the State Bank of India 1980-
81, a sick unit is one which fails to generate
internal surplus on a continuing basis and
depends for its survival on the frequent infusion
 7.2
98
of external funds. Generally sickness can be
easily diagnosed when
(a) turnover declines continuously and
finished goods accumulate

(b) losses incurred on a continuous basis

and profitability reduces and

(c) the unit is unable to generate internal

surplus in gross income relatively to gross
expenditure.

Thus, the cash profit, net working capital and

net worth are the major factors which distinguish a
healthy unit from the sick one. When any two of
these three factors are negative, the industrial unit
has vital symptoms of incipient sickness and when all
the three factors are negative the unit is a sick one.

The existence of unfavourable working capital is

the guiding indication of incipient sickness and the
banker, financial institution and other creditors can
first identify the sickness. The selected data in
statement form prescribed by RBI filed by borrowers
for every 3 months are available to these financiers
and they can easily detect any pressure on working
capital and can initiate suitable corrective action at
this beginning stage by guarding the financial
assistance (long, medium and short term finance).
They can nurse the sick unit for revival to a healthy
position. The pressure on working capital may be
manifested by 'frequent return of cheques', delay in
 7.2
99
meeting in ward bills, over utilisation of cash credit,
frequent appeal for adhoc assistance, concealment of
depleted stock, non-payment of instalment of term
loan and delay in payment of outward bills
purchased. Apart from these, the financiers should
watch the sales and inventories. Reduction in sales
and increase in unsold goods reduce the generation
of internal surplus. In case of sickness the banker
should extend further loan for correction of sick
condition instead of freezing the account. Freezing of
account will force the sick unit to turn to other
financing agency for loan and it will hide sickness.

What is Industrial Sickness ?

An industrial unit is said to be sick when it is not
healthy. The health of an industrial unit can be
measured on the basis of a number of criteria,
among which the more important is the return on
capital and reserves after providing for depreciation.
The Study Team of the State Bank of India, in its
report on Small Scale Industries Advances, 1975,
defines a sick unit as one which fails to generate an
internal surplus on a continuing basis and depends
for its survival upon a frequent infusion of external
funds. The Reserve Bank of India defines an
industrial unit as sick "if it has incurred cash loss for
one year and in the judgement of the Bank, it is likely
to continue to incur cash loss in the following two
years and it has imbalance in its financial structure
 7.3
00
such as current ratio being less than 1:1 and
worsening debt equity ratio7."

It would be seen that industrial sickness is not

an over night phenomenon. It develops in course of
time. Before a unit actually gets sick, a number of
symptoms appear on the financial sides that indicate
the impending sickness. A few important symptoms
directly or indirectly related to finance are as
follows : (i) slow turnover in the account of the unit;
(ii) frequent requests for overdrafts or drawing
beyond the sanctioned limit, sometimes even without
prior intimation to the bank; (iii) failure to honour its
bills on maturity ; (iv) return of bills drawn by a unit
on its buyers ; (v) slow off-take of stocks ; (vi)
inexplicable delays in the submission of stock
statements ; (vii) tendency to draw less by cheque
than in cash; and (viii) over-valuation of stocks,
diversion of stocks or failure to ensure stocks ; etc.8

Marathwada is an important peasantry region is

equally poor in forest wealth, man power and other
natural resources. The tragedy is that due to low
potentialities for economic and industrial
developments, it continues one of the most backward
and poor region in Marathwada. The economy still
continues to be predominantly agricultural and rural
in character9.
 7.3
01
Small scale industry occupies some position in
the economy of Marathwada in terms of both
employment and output. It creates immediate and
substantial employment opportunities at a relatively
small capital; cost facilitates mobilisation of
resources of capital and skill which might otherwise
remain inadequately utilised and bring about a
harmoniously balanced, integrated and egalitarian
socio-economic order in the country. With the
objectives of creating employment opportunities and
exploiting the local abundant resources, the
Government of Maharashtra has undertaken a
number of programmes to develop the small scale
industries throughout the State. During the last two
decades the number of small industries has risen.
This spectacular progress is the result of various
promotional efforts made by the State Government,
MDC & other agencies. But unfortunately inspite of a
rapid stride made by the sector of the economy in
the industrial field, there has been simultaneous
increase in the rate of mortality owing to the
incidence of sickness which is posing a major hurdle
in the over all economic growth and development of
Marathwada. Since Small Industries sector of the
economy has been accorded priority in the economic
planning of the State, this phenomenon caused by
the incidence of sickness has been engaging the
attention of the government to root out this grave
 7.3
02
economic malady so that the incidence of sickness
could be minimised to ensure an accelerated and
balanced growth of this vital sector of the economy.

It is to be noted that sickness in the industrial

units affects adversely different sections of the
society. it causes not only the loss of capital owned
as well as borrowed but also leads to potential fall in
production and revenue to the State exchequer with
the added possibility of the retrenchment or lay-off of
the workers. prevention and revival of sick units is
essential not only for making the existing investment
in these industries productive but also for creating
confidence among the prospective entrepreneurs.

Why Units Become Sick ?

The financial management has direct concern to
know about exact reasons of sickness or has to
answer the question “Why unit is sick?” Units
become sick because of mistake made by the banker
or by the SIU owner or in some cases due to reasons
beyond the control of both these parties. We can
classify the various factors responsible for sickness
under these three heads, namely, the bankers, the
SIU owner borrowers and environment, i.e., situation
beyond the control of both.

The Bankers. The bankers may commit the

following mistakes & affect the finances of units :
 7.3
03
− Permitting location of the project at
an ill-suited place causing to need of more
overhead for up-keep;

− Inadequate credit or too much credit

leading to over or under capitalization ;

− Accepting over ambitious and

unrealistic sales projections for assessing
the financial requirements;

− Laxity of control by not ensuring a

proper way of disbursal resulting into
diversion of funds;

− Ineffective financial supervision due

to lack of adequate and trained staff to
supervise credit ;

− No casual inspection of stocks ;

− Permitting delay in submission of

statements, returns and financial
accounts ; and

− Deficient or defective documentation.

An apparently unbelievable fact is that, in some

cases, the manager may himself be responsible for
the difficulty in recovery of advances. Lack of
integrity apart, laxity in the matter of follow-up and
control may spoil many good accounts. Some of the
following actions of the managers directly contribute
for making financial account sick :

− Non-compliance with the terms of

sanction ;
 7.3
04
− Allowing excess drawings in too many
accounts too frequently ;

− Inspecting godowns in a casual

manner without any element of surprise ;

− Confining to cabin and building an

ivory tower attitude ; and

− Thinking that for advances sanctioned

by higher authorities he is not responsible.

The SIU Owner Borrowers. The mistakes on

the part of SIU owner - borrowers can be further
classified into categories, namely, ‘honest’ and
‘dishonest’ mistakes concerning to finances.

Honest mistakes. These are those financial

mistakes which occur not because of mal-intention
on the part of the borrower but because of his
ignorance to plan things properly. The following area
a few such examples :

− Wrong choice of products leading to

waste of finance;

− Inadequate equity base;

− Over-investment in fixed assets not

immediately required for purchase of
unproductive fixed assets;

− Deficiency in managerial financial

skills ;

− Defective purchase policy resulting in

piling up of stocks;
 7.3
05

− Uneconomic pricing policy ;

− Poor credit collection system ;

− Excessive borrowings;

− Incorrect estimation of demand of the

product and the competitive position ;

− Inadequate marketing arrangements

or improper distribution system ; and

− Obsolete plant and machinery

resulting in high costs of production and
inferior quality leading to cash loss.

Dishonest Mistakes. These are those financial

mistakes which take place because of willful cheating
or dishonest intentions of the party. A SIU owner
who walks into the bank with the intention of
cheating belongs to this category. The proposal of
such a SIU owner is generally full of loopholes; he is
very often in great haste and he cannot stand a
cross-examination. However, if the manager himself
exposes his weakness, he cannot blame the cheat for
exploiting him.

A banker will find it very difficult to compromise

with such unscrupulous entrepreneurs whose
dishonest actions have led to sickness and siphoning
off of funds. The following are some of the example
of dishonest intentions having concern to finances :
 7.3
06
− Diversion of funds for non-productive or
speculative uses;

− Over-invoicing or high valuation of stocks for the

purpose of availing more credit than his
financial strength permits;

− Mentioning wrong quantity and quality of stocks

in the stock statements;

− Drawing accommodation bills and getting them

discounted;

− Multiple borrowings-even same goods being

hypothecated to two banks;

− Poor plant maintenance;

− Absconding.

To a normal SIU owner, his banker is like a

friend, philosopher and guide. He will have no
secrets as far as the doctor or the banker is
concerned. A bad SIU owner, on the contrary, keeps
away from his banker. He suspects the banker and
avoids him as far as possible. Instead of seeking
guidance for his problems with the banker, he resorts
to his own ways of solving the problems by throwing
dust in banker’s eyes, if necessary

The Environment. Very often, problems arise

because of external or internal factors beyond the
control of the SIU owner and the banker. These can
be called as the environmental factors and the
following are a few such instances :
 7.3
07

− Shortage of infrastructural facilities

like power, fuel and raw materials.

− Labour troubles;

− A change in fashions, tastes, etc.;

− Recessionary tendencies in the

concerned product of parent units in the
case of ancillary industrial units ;

− Natural calamities ;

− Fall in the export market ;

− A shift in Government policies relating

to

(a) Export-import restrictions.

(b) An increase in excise duty;

(c) A sudden hike in wages due to a

new industrial policy or promulgation
of the Minimum Wages Act, etc. ;

− Dissensions among partners ;

− Untimely death of a key person.

Alarming Signals of Sickness :

A unit, will seldom become sick overnight,
although one can not have a mechanical device for
giving an alarm in the case of a danger signal, the
fact remains that all units growing sick invariably
give out adequate alarming signals. These signals are
like the early warning indicators which, when
 7.3
08
perceived, should stimulate a branch manager’s
curiosity for taking a preventive action in time to
safeguard the bank’s interest. It is, therefore,
necessary that the SIU owner should be aware of
these symptoms. Below is a checklist of some of the
symptoms manifested by potential problem
advances. However, none of these symptoms/signals
can be considered as a positive proof of any problem.
They are simple indicators, which call for further
probe. None of them may be a crucial factor by
itself, but the existence of a number of these
symptoms in any account should definitely the SIU
owner for full investigation :

− Continuous cash losses.

− Money raised on all assets available.

− Manipulation in stock statements.

− No turnover of stocks – accumulation of finished

goods.

− Unexplained delay in the submission of

periodical statements and the balance sheet.

− Frequent return of bills drawn by the unit or

failure to honour bills on due dates.

− Frequent issue of post-dated cheques, unless it

has been agree upon.

− Continued failure to meet term and current

liabilities on due dates.
 7.3
09
− Lay-off or retrenchment of workers.

− Extravagance in the personal life style of

partners/directors.

− Transfer or resignation of key management

personnel.

− Closure of factory.

− Starts dealing with another bank with the

consent of the former banks.

− Borrowings from market at excessive rates.

− Diversion of funds from the existing business to

new industrial lines.

− Rumours of emerger or amalgamation.

− The borrower being involved in legal

proceedings for recovery of amount due from
him.

− Loss of major product lines or distribution rights

etc.

− Plants obsolescence.

− Product obsolescence.

− Incapacity or death of the key person, disturbing

finances.

− Non-payment of mandatory dues such as taxes,

provident funds, etc.

− Utilising short-term funds for long-term uses.

− avoiding to see the bank manager or becoming

over hospitable to him.
 7.3
10

− Manipulative accounting, e.g., change in mode

of stock valuation, revaluation of assets and
reluctance to set up depreciation provision’s

− Dissatisfactory operation of the bank account.

Some of the following features, if evident in the

operations of the account, should raise a suspicion in
the minds of the bankers and they should clarify it
through discussion with the SIU owner :

− Heavy cash withdrawals.

− Payments in round figures

− Proceeds of cash sales not coming to

the account.

− Slow collection of debtors receivables.

− Full utilization of the limit most of the

time and the balance remaining stagnant
indicating a shortage of funds or a
recession in demand.

− Frequent returns of cheques with the

‘refer to drawer’ memo.

− Slow turnover of operations.

− Frequent requests for drawings

beyond permissible limits/drawing power.

The Strategy for Prevention of Sickness and

Financial Miss Management :
 7.3
11
Based on the above alarming signals, SIU owner
may follow the following norms to detect such signals
in advance and take suitable action.

− Adherence to fundamental principles

of lending.

− Utmost care should be exercised

when the owner wants to leave one bank
and come to another bank.

− Monthly stock statements should be

closely examined with regard to valuation
and movement ‘in’ and ‘out’ of stocks.
Some physical verification on a random
basis should be done at regular intervals.

− Stock inspection should be done

frequently with an element of surprise.

− A dialogue should be held if the

account operations indicate any sign of
sickness.

− A regular contact with the debtor

should be maintained and frequently, in an
informal manner, information should be
gathered about various parties from
various sources including their
competitors.

− A break-up of books debts age wise

should be obtained every month to ensure
that receivables are regularly moving.

− Financial statements must be

prepared within six months of the close of
the accounts.
 7.3
12
− Some information system, on the lines
of the Chore Panel suggestions, should be
introduced to throw up signals of incipient
sickness well in time. The information
system should have inbuilt checks to
ensure the reliability of the data furnished.

− Banks should have counseling and

consultancy services which may render
help in the selection of a product,
inventory control, production planning,
costing and pricing, and financial planning.
 7.3
13
Main Causes of Sickness :
The T.I.S.C.O. Bombay took up this challenging
task (1999) and conducted a study in certain
selected pockets in the Marathwada to gauge the
impact of sickness in the small scale sector regarding
its balanced growth. The basic causes which have
been known are analysed below :
Causes of Sickness Impact in terms of
percentage

(a) Financial difficulties 35.2

(b) Inadequate power 3.80
supply
(c) Management problems 24.0
(d) Technical problems 5.40
(e) Delay in payment from 5.40
Government Dept.
(f) Marketing problems 5.40
(g) Diversification of funds 3.80
(h) Paucity of raw 1.90
materials
(i) Labour problems 1.90
(j) Quarrels among 1.90
partners
(k) High incidence of 1.90
taxation
(l) Other problems 9.40

100.00

According to the survey report submitted, delay

in sanction of loans, lack of market facilities, acute
power crises, ambivalent government policy, inter-
 7.3
14
unit rivalry and unrealistic targets have been telling
upon the health of the industrial units.

The factors such as Finance, Marketing,

government policy, power crisis, inter unit rivalry,
raw material & gestation period are discussed ahead
to point out their concern to sickness of ISU and
subsequent effect on financial management.

I. Finance :
The experience survey reveals that on account
of financial difficulties more than, 35 per cent of the
units under study were found sick. Most of the
entrepreneurs are allured and attracted by the
package of incentives offered by the government.
However, the process of obtaining them has a telling
effect on their performance and morale. Time taken
in getting registration varies from three months to
one year. The process of inspection and appraisal is
so lengthy and cumbersome that it take a long time
before the loan is sanctioned and disbursed. It also
depends upon the resource-fullness of an
entrepreneur and his ability to pester the officials
with some extra-gratification.

The release of the first instalment, which is

somewhat a happy occasion is also a signal of the
future peril that is in store for the entrepreneur. Most
of the entrepreneurs are reported to have received
 7.3
15
the second instalment after a long period ranging
from two to four years. many of them do not receive
it at all. At the time of release of the second
instalment, interest on the first instalment is
deducted. This makes the second instalment
considerably inadequate. The long interval upsets
the cost of the project and by the time the unit is
about to start, it is declared defaulter and put on
auction by the financing institution. This earns
disrepute for the unit and makes it non-viable.

II. Marketing :
The survey reveals that for 95 per cent of the
entrepreneurs marketing is the biggest problem. The
government departments do not comply with the
government instructions and place piece-meal orders
payment of which is made after long time and that
too, after a lot of persuasion and payment of extra-
gratification. The functioning of the State Small
Scale Industry Corporation has also been criticised
for its failure to provide marketing facilities. Low
marketing creates the problem of finances. In order
to boost marketing, excessive credit is required to be
granted by the SIU.

In a broader context, the small-scale industry is

facing a keen competition from the organised sector.
Several items reserved for their exclusive production
are simultaneously being produced by the organised
 7.3
16
sector and there is no legislative protection in favour
of the SSI units. With the network of a sophisticated
marketing system the organised sector throws them
out of the market.

III. Government Policy :

All the maladies affecting the growth of small-
scale units are the product of an ambivalent
government policy and unsupportive bureaucracy.
The entrepreneurs feel that the capitalists offer huge
money to the politicians during election in exchange
for liberal government policy in their favour. If the
government is really serious about this sector, why
there had not been any legislative protection even
after three decades of lofty promises? It is an
ambivalent socialistic idealism which is guiding them
to proclaim too ambitious targets for this sector.
And, consequently, the target is miserably failing in
the absence of a sound infrastructure.

The entrepreneurs are also afraid of the entry of

the large sector in the guise of the small
entrepreneurs whose main interest is to tarnish the
image of this sector by producing sub-standard items
deliberately and leaving the sector finally. They feel
that if the government is not free from the capitalist
bias, the sector would never see a healthy growth.

IV. Power Crisis :

 7.3
17
All the entrepreneurs experience the problems
of acute power shortage and the rising cost of power.
Frequent power tripping cause serious damage to the
production and the raise of minimum guarantee is an
insult to their prevailing injury. Because of the
minimum guarantee, they have to pay for the energy
they never consume. The process of billing is also
defective and the entrepreneurs often get erroneous
bills.

The units depending totally on power can never

reach the production target in the absence of an
uninterrupted power supply. Discontinuation not
only affects the production but also gives birth to a
number of malpractices adopted by the power Board
officials.

V. Inter Unit Rivalry :

Over 50 per cent of the entrepreneurs report
that inter-unit rivalry is responsible for many of the
problems this sector has been facing. Going to the
genesis, they say that unplanned growth of particular
industry leads to unhealthy competition. Some
entrepreneurs connive with the officials of the
financial corporation in order to buy others' units in
case they were being auctioned.

VI. Raw Material :

 7.3
18
Shortage of raw materials is another important
reason of low utilisation of production capacity. The
entrepreneurs often do not find the requisite quantity
of raw materials. Open market prices of some scarce
raw materials are very high and, therefore, many a
time, entrepreneurs prefer to dispose off the small
quota of raw material in the black market rather than
process and sell them as finished products. Such
practice further reduces the percentage of utilisation
of production capacity. One unit manufacturing
spare cement pipes fell sick only due to scarcity of
cement and then due to scale of its meagre quota of
cement in the black market.

VII. Gestation Period :

It was found that gestation period of sick units
was varying from 6 months to 2 years. It was
experienced that no project was completed on
schedule due to dilatory and cumbersome working of
various government agencies at every stage of
operation. Allotment of land, sanction and then
connection of power, sanction of loan from financial
institution and banks, sanction of quota of raw
material and its actual disbursement and other legal
formalities such as registration in the several bodies,
like SSI, Labour Commissioner, Sales Tax etc., take a
lot of time. During the time, the entrepreneurs have
to run from one place to another to consult and
complete the legal formalities and have to incur
 7.3
19
many preliminary and pre-operative expenses
besides drawings for their own expenses. by the
time the project is completed, their own capital is
reduced to naught. Apart from it, when the project
gets delayed, the scope of cost over run increases.
in some cases, this leads to severe dearth of liquid
funds and working capital.

Most of the entrepreneurs allege that

concessions and incentives given by the government
are only on paper. It is thus felt that they want no
new facilities, but implementation of various
schemes and incentives already announced. No
doubt, the Bihar Government has laid full emphasis
on accelerated development of small scale industries
and has announced a number of new incentives and
concessions. However, it is felt that because of
communication gap and a host of implementing
agencies for different kinds of assistance and their
complicated procedures, most of these schemes
have remained on page without being of substantial
use to the entrepreneurs.

It is also experienced that level of managerial

effectiveness in the sick units remains very low. The
entrepreneurs themselves have to perform all the
managerial functions, viz., organisation, production,
sales, purchases, general control and external
relationships. Only one or two clerks are appointed
 7.3
20
to keep the books and records of the business. To
perform these managerial functions, the
entrepreneurs have to remain 3-4 days a week
outside the enterprise. No technical or qualified
persons are appointed mainly for fear of additional
overhead costs.

Remedies And Rehabilitation :

Having realised the gravity of the problem
emanating on account of industrial sickness in small
scale units, the following suggestions may be put
forth to prevent the small units falling sick and also
to revive the sick units of the State :

1. Taking financial assistance from the banks

should be free and frank and should not hesitate
in divulging the actual position of the
performance of the unit, just as a patient should
not conceal anything to doctor. This is possible
only with the generation of mutual trust and
confidence.

2. Lack of scientific management is also one of the

causes of sickness and as a preventive measure
it is suggested that before the entrepreneur
enters into any industrial venture of a biggest
magnitude, he should undergo short term
training in modern management technique so
 7.3
21
as to equip himself with the techniques of
modern management.

3. The entrepreneurs must strive to build a reserve

fund of its own to strengthen its equity base to
fall back upon in times of needs.

4. The small scale entrepreneurs must refrain from

making unproductive expenses and should
utilise the funds for the same purpose for which
it has been granted.

5. Management deficiencies should be overcome

by inducting professionals on the Board of
Directors and by appointing competent
technical and managerial personnel in key
position in production, finance and marketing.

6. All the bills of SSI units is respect of supplies

made to the Govt. Dept/public sector
undertakings/corporations should be paid within
a period of 30 days failing which interest at the
rate charged to the unit by the bank should be
paid from the date of supply till the date of
payment.

7. The government should grant legislative

protection to the sector for assured market and
process of quality control should be modified.
 7.3
22
8. The single window delivery system should work
in co-ordination with different wings to minimise
the work of time.

9. Keeping in view the weak equity base in all-sick

units, it is suggested that all identified sick units
have inadequate owned funds should be given
equity assistance in the form of interest-free
long term loans on cash basis.

10. There should be co-operation between term

lending institutions and commercial banks.
Commercial banks, by and large, provide
working capital finance. They are more in the
know of things as compared with term lending
institutions because of their daily contacts with
the borrowers.

11. The Government can merge a sick unit with a

financially sound unit in order to make both of
them work.

12. The Government can simply take over a sick

unit and operate it as a State enterprise.

13. All the financial institutions of the State,

especially Bihar State Financial Corporation and
other commercial banks should be asked to
provide additional financial assistance to the
sick units including granting moratorium on
 7.3
23
interest, reduction in the rate of interest and
moratorium on repayment of principal amount.
The B.S.F.C. should also organise a special cell
to provide the technical, financial, and
managerial training and guidance to the
entrepreneurs of sick units.

14. The entrepreneurs allege that working

procedure of District Industries Cen'res (DIC) is
not favourable towards sick units. So, it is
suggested that DICs should take special care of
the sick units and should adopt a generous view
regarding sanction of quota of raw material to
sick units and should assist them in solving their
various problems in the field of production,
marketing and management.

15. The State Government should direct the

Maharashtra Electricity Board not to charge
arbitrarily on the basis of machines horse power
capacity despite its own failure to supply the
adequate power.

16. The sick units should be provided subsidised

generator sets of high power and there should
be exemption from sales tax on their products.

17. Having experienced the under utilisation of

production capacity in small sick units, it may
be suggested that two or more sick units be
 7.3
24
merged, so that there may be better utilisation
of existing plant and machinery, and to provide
a sound equity base and to reduce the overhead
charges.

18. Unless a sick unit becomes viable and starts

generating surplus, no penal rate of interest
should be charged till such time.

19. At present the nursing plan is not uniform and it

differs from bank to bank. So, all the banks
should frame the nursing programmes in the
interest of uniformity in the approach to the
problem.

Sickness In Industries Inviting Sickness In

Banks :
Any effort to keep the sick industrial units
artificially viable would show luke-warm response, if
the commercial banks or other financial institutions
withdraw their support. it is attempted in this
chapter to examine the credit facilities extended by
commercial banks to the sick industrial units, the
extent of recovery of loans and to highlight the
growing impact of industrial sickness on the recycling
of deposits of the commercial banks.

If the diagnosis is wrong.

the medicines would be ineffective.
If the diagnosis is delayed.
 7.3
25
the medicines would be least pro-active.
And if the diagnosis is time-honoured and
right,
the medicines would be highly sensitive.

Unlike other countries, we have been

instrumentalising redundant measures to keep the
sick industrial units artificially viable. RBI has been
framing the liberal credit policy and the commercial
banks naturally come in the trap of the sick units.
Particularly in the industrial economy of Marathwada
wrong viability and techno-economic studies have
been found to be the root-and-branch cause for the
present state of affairs. No doubt, the sick units have
been getting in adequate financial assistance from
the commercial banks but until they adopt the
practice of eating up their own capital, the locking-up
of funds would continue vis-à-vis the re-cycling
process would be reversed. The statistical reports of
the DIC, A'bad reveal that Rs. 150 crores of the
deposits of the commercial banks from Marathwada
and other financial institutions have been locked-up
with the sick industrial units10.

The present chapter studies the problem under

the following heads ; with reference to Marathwada
I. Financial facilities extended by the
commercial banks to the sick industrial
units.
 7.3
26
II. Recovery of loans by the commercial
banks.

III. Cases of locking-up funds and their impact

on the re-cycling of deposits.

I. Financing the Sick Units :

Particularly in a Region like Marathwada, where
quite a good number of big, medium and small
industries have been winding up their operations
annually, this state of affairs has been inviting
plethora of dangers to the sick units and the
commercial banks as well. Figures from economic
survey by DIC office, Aurangabad reveal that at the
end of June 1998, banks had identified 690 small-
scale sick units involving aggregate bank finance of
Rs. 10 crores and 43 large sick units involving bank
finance of Rs. 7 crores form Aurangabad district11.

No doubt, the global commercial banks have

also been experiencing this problem but they are free
to apply the measures like curtailing expenditure on
human resources, But in the Marathwada, we find
least scope for practising these measures as the
Banking System is more or less labour intensive. It
would also not be practical that the sick industrial
units witness prematured death and the commercial
banks remain silent. In any case, the commercial
banks would hardly be spared from the responsibility
of financing the sick units and so the commercial
banks and the RBI have to view things jointly.
 7.3
27

II. Recovery of Loans :

If the financial agents fail in managing the time-
honoured recovery of loans, the process of deposit
accretion would be geared in reverse direction. It is
in this background, banks and the other financial
institutions have been administering stringent
measures for the timely recovery of loans. In view of
the growing problem of overdues and locking up
deposits, the commercial banks have been making
provisions for the re-scheduling of loan instalments
and interest payment. They have also been
conducting frequent inspections and have been
materialising personal discussions with the
promoters/chief executives of the defaulting
concerns13.

No doubt, these measures would bring two-

pronged results, viz., the sick units would re-pay their
dues in easy instalment and the re-cycling of funds
would gain momentum. Although, the trend of eating
up their own capital has been commonly found in the
sick units but the large sick units14 create major
problem as they are the big defaulters15, locking up
the normal functioning of the commercial banks.
Experts feel that identification of small-sector heavy
branches in a particular area/district and creation of
separate cells for nursing the needs of the assisted
units would make the task easier16.
 7.3
28

Worthwhile to mention for Marathwada that re-

scheduling and nursing have helped in several cases
and 2 larger units with outstanding credit of Rs. 2
crores, considered sick earlier, have now been
removed from the RBI's sick list.

It would also not be wrong to says that the

commercial banks from Marathwada have also been
financing under pressure without maintaining the
regulations and policy and thus invite the problem of
recovery. RBI has to see that such pressure on the
commercial banks is checked.

The problem of recovery becomes grave where

we find that the cases of sickness are not genuine
rather induced. Would the sick units honour the time
schedule of re-payment when they invest the
borrowed funds for non-productive purposes?
Particularly in the small sick units, there has been a
popular belief that the bank loan is almost a free gift
"Never bother about repaying it." Would the fiscal
discipline have any meaning, if the borrowers work
with this motto ? No doubt, they have been facing
the problem of management expertise and are often
found in a fix. Would the borrowers be effacious in
materialising the re-payment when they fail in
solving the managerial crisis?
 7.3
29
Experts opine that recovery of loan should be
done in a fashion that would serve the interest of the
borrowers and the banks as well.

Frequent visit of bankers would show favourable

results. It would be advisable that all the commercial
banks in Marathwada appoint Recovery Officers for
the purpose of maintaining a sound personal contact
with the borrowers. Further, careful study of the
borrowers' background, integrity, where abouts and
techno-economic examination would also bring the
desirable results. Not only this, presently the
bankers have limited legal rights and to bring things
on right track, it would be advisable that the banks
are accorded the powers to confiscate the properties
of the defaulters, albeit not hypothecated to banks.

Thus, aforesaid measures would remove the

growing problem of recovery and overdues and
would provide to the banks a sound nexus of the
smooth re-cycling of funds.

III. Re-Cycling of Funds :

It can't be refuted that the incidence of sickness
has been growing like an infected virus vis-à-vis has
been causing an imbalance in the opportunity
management of the commercial banks or the other
financial institutions. They have the limited avenues,
albeit surrounded by the plethora of regulations and
 7.3
30
the liberal credit policy of the RBI. If the re-cycling of
their funds is not generated, the sickness in
industries would invite sickness in banks. Experts
belonging to the discipline feel that communication
gap has also been responsible for the present state
of affairs. And if we are interested in removing the
complexities, banks should have an up-to-date
knowledge of the frequent changes found not only at
inland level but also at global level. They suggest
introduction of a Commercial Intelligence Service17,
bringing out at regular intervals the techno-economic
developments.

No doubt, bridging over the communication gap

would also help the banks, particularly in course of
diagnosing the magnitude of sickness.

And if they succeed in gauging the magnitude,

the preventive measures would be applied, a bit
earlier. If the diagnosis is time-honoured and right,
the medicines would be highly sensitive.

While announcing credit policy for the year

1999. The chairman, Bank of Maharashtra rightly
observed that the problem of industrial sickness
would not have become so serious, if banks had been
alert. He was of the view that the greater and timely
involvement of banks in monitoring the sick units
would have warded-off much sickness. He suggested
 7.3
31
that the bankers should have in depth knowledge of
the day-to-day happenings to their assisted units18.
Crux of the problem is that they have not been
showing their interest, particularly in respect of
establishing relationship with the assisted units. If
bankers show new ethos, the cases of sickness in
banks would be avoided as the recovery of loans
would establish sound milieu for the re-cycling of
funds. To accelerate the rate of re-cycling, the RBI
has also to check the one-way process. it would be
of immense use that the RBI gives due weightage to
the view points of the commercial banks, in respect
of formulating and implementing the credit policy.

Moreover, when the commercial banks are

actively instrumental in assisting the sick units, it
would be reasonable that they watch and restrict the
non-productive uses of the borrowed funds.

Undoubtedly enough, the re-cycling of funds

would evidence deceleration until the assisted units
adopt the practice of diverting funds to the non-
productive heads.

Participating in the Session on 'Industrial

Sickness and its effects on banks' profitability, the
deputy Governor, RBI, Mr. A. Ghosh, advocated that if
a sizeable portfolio of industrial units is allowed to
remain sick, banks' profitability is bound to slump19.
 7.3
32

And if the assisted units do not give up their

softness for non-productive investment ;
the locking-up of funds would be perennial,
the recovery of loans would be poor,
the re-cycling of funds would be injured,
the sickness in banks would be possible
and
the sick industrial units would witness
pre-matured death.

would the diagnosis have any meaning, if the

vulnerable points have become cancerous?

No doubt, in majority of the cases we make

wrong viability and techno-economic studies
resulting from which we fail in arresting the real
problem. RBI while announcing the credit policy for
the current year should attach due importance to all
these things.

Annotating on the problems, It is concluded that

sick industries from Marathwada have been playing a
sensitive role in garboiling the financial resource
management of the commercial banks and the other
financial institutions. Not only this, they have been
inviting dangers also for their own development as
failing their co-operation, they would not be
successful in improving their financial health. Now it
is upon the assisted sick units to realise gravity of the
 7.3
33
situation and to extend due co-operation to the
commercial banks by making timely repayment of
loans. Not only this, they have also to restrict on the
utilisation of funds on the sanctioned heads.

The commercial banks have to establish close

relation with the assisted units and have to exercise
decision making practices in the background of the
experiences gained and the informations received.
Further, the RBI has to adopt both-way device where
the view points of the commercial banks should be
given due weightage.

And thus, the sick industrial units would come

out from the dangers, would be declared viable and
would be out from the RBI's Sick List. Not only this,
the banks would also be free from the problems of
overdues and recovery vis-à-vis the recycling of
funds would gain momentum.

Supervision of Bank Credit and Rehabilitation

of Sick Units for better financial Management :
Bankers appraise the loan applications carefully
with the idea of eliminating such borrowers who may
fail to keep their promises by not repaying the loans
or diverting money to inappropriate uses. But an
appraisal alone can never guarantee protection
against such a type of future risk. In any business
forecasting future performance on the basis of
 7.3
34
present plans and conditions and past performance is
subject to wild errors. These errors may take place
as the future is full of uncertainties and many
changes may occur in various fields, e.g., economic
conditions, management capabilities, technology,
tastes, motivation, etc. The future can at best be
estimated and definitely ascertained. In order to
take care of these changes and, thus, protect oneself
against such future risk, post-allocation supervision
or follow-up becomes imperative. It should be kept
in mind by bankers that the loan left to itself is lost,
unless followed up.

The Process of Supervision

The supervision or follow-up should start from
the point where the appraisal ends i.e., from the
stage of disbursing the loan. At the time of disbursal,
the banks should carefully supervise the end-use of
money. Often, the money is diverted for some other
purpose than stated in the loan application and thus
defcating the basic objectives for providing finance.
An effective supervision would necessitates careful
watch over the following main factors :

Assuring the End-use of Funds :

The end-use of funds, in the banking world, has
been discussed to such an extent with so little end-
result that the former Governor of the Reserve Bank
of India, Mr. Adarkar, once exclaimed in desperation
 7.3
35
that “the end-use of credit is hard to establish and
there is no expertise either with the Reserve Bank or
with commercial banks to ensure the end-use of
funds.”

The end-use of funds, in the case of term loans,

is the acquisition of fixed assets. This can be
ensured to a large extent by disbursing the money
directly to the dealer and not to the borrower. In the
case of working capital advances, where the purpose
is to acquire current assets in course of time,
assuring end-use is comparatively difficult. If
working capital funds are used for acquiring may also
be for activities outside the business and even for
speculative purposes. Luckily, for the banking
industry, the Tandon Panel has done some
remarkable work in this direction and has dealt
extensively with the subject of follow-up.

Let us examine the modus operandi of diversion

of funds in working capital advances i.e., mainly the
cash credit system.

Under the present cash credit system, SIU

borrower is asked to furnish stock/book debts
statements every month. On the basis of the value
mentioned in these statements, the drawing power is
calculated. Apparently, this system appears to be all
right, as the security remains intact and the
 7.3
36
utilization of funds is also properly regulated. Any
diversion to other uses can be easily traced by
shortages present in the stock/book debts. But
diversion starts when the borrower raises more credit
or current liabilities than actually needed by him or
more than what was disclosed to the bank. Such
extra credit, when received, helps him in diverting
the bank’s money to other unwarranted uses.

In the case of certain seasonal industries like

rice-shellers or sugar units, such practices are
commonly seen when the industrial units do not pay
dues to raw material suppliers sometimes even up to
the end of the season, although by that time they
realize their total money and also adjust the bank
credit. Such a practice basically starts due to a
shortage of margin money and usually results into
diversion of funds to some other allied/sister
concerns. This practice of not paying dues for an
unduly long period is so rampant in the sugar
industry that the U.P. Government has to make a
statutory condition that a part of cash credits to
sugar units has to be compulsorily set apart for
payment of cane dues.

To check the diversion of funds by way of

raising extra credit and current liabilities, banks now
insist that current assets should be more than the
current liabilities, including cash credit borrowing
 7.3
37
from banks. In advanced countries like the U.S.A.,
the borrowers are supposed to maintain current
assets to the extent of 200 per cent of the current
liabilities. In our country, when the banks follow the
second method (as suggested by the Tandon Panel),
the current assets would be at least 130 per cent and
in the third method they may further go up. The
following illustration will highlight the fact that how in
the present cash credit system, relationship between
current assets and current liabilities is impaired,
resulting into diversion of funds.

Illustration :
The weakness of the cash credit system can be
illustrated by taking the following example of
borrower’s financial position :
Current Current
Liabilities assets

Bank Rs 75,0 Inventory Rs 1,00,0

borrowings . 00 . 00

Other current Rs 10,0 Other Rs 10,000

liabilities . 00 current .
assets
Rs 85,0 Rs 1,10,0
. 00
. 00

Let us assume that the entrepreneur has raised

equity and term loans for covering the cost of fixed
assets as well as a portion of current assets. The
banker’s function is perceived as providing funds
 7.3
38
required for carrying the balance of the current
assets. Against the total inventory of Rs. 1,00,000,
an advance of Rs. 75,000 is sanctioned by way of
cash credit. The advance is secured by a charge
over inventory with an appropriate margin in this
case 25 per cent the margin representing the
borrower’s contribution to carry the current assets.

So long as there is security, which is declared in

the periodical stock statements, the borrower is
permitted to draw up to the drawing limit, computed
on the basis of value of stocks less the stipulated
margin, or the sanctioned limit, whichever is lower.

Under the system, it is possible for a borrower

to draw against available security and utilize the
funds for purposes other than increasing his current
assets of repaying his other current liabilities; he can,
for instance, use the funds for acquiring fixed or non-
current assets as the following example illustrates :

Current Current
Liabilities assets

Creditors for Rs 50,000 Inventory Rs 1,00,0

purchases .
. 00
Bank borrowing Rs 75,000 Other Rs 10,000
. current
.
Other current Rs 10,000 assets
liabilities .
Rs 1,35,0 Rs 1,10,0
. 00
. 00
 7.3
39

Inventory of the value of Rs. 1,00,000 is

financed to the extent of Rs. 50,000 by creditors for
purchases; but the borrower is enabled to borrow up
to Rs. 75,000 on the security of stocks worth Rs.
1,00,000 less the prescribed margin of 25 per cent,
the drawing limit being Rs. 75,000. Had the
customer drawn genuinely for meeting his current
assets requirements only, his maximum eligibility
(assuming nil contribution from him to carry the
current assets) would have been Rs. 50,000, thus the
excess of Rs. 25,000 he can divert to non-approved
uses without the banker’s knowledge.

In order to ensure the end-use, the Chore

Committee has recommended that funds flow
statements of big borrowers (have limits above Rs.
50 lakhs) should be obtained at quarterly intervals
and the actuals be compared with the estimates
submitted earlier, thus ensuring the proper use of
funds.

In other cases too, the SIU borrower has to

provide projections for various items including the
credit expected to be received. At the end of the
year, these projections will be compared with the
actuals and diversions will be traceable. In this
manner, the chances of diversion of bank money will
be minimized as proper adjustments for the expected
 7.3
40
credit can be done while assessing the working
capital requirements. Thus, in cases, where the
Tandon/Chore Panel Report is applicable, it would be
possible for the bankers not only to detect diversion
of funds but also check such processes before the
unit is converted into a sick unit. This system is a
landmark in the Indian banking and is expected to go
a long way in ensuring the end-use of cash credit.
Through this system banks will not only be able to
detect diversion of funds but also check the misuse
of credit and ensure the en-use of funds.

The process of supervision begins from ensuring

the end-use of funds but does not end there. In fact,
it has to continue so long as the loan continues;
bankers should, therefore, carefully supervise the
other following dimensions of the industrial activity
too.

Progress of the Unit :

Once the production process starts, the bank
should keep a careful watch over sales and
profitability figures. The actual figures should be
compared with the projections does earlier and if
there is any shortfall, it should be explained for. If
the sales begin to decline, the bank should
immediately try to diagnose the causes and help in
checking the tendency. A decline in sales may be
recorded due to several reasons like poor quality,
 7.3
41
increasing costs, changing tastes and fashions. If the
decline in sales had been due to poor quality, the
matter should be referred to the bank’s technical
experts and if they fail to solve it, guidance should be
sought from technical agencies like the Small
Industries Service Institutes (SISIs), the Indian
Institute of Technology (IIT) and the Industrial
Training Institutes (ITIs). These institutes are
generally on the look out for typical problems to
strengthen their research work and as such they
would welcome such references. The sales may
register a declined due to cost moving up and
pushing the price to a high side, without a
corresponding increase in the prices of other
competitive units. Such a phenomenon, although it
reflects the inefficiency of the management, should
be thoroughly discussed with the entrepreneur and a
remedial action should be launched quickly. If
certain factors like the changing tastes, fashions,
environment, etc., which are beyond the control of
the borrower, have caused the decline in sales, the
situation should be studied by some expert agency
and some solution should be found.

Another important aspect is the profitability

rate. Sales can be ascertained every month but
profitability will be known only at the end of the year,
or a half. A declining profit rate (profit to sales) is
 7.3
42
also an unhealthy phenomenon and needs a proper
study and a check well in time.

Security :
Although the inspection of primary security is an
age-old method of follow-up, the tragedy is that the
entire follow-up in the past centred around it only
and that too with very little effectiveness. Now,
when the security concept is being replaced with
purpose oriented schemes, the approach to follow-up
also needs a change.

The primary security can be in the form of fixed

assets or goods or bills. In all the three cases, the
points for supervision will differ.

Fixed Assets. In these cases, an inspection

usually takes place on a quarterly or a half yearly
basis. While inspecting, the bankers should examine
the condition or the maintenance of the assets, In
the case of fixed assets of mobile nature like motor
vehicles, bankers should impose a condition on the
borrower that the vehicle will have to be brought the
bank for inspection ; at least once a month/quarter.
In such cases, the banks should examine not only the
maintenance standard but also the other related
aspects like the tax and insurance papers.

Goods. Goods can be pledged or hypothecated

and in both the cases they have to be checked every
 7.3
43
month. If physical checking of each item is not
possible due to the constraint of time, a selective
approach, wherein most valuable items should be
checked up first, may be adopted. The checking
system should be so devised that all the goods are
physically checked once in six months or at least
once a year.

For the purpose of computing the drawing

power, the SIU borrower has to value the goods
either at cost or the market value, which ever is
lower. The cost can be easily verified from the
original invoices. However, bankers should guard
themselves against over-invoicing, which is resorted
to, to avail a higher drawing power against goods,
which are actually of a much less value. Over-
invoicing can be checked by making a comparison of
prices with some other similar firm or by a casual
cross-checking of prices from the open market.
While computing the drawing power, banks have to
safeguard against double financing also, as goods
purchased on credit basis may be lodged with the
banker and finance availed against such unpaid
goods. For checking it, banks should insist on the
submission of invoices the payment of which has
already been made. Alternatively, the banks should
ensure that the payments are promptly made to the
suppliers. There should be no difficulty in following
this practice in the case of pledge of goods. In the
 7.3
44
case of hypothecated goods, the borrower should be
asked to furnish separate details of paid and unpaid
goods in the stock statements. Banks may verify the
correctness of the information contained in the stock
statements by examining the figures of purchases
and sales recorded in the books as well as the entries
in the cash book and the bank account.

The inspection of goods should not be confined

to some particular date in every month, rather, some
surprise inspection system should be evolved to
know the real position. Bank should also watch the
turnover of goods. If some items are held up for
unusually longer periods, bank should become
cautious as it might be because of deterioration in
quality or due to obsolescence.

Bills. In case of bills limit, the bank should

carefully scrutinize the ratio of bills returned, their
nature and reasons thereto. If the bills being
returned unpaid very frequently, it indicates that
either the bills are no genuine trade bills or these is
something wrong with the goods i.e., they are not of
an acceptable standard, or the price charged is high.
While sanctioning the bills limit, the banks should try
to know the drawee’s resources and if it is not
possible, maximum drawing limit should be fixed up
for the drawees whose resources position is unknown
and uncertain.
 7.3
45

If a doubt arises when the bills are supported by

transport/railway receipts, it will be prudent for the
bankers to physically check the contents of a few
packages of some consignments. The maximum
caution should be exercised in cases where bills are
supported by ‘receipted challans’ drawn on local
parties. Banker should personally visit the factory
premises in order to verify the actual production level
and sometimes should also verify from the drawee’s
premises whether such bills are arising out of real
movement of goods or not.

Besides primary security, a careful watch has to

be kept over the collateral, if any. Any material
changes in the monetary value of the collateral
should put the bank on the alert. For example, if the
guarantor’s worth goes down due to some reasons,
the banker should try to replace him with another
guarantor.

Maintenance of Accounts and Submission of

Statements :
Banks have to educate their borrowers
particularly the small entrepreneurs, in the
maintenance of accounts in a proper manner. For
this purpose, some big banks have developed and
published some literature for the guidance of
entrepreneurs. Along with stocks, banks should
 7.3
46
invariably check the account books, particularly the
cash book. Such an examination will also help in
finding out the veracity of the stock statements. The
final accounts, too, should be prepared in time and
submitted to the banks. The banks should also insist
on timely submission of stock statements by the
party.

Labour Relations and Market Reports :

The quality of labour relations also reflects the
competence of the borrower. If the workers are
unhappy, it may lead to strikes or other difficulties. It
is not difficult for a shrewd banker to find out these
relations. He can do so by having a casual chat with
the employees in their leisurely hours. Often
dissatisfied employees start sending anonymous
complaints even to the banker and if they contain
some facts and figures, banks should try to find out
the genuineness of them. Sometimes a casual chat
in the market provides very useful hints. It has
usually been noticed that the private creditors or the
market people visualize the shadows of coming
difficulties much earlier than the bank. Hence, if a
banker keeps his ears and eyes open, he can also get
useful clues on various problems arising with various
entrepreneurs.

Miscellaneous Factors :
 7.3
47
A complete list of points for supervision is
neither possible nor aimed at. There may be other
points which will demand an immediate attention of
the banker. For example, if the constitution of a firm
is changing, the banker should carefully watch the
events and if an active and rich partner is retiring, it
shall affect the decision of the banker too. Any
material alteration in the status of the proprietor or
partners should alert the banker.

Difficult Accounts :
Before an account becomes sick, it gradually
starts developing into a problem account or difficult
account. The characteristics of a difficult account are
: no turnover, security held not saleable, shortage
either physical or in terms of value, defective
documentation or a recalled account. A cash credit
or overdraft account, which remain fully drawn but
generates hectic last-minute activity every day,
indicates the account is turning into a difficult
account.

In concerns which start overtrading, financial

difficulties are bound to arise. This would force them
to collect their book debts in haste to the extent of
even offering heavy discounts. He is also likely to
borrow heavily from all possible, sources besides the
bank.
 7.3
48
In trying to locate the symptoms of an oncoming
difficulty in a loan account, it should be remembered
that none of the signals can be considered as final
proof of a problem account. Rather they are only
vague indicators which may require further probe.

Sometimes an account may become difficult of

recovery due to defective appraisal done by the
banker. Giving too much too soon can be as bad as
giving too little too late. Sometimes the project
location may be bad; the entrepreneur may lack in
managerial or technical competence. There could be
innumerable such reasons leading to sickness.

The Technique of Supervision :

There is general acceptance among bankers of
the desirability of some provision for supervision of
the bank credit. Each bank, by its experience, should
design the supervision or follow-up forms in such a
way that all relevant and critical information is
collected avoiding an unnecessary and
unmanageable store of information.

The small industrial units, in general, have very

little resistance power against odds and require
intensive care by the bank, even after providing the
finance. Normally supervision is not liked by anyone;
but the entrepreneurs may not resent supervision if
they are convinced that it is in their interest and shall
 7.3
49
also mean the continuance of financial assistance.
Most of the entrepreneurs, who are carrying out the
entire gamut of industrial activity single handed,
shall welcome technical or managerial help and
guidance. The advice will be definitely needed for by
them, when it comes from the people who provide
the major share of funds to them. But such advice
presupposes a good rapport between the banker and
the borrower. In fact, at no time the banker should
leave an impression that he is there to act as a
‘policeman’ whose job is to trace culprits and book
them, rather, he should be like a family doctor who
comes to the enterprise with the intention of curing
ills.

Thus, it would not be wrong to say that what the

small industries need more is ‘counsel’ than ‘cash’.
This fact is further reinforced by Arthur Lewis’s
remark that “Lending money to inexperienced small
business people without supervision is often
equivalent to pouring it down the drain. What these
people need is first supervision and advice and only
secondarily capital. And when money is lent, its use
should be supervised carefully. The officers of the
institution should have powers to enforce changes in
managerial practice as a prior condition of the loan
and to check unprofitable practices at least until the
loan has been repaid20.”
 7.3
50
It can be summarized that the main objective of
follow-up is to act as a radar indicating how the win
blows so that the signs of developing difficulties
could be detected in time and thus minimize the
number of sick units, if not able to completely
eliminates them.

Sick Units And The Rehabilitation Approach :

This appears to be very reasonable, particularly
in the case of small scale units, which may suffer
losses for short periods of one accounting year at the
inception stage, but may still not be categorized as
sick units merely on the basis of cash losses for one
years. Besides the period of losses, the quantum of
loss also needs consideration. Small losses at the
initial stage do not make a unit sick. But if a major
part of the unit’s equity or owned funds (say 50
percent or more) is eroded by way of cash losses, the
debt/equity ratio will be more than doubled and the
unit shall face a shortage of working capital, needing
fresh infusion of funds. Let us take an example.
 7.3
51
Example
X & Co.
Liabilities (Rs.in Assets (Rs.in
Lakhs) Lakhs
)

Current 3.00 Current assets 3.50

Liabilities
Term Liabilities 1.00 Fixed assets 1.50
Capital 1.00
5.00 5.00

In this unit, the current assets are more than the

current liabilities and the total indebtedness ratio is
4:1. It is an acceptable small-scale industrial
proposal. But suppose the cash losses start
occurring and 50 percent of the capital is wiped out,
it leaves the unit in the following position :
X & Co.
Liabilities (Rs.in Assets (Rs.in
Lakhs) Lakhs
)

Current 3.00 Current assets 3.00

Liabilities
Term Liabilities 1.00 Fixed assets 1.50
Capital 0.50
4.50 4.50

In this situation, the unit has got no liquid

surplus, i.e., the net working capital is zero,
indicating the unit’s hand-to-mouth position.
Besides, the total indebtedness ratio, which was 4 :
1, has gone up to 8 : 1. this unit will have acute
problems of liquidity and will require fresh infusion of
 7.3
52
funds. Because of no borrowing capacity left, the
unit will find it difficult to operate in a normal manner
and will, therefore, be a sick unit at some stage.

Besides the criterion of continuous cash losses,

units may have following symptoms of sickness :

1. The units whose accounts remain

irregular for more than 12 to 18 months
and other irregularities are also on the
increase, may be considered sick. The
units, which have committed three
successive default in payment of term loan
installments, may also be treated as sick
units or as on the verge of sickness.

2. A continuous decline in sales and

operations below the break-even level for
long periods coupled with irregularities in
accounts, can be taken as a definite sign of
sickness.

3. The stoppage of activity for a

sufficiently long period (say, 6 months, as
a result of some external or internal
reasons) would make a unit sick, unless
there is evidence to the contrary.

For dealing effectively with industrial sickness, a

special Act known as the ‘Sick Industrial Companies
 7.3
53
(Special Provisions) Act” 1985 was passed by the
Parliament of India and received the assent of the
President of India. The main objects of this Act are (i)
to secure timely detection of sick and potentially sick
companies owning industrial undertakings and (ii) to
determine preventive, ameliorative, remedial and
other measures which need to be taken with respect
to such companies and the expeditious enforcement
of the measures so determined.
 7.3
SICKNESS IN THE 54 SMALL-SCALE SECTOR
AN ANALYSIS OF CAUSES

DROP IN INTERNAL CASH

GENERATION OR CASH LOSSES
DEU TO

BORROWER’S MISTAKE ENVIRONMENTAL

BANKER’S MISTAKE HONEST DISHONEST FACTORS
− Permitting location of − Wrong choice of − Diversion of funds for − Shortage of infra-
the project at an ill- products. non productive or structural facilities like
suited place − Inadequate equity base. speculative uses. power, fuel, and raw
− Inadequate credit given. − Over investment in − High valuation of stocks. materials.
− Accepting over unproductive fixed − Mentioning wrong − Labour troubles.
ambitious and assets. quality and quantity in − Change in fashions,
unrealistic sales − Deficiency in managerial the stock statements. tastes, etc.
projections for assessing skills. − Drawing accommodation − Recessionary tendencies
the financial − Defective purchase bills and getting them in the product or in the
requirements. policy resulting in high discounted. product of parent units in
− Laxity of control by not inventory carrying costs. − Multiple borrowing even case of ancillary units.
ensuring a proper way of − Uneconomic pricing same goods being − Natural calamities.
disbursal, resulting into policy. hypothecated to two − Fall in export demand.
diversion of funds. − Poor credit collection banks. − Swift change in
− Lack of adequate and system. − Poor plant maintenance. Government policies
trained staff to supervise − Excessive borrowings. − Charging very high over relating to :
credit. − Incorrect estimation of heads. (a) Export-import
− No casual inspection of the demand of the − Absconding. restrictions.
stocks. product and competitive (b) Increase in excise duty.
− Permitting delay in position. (c) Sudden hike in wages
submission of − Inadequate or improper due to new industrial
statements, returns and marketing and policy of promulgation of
financial accounts. distribution the Minimum Wages Act.
− Improper follow-up arrangements. − Dissensions among
resulting in diversion of − Obsolete plant and partners.
funds. machinery − Untimely death of a
key person.
 8.3
55
The Banker’s Rehabilitation Approach For
Rational Use of Finances by SIUs :
The objective of rehabilitation is to restore the
capacity for generating the internal financial surplus
rather than immediately recovering the amount.
Otherwise, too, in cash credit accounts, banks
seldom get their money back.

The first thing which a banker should do, if

indicators reflect sickness, is to review the advance,
securities and documentation so that money is not
lost in case of an eventuality. The stock statements
showing the basis of valuation, ageing schedules of
debtors/ creditors and schedule of fixed assets
should also be obtained. The quality and saleability
of stocks, realisability of debts and condition of fixed
assets should be carefully assessed. The documents
should be got examined by a legal expert, if
necessary, and it should be ensured that the bank’s
position is absolutely safe.

The second step should be to determine

whether the unit has a potential financial viability or
is it beyond revival. An in-depth study is required to
assess and distinguish financially viable units from
non-viable ones. In case of potentially financially
viable units a further financial or technical assistance
may be needed while in the case of non-viable units,
 8.3
56
enforcement of security or instituting legal
proceedings may be required.

Potentially financially viable units are those

where the situation is not completely out of control
and the borrower also is willing to cooperate and
submit to the discipline laid down by the bank. At
this juncture, the attitude of the borrower is very
important, since the action contemplated must get
his co-operation. The SIU owner should also be made
tactfully aware of the actions which the bank will not
tolerate. An opportunity for rehabilitation should be
given only to those SIU owners whose bonafides and
character are beyond doubt. In case where sickness
has gone beyond cure, it is not use in throwing good
money for bad money and recovery or a writer-off
will be the only alternative.

Once financially viable units are identified and a

decision is taken to assist them, the following three
components shall be involved in the rehabilitation
process :
(i) An analysis of the past financial &
performance operations in order to know
the unit’s financial strengths and
weaknesses. The diagnosis of the
weaknesses has to be done in detail
because the removal of these weaknesses
is essential to revive the unit. For a proper
 8.3
57
diagnosis and curative methods, the help
of professional finance experts, if need be,
may be obtained.

(ii) Deciding the level of financial

operations which the unit has to achieve in
order to generate a sufficient surplus for
regularization. The borrower should be
asked to submit cash projections for the
next 6 to 12 months with underlying
assumption, projected balance sheet and
the income statement.

(iii) An examination of the problems and

the probability of attaining the desired
level of operations.

The banks may adopt one or more of the

following methods to enable the SIU owner to come
out of the wood :
(i) Discussing the problems involved with
the SIU owner .

(ii) Suggesting changes in management

or leasing of the factory to some other
person.

(iii) Suggesting changes in the inventory

levels.

(iv) Retricting expenditure on fixed

assets.
 8.3
58
(v) Getting additional collateral to protect
the banker from future loss.

(vi) Lending additional money, i.e.,

nursing

Whenever a unit becomes financially sick, it is

not only the commercial banks but several other
persons / agencies also are affected. Before giving
an additional input of finance, bankers should ensure
fullest co-operation from them. The principal
agencies, which are normally interested in the
financial revival of a SIU unit, are as follows.

(1) Owners/promoters who have the

highest stake.

(2) The creditors, who have lent funds to

the unit.

(3) Central/State Governments who

collect taxes.

(4) Consumers, who use the product of

the unit.

(5) Providing Fund Commissioner/Labour

Welfare Commissioner etc., who are
interested in the welfare of the workers.

(6) Labour force, who may lose their jobs

or their future growth.

(7) Other term lending institutions like

IDBI,ICICI, IRCI, IFCI and State Finance
Corporations.
 8.3
59
Needless to say that any financial based revival
plan without proper sacrifices by all these agencies
shall not succeed. The sacrifices/reliefs expected of
these agencies are as follows :

(1) Owners/promoters. They should be

prepared to inject their share of margin money for
the additional finance needed for revival. If the bank
wants to check certain practices, they should be
willing to co-operate fully. If they have lent funds in
the shape of loans, they should be prepared not only
to postpone the recoveries but also to charge
reasonably low rate of interest.

(2) The creditors. They are the people who

create maximum problems for the banker. When the
unit turns sick, in their anxiety to safeguard their
money, they try to recover their dues at the earliest
possible. If they are not taken into confidence, the
possibility of diversion of additional funds provided to
their coffers cannot be ruled out. Hence before
executing any rehabilitation plan, either they should
be made to wait for their payment or should be first
paid off so that later on there is no diversion to these
channels.

(3) Central/Sate Governments. Very often sick

units do not make full payment of their dues towards
Income tax or Sales Tax or Excise duties. These tax
 8.3
60
authorities should be consulted and possibility of
postponing/ condoning/ reducing their dues should be
explored. If this is not done, these authorities with
the help of the vast powers they enjoy may
jeopardize the whole rehabilitation plan. On the
same lines, possibility of deferment of electricity
dues, octroi/local duty, etc., should be explored.
Some State Governments may agree to convert the
aforesaid dues in terms loans on soft terms.

Sick units may also be declared as relief

undertaking by the State Government with a view to
forestalling liquidation proceedings against them.

The state Governments may also help the unit

in several other ways, such as
(a) Helping the labour rationalization and in
retrenchment plans by taking a pragmatic
approach,

(b) Exempting the sick units from bonus payments,

and

(c) Place Government orders to such units and

extend price preferential treatment.

(4) Consumers. Consumers, although they may

be used to the product of the unit, may not help
much in revival of the unit. But if the consumer
preferences have changed, the revival plan may not
work. At least, the demand of the product and its
 8.3
61
popularity should be carefully examined before
pumping additional funds into a sick unit.

(5) Provident Fund / Labour Welfare

Commissioner. These authorities enjoy vast powers
for the welfare of the labour force. They should be
consulted and their view should be properly
examined. If need be, they may be requested to
relax certain standards, of course, within the
permissible limits.

(6) Labour Force. Like owners/promoters, the

labour force too has a high stake in the revival of the
unit. They directly share the prosperity of the unit.
Their leaders should be taken into confidence and
sacrifices expected of the workers should be clearly
spelt out. If this is not done, the revived unit will not
be able to bear any shock of industrial unrest later
on. The productivity of workers may have to be
increased if the labour cost has to be brought down
and the support of labour unions will be necessary for
doing so.

(7) Other Term Lending Institutions. Without

proper co-operation of these units bank funds cannot
bring miracles. If these institutions go on insisting on
recovery of their installments, cash losses will
continue. The loan officers should sit with officials of
 8.3
62
these institutions and chalk out a realistic and
practical plan of action.

Nursing : Approach And Precautions :

Thus, if the additional does of money is provided
after seeking co-operation from various agencies, it
will bring better results. Thus additional money can
be arranged from sources like capital or loans,
disposal of excess stocks, collection of outstanding
bills, or finally by way of loans from commercial
banks – popularly called ‘Nursing’ When a decision is
to be taken to nurse a unit for its revival, the
following points should be kept in mind :

(i) A timely decision to pump in further funds

should be taken. In certain cases, where the banks
took 6 to 18 months or even more, the problem of
sickness was considerably magnified.

(ii) Nursing would imply that the unit will have

to work at an increased capacity so that it is not only
able to pay off the old debts but also leave some
extra surplus. A detailed study will have to be done
to know whether such a rise in production is possible
and viable from the viewpoint of costs and the sale
price. Such a study will require a thorough
examination of the various other related issues like
the availability of raw materials, market demand,
 8.3
63
selling and distribution system and the
space/capacity available for expansion.

(iii) The actual need for an additional input of

finance for achieving the desired level of activity will
have to be carefully assessed. The dose of the
additional finance should be sufficient to prop up the
unit. A lower does may not cure the sickness and a
larger dose may result in the wastage of monetary
resources and also increase the interest burden of
the already sick unit. Some units may be sick
because of obsolete plant and machinery and may
need long-term funds for replacement or
modernization. Thus, before injecting fresh funds, it
is necessary to have a complete project report and a
feasibility study.

(iv) As the basic objective of nursing is to

restore the unit’s capacity to generate internal
surplus, it shall not be justifiable to charge penal
rates of interest from sick units. Rather, in most of
the cases, the recovery of overdue interest shall have
to be scheduled in phases.

(v) It will be worth nursing only those units

which could stop incurring cash losses within a year
or so. If it is not going to happen, commercial banks
may leave such cases to the Industrial
 8.3
64
Reconstruction Corporation of India (IRCI) or some
other Government agency.

(vi) Employees should be clearly told that either

they contribute by way of high production, behave in
a disciplined manner and agree to retrenchment of
surplus labour or face total unemployment.

(vii) Some managements may like to persist in

their old deficient style without any inclination to
subject themselves to the financial and other
disciplines imposes by banks. Such inefficient and
non-co-operative managements have to be eased
out. It has often been noticed that changing the
management by way of leasing out of the factory or
handling it over to an efficient management
sometimes proves very effective if it is done along
with nursing. The existing management is bound to
resist such efforts but funds should also not be
entrusted to an inefficient or incompetent
management. Under the present laws, such a
change is not possible without the co-operation of the
management. But banks can pressurize by way of
refusing to advance further or threatening legal
action. Very often, in a company set-up a threat to
invoke personal guarantees of directors proves an
effective instrument. However, the better course
shall be to replace some executives or appoint
additional executives so that some persons
 8.3
65
representing the old management also continue. If
the boards are already large, it is advisable to have a
working committee on which the nominees of the
bank should have a majority.

In a nursing programme for the rehabilitation of

sick industrial units, there is no margin for an error as
the funds available with the units are negligible. It is,
therefore, necessary that once the nursing
programme is undertaken, its implementation should
be strictly followed upon the basis of the lines
indicated in the rehabilitation plan. This would
necessitate the introduction of a suitable monitoring
system to check the progress of the unit from time to
time.

As per RBI guidelines, a sick SSI unit will be

considered viable if it is able to service its debts
without any help of concessions within 5 years (2)
years in case of tiny/decentralized) from the date of
implementation of rehabilitation package. However,
the restructured past debts, i.e., WCTL and funded
interest, should be repaid within 7 years (3 years in
case of tiny/decnetralised units) from the date of
implementation of rehabilitation programme.
 8.3
66
Reliefs for better financial Management :
The following reliefs and concessions may be
provided to potentially viable sick so as to secure
better financial management :

(1) Rate of Interest. As against the present

ratio interest of 13.5 per cent on WCTL and 10 per
cent on funded interest, WCTL shall carry interest @
10 percent and funded interest shall be free of
interest. The interest charged during the period from
finalization of package till the actual implementation
of the same is also to be funded similarly. The rate
of interest on term loans may be reduced wherever
necessary by not more than 3 per cent in case of
tiny/ decnetralised sick units and 2 per cent in other
sectors, provided the interest rate so charged is not
less than interest rate being charged in advances
sanctioned under IRDP.

(2) Financing of Cash Losses. Since the unit

may continue to incur cash losses during initial
stages of implementation of rehabilitation package,
the cash losses excluding interest thus incurred by
the unit will also have to be financed till it achieves
break-even point.

(3) Repayment of WCTL and Funded Interest.

WCTL and funded interest shall be repaid within 5
years and 3 years respectively.
 8.3
67

(4) Sanction of fresh Working Capital Facility.

Need-based working capital facilities may be
sanctioned at the rate of interest not exceeding 15
per cent.

(5) Contingency Loan Assistance, Start-up

Expenses. For meeting escalation in the capital
expenditure to be incurred under rehabilitation
programme, the banks may provide, if considered
necessary, contingency loans up to 15 per cent of the
total cost of rehabilitation at the rate of interest
charged on working capital limits. Similarly they can
also provide for start-up expenses and margin for
working capital requirements in the form of long-term
loans.

(6) Promoters’ Contribution. In case of tiny

units, promoters’ contribution should be minimum 5
per cent of cost of rehabilitation (10% in case of SSI
units). However, in case of decentralized units
promoters’ contribution may not be insisted upon.

(7) DICGC Guarantee. The guarantee fee may

be paid by banks/financial institutions during the
period of rehabilitation.

In case of nursing, it is necessary to have a

time-bound programme to be implemented in a
phased manner and watching the progress achieved
 8.3
68
at every level. Banks will have to monitor all the
nursed units in the sense that the borrowing units
should be made aware that they are under a
constant was so that they work as per the schedule
of reconstruction. A corrective action, whenever
necessary, in the case of changed circumstances will
have to be taken. Banks have to ensure a proper
working of the revival programme in the following
areas :

(i) Weaknesses. The action plan should indicate

the strategy for overcoming weaknesses diagnosed
in the sick unit. The success of the programme will
depend on the strategy to a large extent. If
marketing has been the main problem, then the
action plan should have concrete steps to tackle this
problem. In no case the same mistakes should be
allowed to be repeated.

(ii) Additional Funds. The repayment

programme has to be designed in such a way that it
matches with the surplus generating capacity. In the
nursing programme, an outlay of additional funds is
involved and hence a proper use of funds has to be
watched. The unit should prepare a cash budget for
every quarter so that banks can easily assess the
needs.
 8.3
69
(iii) Information System. The following are the
various ways to develop a system in which banks are
kept will informed about every detail :
(a) Monthly meetings with the borrowers
should be held to assess the progress of
implementation and identify any further
problems. If necessary, a consultation may
be held with consultants to assess and
evaluate the progress.

(b) Monthly budgets (estimates and

actuals) for sales, purchases, overheads,
etc., should be asked for. Besides, a
monthly operating statement and cash flow
statement should also be asked to be
submitted. If large variations in estimates
and actual exist in any month, timely
corrective measures should be taken.

(c) Banks should insist upon a regular

submission of stock statements and they
should scrutinize them carefully.

(d) The post-sanction inspection should

be frequent and of a surprise nature.

(e) Banks should occasionally examine

the operations of the account to know that
the sale proceeds are being brought into
the account.
 8.3
70

(f) A prompt submission and scrutiny of

annual accounts should be insisted upon.

(g) A review of limits based on the pat

performance should be done at least once
a year.

(h) Where another lending institution

along with a particular bank is involved,
joint discussion and meetings should be
held.

If due to the nursing and intensive care followed

in the monitoring system the unit starts generating a
surplus, the close monitoring procedure may be
replaced by a normal follow-up procedure.

The Hard Way Out :

In cases, where the nursing also fails to bring
the desired result or in cases where nursing could not
be done since the accounts became sticky due to
dishonest intentions of the borrower, the bank has
necessarily to go to court of law for recovering the
advance. Banks should also invoke the guarantee
cover for such accounts by lodging their claims under
the Guarantee Scheme for Small Scale Industries to
the Deposit Insurance and Credit Guarantee
Corporation (DICGC). A separate chapter, later on
 8.3
71
will provide a detailed analysis of the various
provisions of this guarantee scheme.

Before going to the court, it should be

remember that court action is neither easy or
inexpensive. Even if the bank succeeds in getting a
decree, there are cases where the execution of
decree becomes highly problematic. Besides the
time, energy and money which will be needed for
court action, the related correspondence will
normally be tremendous. A prudent bank will take
these factors into consideration before rushing to the
court of law.

The study covered 50 small-scale. The study

revealed the following problems were detected in the
unsatisfactory group :

Managements No.
of
Units
1. Lack of working capital management 32
2. Lack of organization 20
3. Lack of Technical/Managerial capability 17

Marketing
1. Recession in market 9
2. Unit is dependent on buyer/very few 13
buyers
3. Competitive market 17
4. Wrong distribution policy or methods 4

Finance
1. Insufficient margin on selling price 5
 8.3
72
2. Capital expenditure being financed by 15
working funds
3. Development expenditure eroding into 5
working capital
4. Interest burden and stiff repayment 7
schedules of term loan and other bank
borrowings leaving insufficient funds for
working capital
5. Inadequate bank finance. 8

Production
1. Frequent break-down of plant and 5
machinery
2. Raw material shortage 16
3. Powers shortage 16
4. Interruption in production schedules due 15
to transportation bottlenecks, delay in
subcontracting, etc.
5. Manufacturing process defects, poor 8
quality control leading to deterioration in
quality of products manufacture by the
units.

These factors contributing towards build-up of

unsatisfactory feature are not only applicable to
small units, but also to medium and large sized
industrial units. Existence of any of these
unsatisfactory factors should be treated as an early
alarm signal of impending deteriorating health of a
unit.
 8.3
73
References
1. Dhingra, I.C. : The Indian Economy, 1999, P.452.

2. State Bank of India Monthly Review, August

1981, P.316 (A.K. Bhattacharya :
Sickness........Undertakings)

3. S.B.I. Newsletter, Feb. 23, 1981, No.8, P.2.

4. In 1975 State bank of India concluded in a study

of "Identification Problems of Sick units in Small
Scale Industries of India" that one of the vital
and basic reasons for sickness was distorted
financial structure of small scale units at the
initial stage of business. The ratio of equity to
debt in most cases was in the range of 1:3 to
1:6 and

5. The study noted that 40 per cent of the small

scale units were started without any advance
market assessment "Hand outs" Bankers
Training College, RBI, Bombay April 13,25,1981.
Paper No. 79/759, PP.3 and 4.

6. More than 200 small & medium industrial units

have closed down operation in MIDC, Waluj,
Aurangabad industrial belt in the past year or
two due to severe infrastructural and labour
problems, State Bank of India, State Bank
Economic News June 11, 1998, Page 2, Bombay.

7. Economic Survey, 1980-81, P.22

8. Ibid, Dhingra, I.C.: P.453.

9. Sukhdev S.S. - Development of Small Scale

Industries in Maharashtra, 1984, P. (ix).

10. Economic Survey of underdeveloped Region

(1999), Ministry of Finance, Government of
India, New Delhi P. 28.
 8.3
74
11. DIC, Aurangabad, Annual Report 1998 Report on
the working of the DIC for the year ended June,
1999, P.39.

12. Chowdhury, R.R., How Bankers can detect it :

The Economic Times, Calcutta, April 24, 1982
P.1.

13. DIC, Aurangabad Economic Survey, 1998, p.17-

26.

14. The Large Sick Units are defined as those

having outstanding bank credit of Rs. 1 crore or
more.

15. RBI Annual Report, 1999., The magnitude of

overdues in Maharashtra would be gauged from
the fact that by the end of June, 1997, there
were 439 large sick units involving an
outstanding balance of Rs. 1,728,40 crores.

16. Panday, D.P., Small borrowers and recovery

problems, P.514, Commerce, Vol. 146, No.3747,
Bombay, 1997.

17. Chowdhury, R.R., op.cit.

18. Excerpted from the speech of Chairman, Bank

of Maharashtra, delivered in the Bank
Economists' Conference, 1999, organised by the
Department of Management Science, Pune
University.

19. Excerpted from the RBI Deputy Governors'

speech, delivered while inaugurating the
Session, Industrial Sickness and its impact on
bank's profitability, in the Bank Economists'
Conference, organised by the Central Bank in
the year 1997.

20. W.A. Lewis : The Theory of Economic Growth,

George Allen & Unwin Ltd., London 1958.
8.3
75
 8.3
76

Chapter – VIII
The Four Case Studies Revealing A
State of Finances of Sick SIUs

− Introduction

− Case No.1 : Jew (Light Engineering

Industry)
Result :
Reasons For Sickness Analyzed :
Bankers Side :
Conclusion :

− Case No.2 : GCC (Chemical Industry)

Reasons For Sickness
Results
Opinion of the Unit And
Suggestions
Conclusion

− Case No.3. SP & AC (Chemical Industry )

Results
Conclusion

− Case No.4 : Printek (Printing Press

Industry)
Results
Conclusion
 8.3
77
Chapter – VIII
The Four Case Studies revealing a state of
Finances of Sick SIUs

Introduction :
Nearly three fourth SIUs in Marathwada are
found sick for one or other reason, the root cause
is ,however, inadequacies of finances .Looking to the
large number of SIUs as sick ,it is decided to
undertake the case studies of four SIUs to know the
exact reasons of sickness. Though this exercise is
illustrative ,it provides a louder vision in the subject
under study. The identities of such units under case
studies are kept secret for avoiding any
inconveniences to the owners of units. The units
whose cases were undertaken are as below with
abbreviations used against each for discussion in this
chapter.

Sr.No Name of The No. of Abbreviatio

. Industry Units n

1. Light engineering. 01 JEW

2. Chemical 01 GCC
3. Chemical 01 SP & AC
4. Printing Press 01 Printek

Total 04

Now it is proposed to take-up each unit

separately and study their cases :-
Case No.1 : Jew (Light Engineering Industry)
 8.3
78
Jagdish Engineering Works (JEW) a light
engineering unit was established in 1981 to
manufacturers of precision Machined components. It
was a sole of proprietorship concern, the owner
having technical experience only. The unit was in the
heart of M.I.D.C. (Auranganad) JEW was granted
financial assistance by a Nationalized Banks in 1982
to the tune of Rs. 10,00,000/- only for purchase of
plant and machinery. The unit had current account
with another Nationalized bank. The unit had also
borrowed Rs.100,000/- from the friends and relatives
in 1981 for starting the business and for the working
capital purposes.

The average sales were to the extent of Rs.

820,000/- to Rs. 8,50,000/- per year and profits
(average) for each year come to Rs. 3,50,000/-
(based on the last 3 yrs average).

The unit had 4 skilled, 5 semiskilled and 8

unskilled workers who were paid Rs. 2850/- p.m. i.e.
34200, Rs. 2250/- p.m. i.e. 27000/- and Rs. 1800/-
p.m. i.e. 21600/- annually per worker. (i.e. Rs.
136,800/- for 4 skilled, Rs. 1,35,000 for semiskilled
and Rs. 1,72,800/- for 8 unskilled per annum). (Rs.
2850 x 12 x 4, 2250 x 12 x 5, 1800 x 12 x 8)

The products were sold on 3 to 6 months credit

and credit allowed by the creditors for the purchase
 8.3
79
of raw materials was only one month. The unit
stated that it had no competitors.

From the above it is apparent that the unit was

running at a heavy loss as the sales amount realized
could not cover even the operating expenses of the
unit. The labourers could not be paid in time every
month.

Result :
The result was that the worker left the job, who
were trained specially for the specific jobs for better
prospect outside which resulted into the closer of the
unit. The unit was completely closed in 1999.

Reasons For Sickness Analyzed :

The first question put to the unit while making
the survey was as to why the unit did not avail bank’s
finance for the working capital requirements and
borrowed from the friends and relatives (interest paid
@ 18% p.a. on an average.) The answer given by the
owner was that he did not know the various
formalities of the bank in obtaining the loans. Also
the bankers insisted for a substantial guarantor and
in order to avoid all these, he had borrowed from the
friends and relatives to start the business early.

All the sales were made to a medium sized

company in Aurangabad, who did not pay good price
for the products, and since the engineering job etc.
 8.3
80
were manufactured were especially made in the
medium sized company, JEW unit could not sell them
to any other company.

The owner took the risk himself and paid off the
loan of Rs. 10,00,000/- to the friends and relatives by
selling some part of his property. The banks term
loan of Rs. 10,00,000/- was repaid to the tune of Rs.
8,00,000/- and only Rs. 200,000 was outstanding as
on the date of survey.

Bankers Side :
It was ascertained from the banker that the unit
was really doing well during the first 9 years and was
regular in repayment of term loan. But after
sometime due to inflation and rise in the cost of raw
materials and labour charges the unit activities
slowly begin to decline. The units had approached
the bank in 1995 for working capital requirements,
and were asked by the bankers to submit the past
records of his performance. But since the unit sales
were decreasing over the year, the unit knew that his
loan would not be sanctioned by the bank. He was
also ignorant of the various documents required by
the bank for sanctioning any loan.

The bank was ready to guide him, but the unit

did not take much interest in his business as he
 8.3
81
started another line of business by then and the unit
was finally closed in 1999.

Conclusion :
The owner of the units stated that if the bank
had helped him in 1995, there would have the revival
of the unit as the job performed was not done by any
other unit in Aurangabad. It is due to the lack of
interest on the part of the banks to nurse a unit
results into the closure of the units was the stand
taken by the entrepreneurs. This contention is not
true. The entrepreneurs are equally or more
responsible in running there business and earning
profits and should not depend fully on the banks
credit.

Case No.2 : GCC (Chemical Industry) :

Ganga Chemical Company (GCC) from Nanded
is a Chemical unit was established in 1983 as a
partnership concern with a capital of Rs. 40,000/-
contributed by the partners, Its products were Acid
Slurry (A.B.S.), Liquid Detergent ( Soap) & Allied
Products (Industrial & Diary Special).

One of the partner is post graduate in Science

and worked as a demonstrator in a college before
starting his business. He was managing the
business. This unit is situated at Co-operative
Industrial Estate.
 8.3
82

The following limits were sanctioned to the unit

by a Nationalized Bank in 1984 :
Cash Credit (Against Book 400,000
Debts)
Bill Discounting Limit 780,000
Term Loan 200,000
Total 13,80,000

No other borrowings were made from any other

financial institution.

The average annual sales of the unit based on

last three years average were Rs. 1300,000/- and the
average loss ( annual) was Rs. 85000/-

The unit has 16 labourers in all out of which 4

skilled, 6 semiskilled and 6 unskilled. The rates paid
were skilled Rs. 3000/- p.m., semiskilled Rs. 2500/-
p.m., and unskilled Rs. 2000/- (Annual Labour cost
Rs. 144,000/- Rs. 180,000/-, Rs. 1,44,000/- =
Rs.4,68000/-)

The Raw materials are purchased from Nanded ,

Mumbai, Pune, Aurangabad and Delhi are bought in
the open market. No assistance is given by the
District Industries Centre in this regard.

The product are sold on 100% credit and the

payment are received ranging between 120 days
and 180 days, while the suppliers of the raw material
allowed only one month credit period.
 8.3
83

It was ascertained that the unit was incurring

loses for the past three years and the maximum loss
incurred was in 1994-95 which amounted to Rs.
1,57,000/-

Since the unit was showing continuous cash

loses for 3 years, the bank treated this unit as “Sick
Unit” and stopped further operations in the account.

There were another symptoms of sickness also

which are as follows :
(1) The average cost exceeded the average
returns, thus resulting decline in profits.

(2) No margin money available to avail

working capital from the bank.

(3) Heavy accumulation of finished goods.

(4) No cash available to repay the loan

installments and interest payment to
the bank.

(5) There was arrears in the payment of the

Sales Tax and Income Tax dues.

(6) Cash in hand, bank merge even to meet

the current liability e.g. The payment of
the wages to the workers and payment
of electricity, water bill etc.

(7) Strained relations with the workers due

to nonpayment of wages in tome had
resulted in their leaving the jobs.

(8) Sales were practically stagnant

resulting into stoppage in production.
 8.3
84

(9) Trade creditors insisting for payment of

their bill, while debtors were enjoying
long periods of credit.

(10) Stock statement not submitted for the

last 4 months.

(11) Cash Credit account is out of order for a

long time, i.e. over 8 months.

The following was the position of the various

facilities obtained from the bank as on the date of
survey.(2000-01)
Outstanding Amount (Rs.)
Cash Credit 4,50,000/-
(Against Book Debts)

Bills Discounting Limit 1,35,000/-

Term Loan 80,500/-

(Installments + Interest)

Total Outstanding Rs. 6,65,500/-

Rounding off into lakhs, we may take Rs.

6,66000/-

It was revealed that though the bank had

sanctioned a cash credit limit of Rs. 4.00 lakhs only,
it was allowing the limits sanctioned for temporary
period which later became the regular feature of the
unit.
 8.3
85
This unit had also borrowed the private money
lenders to the tune of Rs. 30,000/- in 1996 @ 25%
rate of interest per annum for meeting the wages
payment of the workers.

Reasons For Sickness :

The raw materials prices were increased by about
70%

(1) Potential market could not be exploited for

selling the products as the marketing method
was poor.

(2) The debtors extended their credit period which

ranged between 4 to 6 months.

(3) Though there is great demand for the chemicals

produced by this units, the (customers) textile
owners are not getting returns due to lower
demand of their final product because of high
prices fixed by them. Hence this unit is
suffering as its produces the chemicals required
for a particular purpose only by a very few
owners.

(4) One product was to be discontinued as the

customer himself started producing the
chemical required.

(5) There was a fire in the factory due to short

circuit in 1995 and the actual loss estimated
was to tune of Rs. 5,80,000/- out of this amount
only 50% i.e. Rs. 2,90,000/- was realized from
the insurance company.

The Banks Approach :

After Studying the proposal thoroughly and after
satisfying that the unit will be able to overcome the
 8.3
86
deficiencies which led to sickness and the future
course of action prepared by the unit for diversifying
the products for it’s future growth bank had decided
to take up the unit under the nursing programme.

Thus the bank considered granting of Rs.

1,00,000/- to the unit in 1992 just to purchase the
raw materials.
 8.3
87
Results :
The unit stated that since the amount
sanctioned was very meager, it could not be utilized
for the productive purposes hence it was not availed.
The unit therefore could not produce anything and
only depended on the banks mercy.

Opinion of the Unit And Suggestions :

In the opinion of the unit the bank should give at
least an amount of Rs.7,80,000.00 by which the unit
will be able to manufacture six tones of the chemical
which will yield a profit of Rs. 70,000/- (Net) the unit
stated that it is only the financial handicap which was
responsible for its sickness and could again revive if
the bank considered Rs. 7,80,000/- as additional
finance. The unit also admitted that it was allowed to
draw in excess of the cash credit limit sanctioned by
Rs. 50,000/- on a regular basis and hence had helped
the unit to run the business difficult times.

The only way out for revival of the unit is to

diversity the products and maufacture some other
items.

Another fact to the notice through the

discussion was that this unit could not fixed higher
prices as there was exemption from excise duty for
the product manufactured and hence the customers
(Acid slurry manufacturers) wanted the products at
 8.3
88
lower prices. This unit therefore, could not adjust the
extra margin of profit in the prices as otherwise
would have been charged if excise duty was levied.

The unit suggested that if it approaches one

established trading agency, if could boost up sales
which will bring the unit into profits within 2 years
direct sales to owners as was done till now resulted
into delayed payments by them which made unit
sick. But again all this required Banks finance.

Conclusion :
In this case the owner stated that had helped
much by going out of the may and extending credit
as and when needed. But if the bank is now ready to
accept further risk and invest an amount of Rs.
7,80,000/- in the unit it could receive and repay the
entire loan with interest within a span of 5 years.

The banks stand was that already the total out

standing were to the tune of Rs. 780,000/- and if
another Rs. 7,80,000/- were sanctioned by it under
the nursing programme, the total outstanding will be
to the tune of Rs. 15,60,000/- which is risky venture
as there was no security left with the unit of offer as
a cover for the additional sanction. Also, since the
accumulated losses were also heavy it was not
possible for the unit to return to profits within a span
 8.3
89
of 5 years and repay the entire amounts with
interest.

The unit is therefore thinking of closing down

completely.

Case No.3. SP & AC (Chemical Industry ) :

Sunshine Raints & Allied Chemicals Co. (SP &
AC) from Aurangabad is a chemical unit established
in the year 1986. It was a partnership concern. The
business was started with Rs. 100,000/- borrowed
from their relatives.

The main product of the unit were detergent for

the manufacture of Epoxy paints & Thinners,
Polyurethane paints & thinners and speciality
coatings, Decorative water proof cement paints,
Exterior Texurised paints, Oil Bound, Distempers,
Synthetic Enamels and all types of thinners and
primers. Insulating varnishes & metal pretreatment
solutions.

None of the partner was technically qualified.

The unit was situated in the Maharashtra Industrial
Development corporation Ambad (Nasik).

The credit facility availed was NIL and only clean

over draft to the extent of Rs. 5000/- was obtained
from a Nationalized Bank since 1990. The unit had
 8.3
90
current Account with another scheduled commercial
bank.

The units building costing Rs. 1.50 lakhs was on

lease for 99 years and had purchased plant and
machinery worth Rs. 1,20,000/- from its own capital
contributed by the partners and relatives.

The unit was doing was very well and its

average annual sales were Rs. 1300,000/- during
1990 while the average annual profits comes to Rs.
3,50,000/-

The unit had not employed any outside

labourers but the business was managed by the own
members of family and Rs. 30/- per day was charged
as labour charges from the business as there was
only one “Bhatti” which involved manual labour.
Electricity was also not used by the unit.

The raw material were purchased in the open

market from Aurangaabd, Mumbai, Ahmedabad and
no assistance was given by the District industries
Centre.

The products were sold on 100% credit. There

was no delay in receiving the payments initially from
the customers for the first 2/3 months, but some big
concerns did not pay the bills till the closure of the
units and deceived the unit.
 8.3
91

The unit started incurring losses since 1991

onward due to following reasons.

(1) The prices of raw materials increased manifold

i.e. nearly doubled.

(2) The big companies did not pay the bills for
which the funds were locked up.

(3) Since no credit facilities were enjoyed the unit

could not borrow from the bank on the strength
of the stocks maintained by it.

Under such circumstances, the unit though of

diversifying its products by producing another
chemical which had high demand in the market. For
this purpose it approached the Maharashtra State
Financial Corporation in 1991 for the term loan of Rs.
6,70,000/- The Loan application was considered by
Maharashtra State Corporation against the equitable
mortgage of a building and hypothecation of the
plant and machinery. The loan was not disbursed by
Maharashtra State Corporation on the plea that the
partners had very low education and experience in
the new field of business and that the unit was
already incurring heavy losses of about Rs. 65,000/-
per year. The unit was hard pressed as the banks
also did not consider a case due to heavy losses and
since the unit had no securities to offer as the same
were already committed. Moreover the unit was
running into heavy losses and did not enjoy any loan
 8.3
92
previous from the banks. Hence the banks were
unwilling to take up the unit under the nursing
programme.

Results :
The unit stated that because Maharashtra State
Financial Corporation did not sanctioned the loan of
Rs. 6,70,000/-. It has to closedown. The units stated
that the banks did not support the small
entrepreneurs in times of difficulties and insisted
upon guarantors and securities. Hence the unit was
completely wound up in 1998.

Conclusion :
In this case, it was found that the partners were
over confident about their business and tried to
manage their business from the internal sources
without approaching the banks. They also lacked in
financial discipline as the credit sales made could not
be realized by them, thus resulting them into heavy
losses.

Case No.4 : Printek (Printing Press Industry) :

Printek is a printing press from Parbhani
established in 1979. The unit worked as publishers
initially and started working as printer since last 18
years.

It is a partnership concern. The partners

contributed Rs. 30,000/- as initial capital for starting
 8.3
93
the business. All the partners are having technical
experience. The unit is situated in the heart
Maharashtra Industrial Development Corporation
(MIDC) of Parbhani. The unit was closed down in
1991 due to the labour trouble in the printing press
industry which resulted into closure of many units big
or small. It was restarted in 1994.

The units could manage on its own resources till

1991 for its working capital needs since it worked as
a publisher of tax-Books. Due to labour trouble in
1991, the unit suffered and funds position become
strained. Also due to the Govt. decision of
Nationalizing the Publication of Text Books and the
Printing press units suffered and hence this unit
started undertaking printing job of private parties,
banks, industries etc. for which it availed Bank’s
finance in 1991 as follows from a nationalized Bank :

Term loan for purchases Machines

(Hypothecation) of Rs. 4,70,000/-

Soon after availing the bank’s finance the unit

had to be closed down as stated below :
(1) Due to governments decision to
nationalize publication of text Books.

(2) Serious labour trouble.

The average annual sales were to the extent of

Rs. 2,90,000/- in 1991. On the restarting the unit in
 8.3
94
1994 the unit could make a sale of Rs. 6,50,000/- and
a profit of Rs. 50,000/- after meeting all the
expenses.

The unit in 1991 had employed 13 workers and

after restarting the business employed 22 workers as
follows :
Skilled-6 Nos x (Rs. 2850 x 12) Rs 2,05,20
. 0
Semiskilled 14 Nos x (Rs. 2250 x 12) Rs 3,78,00
. 0
Unskilled 2 Nos x (Rs. 1800 x 12) Rs 43,200
.
Total Rs 6,26,4
. 00

The raw materials i.e. paper was mostly

supplied by the customers and in certain cases only
the paper was bought from Aurangabad and Mumbai
market.

The sales were made on 100% credit and the

unit did not find any difficulty in receiving the
payment as the payments was received within 30-60
days.

Results :
On restarting of the units in 1994, the unit
borrowed from the bank Rs. 1426000/- cash credit
limits for the working capital requirements under the
nursing programme. The bank took a great risk that
 8.3
95
the unit which was closed down for four years and
could not repay the term loan and interest there on
allowed working capital facility of Rs. 14,26,000/- for
restarting the unit.

This bold step taken by the Bank received the

unit and the following results were seen :
Year Sales (Rs.) Profit Before Tax
(Rs.)
1994-95 37,56,000 6,25,700
1995-96 41,38,500 8,77,000
1996-97 42,57,000 5,66,800

Thus from the above figures we can see that the

nursing programme under take by the bank boldly
resulted in the units revival and turning into the
profits.

The unit is now paying Rs. 55500/- (average)

interest on loan from the bank per year and the term
loan installment which is re-scheduled by the bank to
the extent of Rs. 60,000/- per year.

Conclusion :
The unit stated that its only for the bank’s
assistance that the unit could be restarted and the
bold approach made by the bank official to nurse the
unit should be really appreciated. The bank officials
stated that the Bans always looked at the units from
a suspicious angle and felt that all sick units are bad
and nursing should be done only in few cases.
 8.3
96

Thus from the above example it can be

concluded that the circumstances which lead to the
closure of the unit should be taken into accounts
instead of the causes for failure of the units and
individual cases dealt with. The same norms or yard
– stick should not be applied for all units and the
reasons for sickness given in various books should
not be followed in judging units performance.

In the words of Douglas C Bazil “The smaller

businessman in order to strengthen his chances for
survival must be aware of accepted cost practices,
financial ratios and other operating standards which
enable him to test ad improve his position both
financially and marketwise”
1.3
97
 1.3
98
))))))))
1.3
99
1.4
00
1.4
01
 1.4
02
1. Reference
University of Minnesota studies in Economies and business organization
and control of the smaller Enterprise – Douglas C. Bazil.(The University of
Minnesota press No.20, Minneapolis) 1959.]
1.4
03
 1.4
04
Chapter – III

Economic Profile of Marathwada having

Concern To Finances & Their Development
− Economic Profile of Marathwada

− Other lower Economic Dimensions

− Some Issues Affecting The Financial / Management or Working of

Industrial Units

− Organised Sector V/s. Subsistence Sector

− The subsistence sector and “Disguised Unemployment

− Possibilities of initiating a virtuous process of rapid

growth

− Trade cycle : An obstacle to smooth functioning

− Effects of Taxation

− Deficit financing

− Principal Weaknesses

(i) Poor Communication System

(ii) Lack of Professionalism

(iii) Poor Liquidity

(iv) Dominance of Financial Institutions

(v) Weak Regulation

(vi) Preponderance of speculative Trading

(vii) Undue influence of big Industrialists

(viii) Periodic Crises

(ix) Defective Capital Structure

(x) Raw Material Shortage

 1.4
05
(xi) Technical Skill
 1.4
06
Chapter – II

Economic Profile of Marathwada having Concern To Finances &

their Development

Economic Profile of Marathwada :

Agricultural was main occupation of the people of Marathwada in
Nizam’s regime which was continued till mid fifties1. But condition of
agricultural was not much improved during the regime of Nizam. The
basic policy of the Nizam had been to disintegrate the economic
integration of the people.2

The Jagir Commission reported about the pitiable conditions of

agricultural, educational, health and water supplying under Nizam’s
regime3. The opening of Hyderabad Godavari Railway in 1900 had made
some marginal impact over the economy of this region. Later on the
Parbhani-Parli railway developed during 1921-31 had also caused to gear
the economy of the small portion of the region. The total length of the
railway within dominions was 1,481 miles in 19414.

Till 1917 there was no independent department of industrial affairs.

On 1st January, 1918 such department was established.5 Even after
establishment of industrial affairs department, the Nizam Government
used to spend less than 1% of the total expenditure on industrial
development of the region6 .

On the whole it is seen from the statistical reports of the Hyderabad

State that an organised factory sector in Marathwada could not gather any
momentum during the Nizam Regime, except the establishment of one
textile mill at Nanded and Cotton and ginning factories at the various
places of the region. The main reason for that there were utter lack of
financial Resources.

Maharashtra is one of the industrially developed states in the

country. Yet, paradoxically, extremely backward and poverty stricken
areas co-exist with the more advance tracts in the State. The Aurangabad
 1.4
07
Division - traditionally known as Marathwada and comprising the seven
districts of Aurangabad, Jalna, Parbhani, Beed, Nanded, Osmanabad and
Latur is not only the most backward in Maharashtra, but, unfortunately, it
also seems to be one of the most undeveloped regions in the country.

Much of the economic backwardness of Marathwada had no doubt

been due to its historical neglect by the erstwhile feudal state of
Hyderabad, of which it was an integral part till 1956. Disappointedly, the
neglect of this region continued even after its merger with the rest of
Maharashtra in 1956. As a result, even after more than three decades of
planning in the country, the economy of Marathwada continues to be
characterised by mostly primitive subsistence farming with little growth in
either the per capita income or quality of life.

As it is, the region is devoid of any major natural resources, either

forest based or of mineral origin. Agricultural is the mainstay of
Marathwada. As much as three fourth of the geographical area is under
the plough and provides work to almost four fifth of the labour force. Yet,
in the absence of irrigation (which does not cover even one tenth of the
net sown area) and adequate rainfall, nearly two fifth of the land and
population in the region falls in the drought prone zones. Not surprisingly,
agriculture in Marathwada is confined to the cultivation of less water
intensive food crops, mostly inferior cereals like jowar and bajra.

With paucity of natural resources from farm, forest and mines, the
advent of industries in Marathwada has been dismally slow. The problem
is further compounded by low levels of literacy and education, lack of
entrepreneurship and skilled manpower, and inadequate physical, social
and financial infrastructure. While Marathwada has been discriminated
against by nature, what is perhaps more pathetic is that it has failed to
receive during the last over three decades its fair share from the State in
terms of investment in physical (transport, communications and power),
social (education, health and housing) and financial (Capital and credit)
assets. Consequently, all the commonly accepted indicators of economic
 1.4
08
development (Covering both the natural and man made assets) vividly
bring out that Marathwada is backward.

Today, we have somewhat better economic picture of Marathwada

but during mid sixties the situation of Marathwada, was deplorable and
that made the Government to take positive action for improvement of
economy.

Historical factors are also responsible for the development on trade

and commerce. For example, the presence of Nizam Government, even
after the independence is responsible for non-development of trade and
commerce. The British and also Nizam looked upon Marathwada only as
the source of supplying agricultural commodities. The peculiar land
revenue policy of Nizam, land-lordism and Zamindari heritage,
fragmented holding etc. were largely responsible for worsening the
condition of the economy of Marathwada. Added to this the absence of
enlighted leadership and the dominance of political leadership from
Mumbai, Pune belt and Western Maharashtra was instrumental in delaying
the development prospects. As result, the rate of capital formation was
very meager in Marathwada region.

The following pages aim to show in what ways the Marathwada

region is lagging behind on the economic fronts and how trade and
commerce suffers from such low economic profile.

Census Reports reveal the Demographic features of Marathwada.

Marathwada’s population in 1981 was 97.29 lakhs. By 1991, it went upto
127.68 lakhs. The growth was 1.9 percent per annum for 1970-1981 and
1.31 percent per annum for 1980-1991. These growth rates were lower as
compared to the decade (1961-71) when it was to the mark of 2.5 percent
per annum. The fall in the growth of population of the region, as against
overall growth rate for the rest of Maharashtra, might be favourable to
economy. It might partly because of the decline in birth rate and perhaps
partly due to migration7.
 1.4
09

The slow pace of economic development in the region is also

reflected in the degree of its urbanisation. Marathwada has the lowest
level of urbanisation among the different regions of Maharashtra8 and
therefore the development of Backing sector is obstacled.

Not surprisingly, of the 42% workers in population of 1991, about

80% of them consisted of the workers engaged in the agricultural sector.
Statistics presented by the Economic survey of Maharashtra bring out this
fact.9

Drought prone area in 1994 consisted almost 40% of the region.

Inspite of progressive steps taken by the state government for the
development of Agriculture.10

While food grain is the dominant cropping pattern of the region, and
accounts for nearly 83.00 percent of the gross cropped area, what is
perhaps even more distressing is that the food grain yields in the
Marathwada are the lowest in the Maharashtra for years together. The
only satisfactory situation is that the Marathwada region is self sufficient
in food grains.

Cultivation of commercial crops is limited and restricted to cotton

mainly and to a lesser extent to oil seeds and sugarcane.11

Animal husbandry in Marathwada region is affected by the limited

and scattered area under pasture. Fodder development has not been
taken up seriously. Thus, the population of cattle’s in Marathwada formed
less than 25% of their total Cattle population in Maharashtra in 1987.12

What is true about milk is equally true about mean and poultry. The
per capital eggs availability is not yet satisfactory.13

Evidently, despite Marathwada’s near total dependence on the

primary sector, this sector has failed to provide the necessary wherewithal
for economic development of the region.14
 1.4
10

Till mid eighties, the industries in Marathwada could not reach to

the takeoff state. The disappointing features of industrial localisation is
that about more than 60% industries under manufacturing have their
plants only in Aurangabad district. The rest of the districts are waiting for
industries. Even the year 2001 would have deplorable position in this
respect.

Factory sector in Marathwada provided employment in 1992 to only

79,129 persons. The total number of factories was 863, out of this the
largest i.e., 478 was in Aurangabad district. The factory sector in
Marathwada is small not only in size of employment, but also in the size
and scale of operations. Infact, the low value added and “processing”
rather than the high value added “manufacturing” activity dominates the
factory sector in the region15.

The number of villages in Marathwada were 7994 against 53 towns

spread in the area of 64,302 Sq. kms. This indicates the rural
environment is lacking in infrastructure for the development of any
industry including sugar industry16.

There are only four river basins in Marathwada i.e., Godavari, Purna,
Penganga and Manjara. besides miscellaneous river basin of Lendi,
Bindusara, Dhondary, Amrita, Sindhphana, Kham, etc. This natural source
of water is often handicapped by the vagaries of monsoon17.

The Marathwada labour force comprised of 80 percent in primary, 5

percent secondary and 15 percent in service sector is indicative of
imbalances in the manpower development. No wonder such an imbalance
would naturally lead to dwarfing the growth of the industry.

Added to above the poor rate of literacy among the males (55
percent) and females (28 percent), lower scale of working population (56
percent), dominance of rural dwellers (78 percent) against urban dwellers
(22 percent), and imbalance of females in total population (48 percent)
 1.4
11
were the indirect reasons negatively affecting the development of
industry18.

Disappointingly enough Marathwada is dependent on agriculture,

scarcely 28 percent of the gross cropped area was covered under the
irrigation. The rest has till been left to the mercy of the truant weather
gods. Not only is the rainfall in the region inadequate, but worst still, it is
also erratic showing wide variations from year to year19.

Out of total soil in the region only 13% is of a deep black quality and
60.68% is of a medium black quality and remaining soil is of poor quality
or fallow20.

Of the 6,357 thousand hectares land of Marathwada, 74% land was

under cultivation; out of which only 18% was irrigated. Against this, the
lower percentage of forestation, only 4% forest area was clearly indicates
the toothing trouble of soil erosion .
21

The study of minimum and maximum and average temperature of

last 25 years (1966-1992) 22
reveals that the minimum temperature is
always between 32.1 to 33.5 centigrade. It is true that this weather may
not be so suitable in absence of adequate water for the cash crop.

The district wise statistics on co-operative societies presented , for

23

the total Maharashtra shows that the number of co-operative institution in

Marathwada (16, 372) is small as against the institutions in Western
Maharashtra (27,589).

Other lower Economic Dimensions 24

:
While the industrial development hardly seems to have begun in
Marathwada, what is even more depressing is that the following demerits
are still noticed in Marathwada.
(1) Fall in per capital income not suited to betterment of living
standard.

(2) Absence of export trade.

 1.4
12

(3) Absence of diversification of industries producing variety of

goods and services.

(4) Gross negligence by the State and business houses towards

the welfare function.

(5) Absence of social change in the favour of national integration.

(6) Lopsided industrial development absentee various districts.

(7) Scarcity of capital and technical know-how.

(8) Predominance of consumer goods industry.

(9) Imbalances of development as between talukas.

(10) Haphazard approach of the Government in planning for

industrialisation.

(11) Slow or no industrial progress made during the planning

period.

(12) Poor share of industries in employment.

(13) Excessive importance to agro based industries excluding

sugar industry.

(14) Dismal attitude of the Government to start the large size

public sector manufacturing venture having potentiality to
create socio economic linkage effects.

Some Issues Affecting The Financial /Management or

Working of Industrial Units
There are many socio-economic issues which directly or indirectly
affect the financial management of SIUs in particular and all the IUs in
general. Their actions and reactions generate impact on the economy and
also on the society. The time is appropriate to study these issues in the
light of experience survey of the SIUs.

Organised Sector V/s. Subsistence Sector :

The economic system of Marathwada district is made of two distinct
sectors. The first sector is the organised sector formed by capitalist
including Government.
 1.4
13

This organised sector, which is quite modern, occupies (excluding

Aurangabad proper) only a small segment of the Marathwada economy. It
contains private or state owned enterprises. The few manufacturing
industries are founded in this sector of the economy but in most cases
they are run by private entrepreneurs. This sector has ample financial
support provided they provide necessary securities to borrowed capital.
The Government or bank finances could find the ways of development of
the economy through this sector. The state owned enterprises in this
respect are better placed and could be harnessed by the state planners
for the cause of development by providing finances. The subsistence
sector of rural Marathwada , which occupies the rest of the economy is
much larger than the organised sector at Marathwada proper. In the
subsistence sector, which is much more traditional in outlook, we find
small scale family agriculture and various other types of unorganised
economic activities connected with peddling, petty shop keeping, etc. Net
saving within this subsistence sector is negligible and their effective
market demand for consumption commodities is very small. Yet, although
these people are at the subsistence level, many do not want to migrate to
other areas even if opportunities are present, nor do they have the funds
to migrate. In short, there is a little impetus within the inhabitants of the
subsistence sector for significant economic improvement. Under
subsistence sector, the financial spending for input is small due to
relectuance by the Banks or financing institutions to provide capital.

The capitalist sector at Marathwada mostly in organised sector

could have the facilities of a modern banking system. Moreover, in this
sector, some entrepreneurs try to introduce new techniques and modern
machineries for increasing the productivity and therefore, the rate of
capital formation and the rate of technical progress are quite high in this
sector, but which is of small size in the rest area of district due to absence
of industries.

The subsistence sector and “Disguised Unemployment”:

 1.4
14
The rural Marathwada has subsistence sector having
agriculture as its main occupation. Because of a growing
population of the district and non-availability of alternative
occupations, there is tremendous pressure and population on
land. Too many try to get a livelihood out of agriculture. The
problem becomes more acute because of small scale family
agricultural systems. All the members of the family work on the
small ancestral plot. The new comer, whether he is a distant
relation or a new-born child, will ultimately start depending on
the same plot with other members of the family. The family
members who work on the family plot, are all self employed
people and it is a very difficult job to disemploy such self-
employed worker. But this crowd of people on a small plot of
land are bringing their ruin, just as too many cooks cannot
improve the dinner, so too many men, working on a small plot
cannot substantially increase agricultural output. Thus, the
average output per member of the family in the district is
alarmingly low not only because of scarcity of land and
outmoded technique of cultivation but due to the fact that the
output resulting form the productive work of members has to
be shared amongst all, some of them are mainly surplus labour.
This phenomenon of “apparent” employment without any
addition to total output is usually referred as “disguised” or
concealed unemployment.

In short, the disguised unemployment exists in the Marathwada

because the resources of the family, particularly land and agricultural
equipment’s, are too small to keep all working members of the family fully
employed throughout the year and because there exist no alternative
 1.4
15
opportunities for redirecting a portion of the excess labour supply away
into other occupations at appropriate times. Quantitative measurement of
this underemployment is difficult, and observers differ in their estimates
of its extent. It is, however interesting to note here that the Marathwada
planning authority tries to meet the problem of surplus agricultural
population which is between 20 and 25 percent.

Thus, due to the existence of disguised unemployment, the per

capital income of most of the inhabitants of the subsistence sector are
unusually low and it is almost impossible to save out of this low income.
The peddlers, the village shopkeepers and other people, engaged in
unorganised economic activity in the subsistence sector, cannot expect to
much profit from brisk business because the farmers, with almost
subsistence income, can hardly think of consuming anything else in
addition to food and cloth. Thus this large segment of the economy,
which we have called the subsistence sector, it almost in a stagnant
condition. Unless the subsistence sector is “dynamited” the expansion of
the organised sector will not be possible. The large number of people
living in the subsistence sector, should earn more, save and buy more and
then only the process of agro based industrialisation in the organised
sector of the district will be strengthened and trade and commerce will be
boosted up.

Possibilities of initiating a virtuous process of rapid growth :

As we have already seen disguised unemployment is the most
prominent characteristic of the subsistence sector of Marathwada
economy. In the small scale family farms, the unproductive disguised
unemployed persons have to be fed from the total agricultural output of
the family. It is as if the productive workers (who are really responsible
for the total output) are undergoing sacrifice, curtailing their consumption
and keeping aside a part of the total product for their unproductive
brothers. In other words, the productive workers “save” a portion of their
real income (i.e., the agricultural output which they have produced) so as
to maintain the unproductive, disguised unemployed person in the family.
 1.4
16
Professor Nurkse termed the productive workers’ saving for supporting
their unproductive relations as the “saving potential” of the subsistence
sector.

Inspite of the “saving potential”, the subsistence sector is

surrounded by a “vicious circle of poverty”. Low incomes of inhabitants of
the subsistence sector means that they would put up less effective
demand for the goods produced in the organised sector and because of
this, capital formation in an accelerated manner and consequent
expansion of the district economy is hardly possible. If the organised
sector does not sufficiently expand, the surplus population in agriculture
(whom we have called the disguised unemployed) cannot be shifted from
agriculture to other occupations. But for the development of agro- based -
organised sector, it is essential to procure more food and raw materials
from the subsistence agricultural sector. As long as the rate of growth of
population in the district is high, the army of disguised unemployed will
be continuously reinforced, because the newcomers will huddle together
with the older members on the family plot and the average productivity
will continuously fall. If this process is allowed to continue then a vicious
circle of poverty will develop in the subsistence sector, causing thereby a
general retardation of the process of economic development of the
district.

The obvious question that now arises is - Why not make these
unproductive consumers (whom we have called the disguised
unemployed) work in output producing activities ? To put it in another
way - Why not utilise the “saving potential” of the subsistence sector for
further expansion of the agro based organised sector ? This question
originally arose in the mind of Professor Nurkse. Knowing fully well that
most the disguised unemployed persons of peasant families have peculiar
attachment to rural life, Nurkse suggested that they should not be
dragged to urban factories at least in the initial stages, because they
would not stick there for long. Instead they should be drawn off the land
and put to work on simple projects, such as, dam building, road building,
 1.4
17
canal construction and irrigation works and their consumption needs have
to be met by means of a process of effective mobilisation of the “saving
potential” of their productive brethren. Most of these capital projects
should be either within or near the subsistence sector itself so that they
could play a distinct role in the dynamiting processes of the subsistence
sector during the period of accelerated growth. In support of Nurkse it is
suggested that the efforts may be made to put disguised unemployed in
the agro-based industries.

Basically, Nurkse’s solution is perfectly all right for

Marathwada . Nurkse is not only keen on making the fullest
mobilisation of goods previously unproductively consumed by
disguised unemployed persons but is bent on utilising these
goods for productive consumption. In other words, his formula
for solving the problem of disguised unemployment is one of
effective redistribution of output as between productive
consumption (i.e., the consumption of the disguised
unemployed person when he is shifted to some productive
occupation) and unproductive consumption (i.e., the
consumption of a disguised unemployed person when he is in
the family farm). But even this process of effective
redistribution of output will not completely solve the problem of
disguised unemployment if, to begin with, there is a deficiency
of consumption goods output. This is because of redistribution
of an inadequate volume of consumption goods output as
between productive and unproductive consumption will
certainly prove to be insufficient for meeting the consumption
requirements of all the disguised unemployed persons when
they are transferred to productive jobs elsewhere in the
economy.
 1.4
18

Trade cycle : An obstacle to smooth functioning :

Lord overstone25 describes the course of a trade cycle
thus; A state of quiescence - next improvement - growing -
confidence - prosperity - excitement - over trading - convulsion
- pressure - distress - ending again in quiescence.

The State of Maharashtra has registered some economic

progress during the last two decades. But it would be
in appropriate to consider this economic progress to be
in a steady upward swing or in a continuous forward
movement. On the other hand, every owner of an
industrial unit knows that, after every ten or twelve
years, the whole production machinery receives a rude
shock, which throws it out of gear for a number of
years in future. There are always upward and
downward swings in business. The periods of business
prosperity alternate with periods of adversity. Every
boom is followed by slump, and vice-versa. This is a
trade cycle. A trade cycle simply means that the life of
a trade or business passes through the phases of
prosperity and adversity alternately. Various theories26
are put forth by the experts explaining a trade cycle,
the detail explanation of which will be out of the scope
of this study. However, their relevance to IU's is
required to be taken into account. After the mid-
seventies when MDC became active in initiating the
LIUs & SIUs in Marathwada, the Indian economy had
reached the lowest web and was engulfed in
depression. The general purchasing power of the
people was deteriorated. It was told that the changes
in climatic conditions had brought down the
agricultural production, followed by a rise in the prices
of diesel and petrol. This brought down the pace of
economic acceleration. Depression created an
unfavourable impact during the last two decades on a
number of industries. Six out of ten industrial units
interviewed in experience survey, told that they were
the victims of depression like a Skylab. During the
depression they were discouraged to undertake any
 1.4
19
venture to produce in an anticipation of demand. The
fear of stock accumulation was rampant. The Govt.
under such environment did not provide help. Similarly
the financing institutions used to have a dismal and
mechanical attitude. The end of all these adversities
was closing down of a number of units which were
sponsored by the various agencies.

Effects of Taxation on Finances :

The SIUs finances are affected by numerous direct and indirect
taxes. The incidence of these taxes affects the financial management of a
particular unit and also the finances of SIUs of Marathwada as a whole.
The chief demerits, (affecting finance) of the direct taxes as reported by
SIUs owners are as mentioned below :-
(i) These taxes are inconvenient, as they are to be paid in lump-sum.
The filling of return is complicated affair and there is a lot of
harassment. On the whole there is an interlocking of funds.

(ii) SIUs entrepreneurs do not like to pay them. To part with money is
not an easy thing, especially when there is no direct quid pro quo.

(iii) SIUs entrepreneurs try to evade them by indulging in mal-practices.

(iv) Many SIUs entrepreneurs told that the rate of taxes are fixed
arbitrarily.

When enquired about the inconveniences of the indirect taxes, the

following opinions were expressed :-
(i) It is not always possible for the finance department of the
Government to anticipate various repercussions of a tax imposed on
a commodity. They appear uncertain.

(ii) They are regressive. Every consumer of the commodity subjected

to tax, rich or poor, pays the tax at the same rate. Therefore, the
real burden of the tax on the poor entrepreneur is greater than on
the rich,
 1.4
20
(iii) These taxes do not develop any civic consciousness in the tax
payer, because no entrepreneur feels that he is paying a tax as it is
concealed in the prices,

(iv) Although entrepreneurs are assumed as un-paid tax payer for

indirect taxes, yet it is though that the cost of collection of certain
indirect taxes is very heavy,

(v) The indirect taxes contribute to the inflationary pressures being

exerted on the economy as a whole,

(vi) A large portion of indirect taxes can be evaded. For example, excise
duty on manufactured goods,

(vii) Imposition of taxes on commodities raised their prices. Sometimes

the taxes levied account for more than the cost of production.

Looking at the demerits of the tax system and the feeling of

pinching it generates, the Government of Maharashtra has made some
limited efforts to return some taxes paid by the SIUs. The adverse effects
of taxation on production, consumption, distribution and
financial/management is are very well known. It is, therefore requested
by many entrepreneurs, to grant them tax holiday at least for a period of
five years after the initial moratorium period and their income and
expenditure sources should not be subjected to audit. In every district
certain industrial locations should be identified for that purpose & they
should be considered for the cent percent tax holidays.

Deficit financing :
Due to low levels of income and a high propensity to consume,
aggregate savings in the economy are far less than they should have
been. Investment being inadequate as compared to national
requirements, the level of production, incomes, savings and thus
investment again, cannot increase efficiency. It is, therefore, necessary to
break such a vicious circle of poverty in these economies 27. Since
 1.4
21
investment expenditure, a prerequisite for a speedy economic
development, is too large to be financed through normal sources of
revenue, deficit financing becomes inevitable. In India the deficit
financing becomes necessary :-

(a) For prosecuting war and keeping defence forces alert in

Punjab and Kashmir Border,

(b) For fighting depression, and

(c) For financing economic development.

The following table shows its gravity

Deficit financing in India's Five Year Plans.

Plan of Year Deficit Financing
(Rs. in Crores)
1. 2.

First Five Year Plan (1951 - 56) 323

Second Five Year Plan 954
Third Five Year Plan 1,133
Three Annual Plan 1,006
Fourth Five Year Plan 2,060
Fifth Five Year Plan 3,560
Sixth Five Year Plan 15,648
Seventh Five Year Plan (1985 - 90) 14,113

Since deficit financing is practised for the cause mentioned at (a)

above, it can not produce favourable results as advocated by the experts
like Lord Keynes. He observes, "Where there was a large scale
employment of labour and excess capacity in the source of capital, the
fear that the deficit financing would create inflation was baseless. For,
when more employment was created by deficit spending on the part of
the Government, there would be spontaneously an increase in the supply
of out-put. Whenever there was depression, an increase in supply could
be had without any rise in average and marginal costs of production, so
that additional demand created additional supply of output without rise in
prices".
 1.4
22
The expectation of Keynes went in vain, since India has constantly
been engrossed in war or in war like situation and is also engrossed in ill-
effects of natural disasters like flood, drought, earthquake etc. As a result
the Indian economy is tuned to inflationary pressure and Marathwada is a
victim of the same.

A report goes that the inflation environment has increased the cost
of input required by SIUs and it had adversely affected the financial
standing of the units.

Principal Weaknesses Affecting The Finances:

The SIUs in Marathwada suffer from several weaknesses, which after
the financial standing. The principal ones are discussed below :

(i) Poor Communication System :

A communication system as between different industrial units, and
financial agencies, industrial units and the Government, MDC and the
industrial units, and industrial units and potential consumer, is weak. The
IUs owners for one or the other reason are reluctant to furnish the details
of transactions to the various institutions. The MDC or DIC offices have no
arrangement of collecting the data about SIUs. There is no up-to-date
industrial directory giving information about the sources of finances, raw
material, technical know-how, availability of machineries, etc.

Similarly, there is an utter lack of knowledge about the various

incentive schemes applicable to the under-developed region, tax
concessions, subsidies, free legal consultancy, and such other things.

During the experience survey it is noticed that the poor

communication effects the following matters having concern to
finances & their management by SIUs.

1. Lack of knowledge of Government incentive schemes

2. Late receipts of Bank documents

 1.4
23

3. Late information of marketing opportunities

4. Lack of knowledge of Revision in Sales Tax, Income Tax

and other taxes including local taxes.

5. Absence of Industrial directory informing possible

sources of input and output outlets.

6. Absence of ready made information about Technical

knowhow.

7. Delay in receiving or sending documents by post.

8. Lot of disturbances in rail, road, sea & air transportation.

(ii) Lack of Professionalism :

While the industrialists from Pune, Bombay are highly professional
in their dealings, a majority of IUs entrepreneurs from Marathwada seem
to lack in high professional standards. Many of them lack in the
professional expertise to guide and counsel their customers. For number
of times they resort to actions which may hurt the interests of the
customers. A senior industrialist from Marathwada. Mr. Machar observed
"the lack of professionalism is a sore point and there is no proper
mechanism to weed out the undesirables". On the basis of field study it
may be highlighted that out of 10 SIUs owners interviewed, only 2 were
found fit and proper in terms of professional knowledge, adequacy of
education, skills in business, availability of infrastructural facilities etc., to
render any worthwhile integrated package of services to customers.

Lack of professionalism affecting finances is seen as below

:

1. Absence of financial planning

2. Reluctance to use services of professional cost

accountant, auditor & accountant.

3. Computer illiteracy depriving to use of finances in

rational ways and their recordkeeping.
 1.4
24
4. Weak control system over finances, their utilization

5. Poor recovery of sales proceeds due to absence of

mordern credit collection methods.

6. Absence of cost record for knowing the actual or

standard cost of product.

7. Delay or pending of Tax dues or tax settlements.

8. Overlook towards the quality of product and subsequent

consumer satisfaction.

9. Less knowledge while facing the competition.

10. Unawareness about government policies of Industrial

Promotion & development.

11. Reluctance to keep “True & fair” picture of the business.

(iii) Poor Liquidity :

The SIUs entrepreneurs suffer from poor liquidity. Barring a few
entrepreneurs, a majority transact business on credit terms, and hence
lack in liquidity. Agony of this is further aggravated by a poor recovery
performance. A field analysis of the quality of credit transactions reveals
that the Government Departments are poor pay-masters, followed by
public utilities. Hence, the efforts of the entrepreneurs are directed to the
sales to be effected to the individual customers whose creditworthiness is
always doubtful.

Poor liquidity entrails the following state of affairs :-

1. Accumulation of overdues.

2. Loss of Goodwill and credit standing

3. Indulging in bribing to act cash in hand from the parties

to whom the supply is made.

4. Borrowing at high rate of interest for cash.

5. Pending of payment of bills like Electricity, Telephones,

Water, Gas and other utilities.
 1.4
25
6. Postponement of expenditure to be made on the needs
of urgent necessity.

7. Delaying exploiting rational combination of inputs

requiring spot cash payment.

8. Delay in using product sale tacties where cash

incentives and cash payment of distribution expenses is
required.

(iv) Dominance of Financial Institutions :

The IUs in Marathwada are significantly influenced by the actions of
the financial institutions. Even though the operations of these institutions
are confined to promoting the ventures in the beginning, their impact is
often quite pervasive due to inconvenient repayment schedule; under the
influence of debt obligation, the entrepreneurs are unable to cope up with
various problems requiring additional finance. In the well developed
economies (Japan, America) there are instances of protecting the infant
industry units from the debt burden. However, the MDC or DIC has not
done any such arrangement.

It is demanded by many that the financing agencies, after

promoting the business shall provide interest free working
capital at least for first five years so that the financial ability
would be increased and on larger scale of the economy the
tempo of industrilization & employment followed by
production/consumption would be accelerated.

(v) Weak Regulation :

The number of regulations evolved out of legal provisions of the
various infrastructural agencies (Industry Department, Public Health,
Electricity Department, Labour Department, etc.) are made for facilitating
the development of economic and industrial activities. However, these
regulations are a misfit in numerous environment where the SIUs are
having a concern. The SIUs entrepreneurs have to make these
regulations turned in their favour by practising under-table tactics. There
 1.4
26
appears a crying need to settle all the work concerning the above
agencies only under a single window. This will minimize the burden over
cash resources.

(vi) Preponderance of speculative Trading :

There is a preponderance over speculative trading, where the
primary motive is to drive benefit from short-term price fluctuations.
While the extent of speculative trading may be less on the part of an
individual SIU, it is certainly not insubstantial when aggregated for all the
SIUs together.

(vii) Undue influence of big Industrialists :

The market sentiment, particularly in Aurangabad and Nanded, is
influenced by one or two big industrialists. The recent years have
witnessed the influence of business tycoons like Bajaj, Garware, Avtar
Group etc. This influence may be direct or indirect cause to affect the
financial standing of the firm.

(viii) Periodic Crises :

As a result of rampant speculation, and excessive dependence of
Marathwada economy on monsoon, a number of crises develop in the
financial liquidity of SIUs and in the total system of procurement of raw-
material, production, marketing, etc. Even at the beginning of the 21st
century, the vagaries of mansoon create, every alternate years, the
scarcities affecting the industrial financial activities. The price distortion,
caused in the primary sector, severely hited hard the secondary and
tertiary sector. The field findings suggest that the market evaluation
process, practised by SIUs entrepreneurs, work haphazardly and almost
like a blind man firing a gun-----. The market, affected by periodic crises
seems to function largely on "hit--- or miss" basis rather than on the basis
of informed beliefs about the long-term financial prospects of the
individual enterprises.

(ix) Defective Capital Structure :

 1.4
27
The key factors and the important considerations in planning capital
structure are :
28
 1.4
28

(a) Income, (h) Flexibility

(b) Risk, (i) Timing
(c) Control, (j) Regulatory Norms,
(d) Growth-rate, (k) Profitability,
(e) Taxes, (l) Attitude of lenders,
(f) ROI, (m) Debt capacity,
(g) Probability of cash
insolvency.

With the above insight the queries were instituted with the sampled
SIUs. Surprisingly a very few were aware of all the above factors while
planning a capital structure. Roughly they used to give more importance
to ROI and profitability factor by overlooking the rest of the factors.

The mis-planning of capital structure led the entrepreneurs of the

sampled SIUs to practice any of the following five policies.
Policy : No debt should be used in any circumstance.

A
Policy B : Debt should be employed to a very limited extent
Policy C : The ratio of debt to equity should be maintained
around 1:1.
Policy D : The ratio of debt of equity should be kept within 2 :1.
Policy E : Debt should be tapped to the extent it is available.
 1.4
29
The majority were found following Policy “E” mentioned above. The
same can be seen from the following collected facts.
Policy Percentage of SIUs, following policy

Policy A 03
Policy B 14
Policy C 19
Policy D 12
Policy E 42
No policy 10

Total 100

(x) Raw Material Shortage :

The extent of requirements of raw materials varies from one SIUs to
another. Inadequate supply of raw materials is the most crucial -
bottleneck in respect of the following types of SIUs:-
(1) Food products;
(2) Cotton Textile;
(3) Leather and its products;
(4) Basic chemicals and chemical products;
(5) Rubber, plastic, petroleum and coal;
(6) Non-metallic mineral products;
(7) Basic metal and alloy industries and their products.

There is a common complaint that the requisite quality and quantity

of raw-material required by the above units is not available. Where
allotments are made, they are frequently well below the needs, and in a
number of cases, hardly sufficient to exploit 30 to 40 percent production
capacity. Under such circumstances, there is no wonder to see that the
units are operating well below the normal capacity and eager to interlock
their funds in storing the raw material whenever it is available..

Besides, a number of entrepreneurs have to purchase raw-materials

from the open markets in competition with Pune-Nasik-Bombay-based
entrepreneurs at escalated prices, often 40 to 50 percent above the
 1.4
30
control prices. This results in a cost-disadvantage. The entrepreneurs try
to recover the same from their customers. It is found during the
experience survey that the problem of shortage of raw-materials
(affecting finances) faced by the SIUs is due to the following reasons :-

: Artificial scarcity is created by the concerned for securing

extra-price or premium; There is for no reason Extra cash
resource is to be utilised.

: Improper allocation of the material by the Govt. If allocation of

material is made on the basis of capacity, it creates a
tendency to sell the quota by the entrepreneurs whose plant
functions well below the capacity or not functioning at all. It
is observed by many alert entrepreneurs that it is rather
difficult to work out the capacities of different plants of the
industrial units belonging to different categories. So also
there is a tendency to claim the raw-material allotment at
inflated scale. All this results into mis-utilisation of the raw-
material and cash resource which are scarce and hence
controlled by manipulating non-ethical tactics.

: A common grievance is that there is no attempt to check

genuiness of quotas asked for ; irregularity in allotment is
often frequently mentioned which lead to bribing practises.

: Many times obsolete supply of raw-material is made which

causes direct loss of financial liquidity.

: Import inadequacies of raw-material is a common cause which

is difficult to overcome. For direct imports, there are usual
complaints of lengthy financial & procedural formalities to be
adhered to and numerous agencies to be contacted. Besides
this, much time is exhausted in receiving the import license.
Most of the entrepreneurs producing products based on
imported raw-materials have a tendency to hold a large size of
imported items so as to avoid future losses. This leads to an
increase in the carrying costs of the borrowed capital &
inventory, or the entrepreneurs may be tempted to sell the
inventory in the market at higher prices for liquid cash.

: There are many absentee entrepreneurs, like absentee land-

lords in agriculture. These entrepreneurs simply procure the
raw-material quota and sell it in the market at escalated
prices ;
 1.4
31
: Government officials may sometimes allot the raw-material on
the basis of the past consumption, which may cause obstacle
to the expansion of the business units.

The following social/economic impacts disturbing finances may be

visualised as an incidence of the raw - material scarcity :

: In order to get a higher quota of the controlled raw-materials,

the entrepreneurs do exert their social and political influence.
But this is possible in a very few cases and for which heavy
cash bribing is required.

: Shortage of raw-materials leads to a functioning of the plants

on a small scale with all the diseconomies of small-scale
production. It increase over-head cost burden and cost of
carrying borrowed capital.

: The size of employment is dimunated both in production and

distribution activities and a tempo of economic activities gets
reduced. This affect the financial viability of the SIUs.

: Confidence of the existing and potential entrepreneurs is

waned which is harmful to financial viability of SIUS. [23 PAGE]

(xi) Technical & Professional Skill :

Among the sampled SIUs it was observed that most of the
entrepreneurs were not equipped with a requisite professional & technical
skill or have not acquired these skills over time. Most of them were also
unaware of the institutional facilities available for acquiring the requisite
financial & technical assistance. But a general feeling expressed was that
the MDC or DIC failed to provide the required professional & technical
knowledge. It was felt by many that the MDC/DIC could have helped small
industries better in the initial stages by preparing feasibility studies based
on finances and market surveys. Although the MDC or DIC did manage a
few market survey, many of them were turned futile. Even the MDC's
owned industrial units were commissioned on the basis of the blue prints
based on market surveys. However, these units did not function as
expected in the blue prints. The main reason for that was an utter lack of
professional & technical knowledge. These units did not employ
 1.4
32
professional experts of high standard to maintain quality control only
because they had to carry on with the non-professionals which MDC had
already employed. If the MDC itself lacked in technical competency what
could it do for others? The Industrial Estates tried to provide common
service facilities to solve the technical deficiencies experienced by the
SIUs. It is found that the units are not willing to avail of the same facility
because it is thought to be a time consuming process.
 1.4
33
References :

1. Deshpande, Small Scale Industrial Entrepreneurship in a developing

Region, Thesis, Dr.B.A.M. Marathwada University, P.126.

2. Kate P.V. impact of the Nizams’ Regime on Marathwada (1724 -

1948) Ph.D. Thesis, Marathwada University, 1978, P.3.

3. Hyderabad Struggle Committee, the Hyderabad problem, P.48.

4. Report on the Administration of H.E.H. the Nizam’s Govt. for the

year 13th fasali - Govt. Central Press, Hyderabad, Deccan 1945, PP.
123-145.

5. Triennial Report of Govt.of Hyderabad, Central Press, Hyderabad,

1922, P.2.

6. Facts & Figures about Hyderabad , Directorate of Statistics

Department Hyderabad, 195,

7. Govt. of India, Census hand Book, 1991 PP. 32-47.

8. Report of Lead Bank, Aurangabad District, P.37. (Published)

9. Chapter- III, Table No.

10. Marathwada At a glance, official Note prepared by collectorate office

for the use of Cabinet, Govt. of Maharashtra, P.12. 1995.

11. District Statistical Abstracts of Aurangabad Dist, 1996, Chapter I.

12. Directorate of Animal husbandry, Report on Animal Census, 1991,

Chapter 3rd.

13. “Marathwada Economy”, & Unpublished note by Revenue

commissioner Aurangabad Region, Maharashtra, 1996, P.12.

14. Ibid, P.43.

15. Annual Report of DIC, Aurangabad,( Unpublished) Chapter II.

16. Ibid, P.46.

17. Gazettier of Aurangabad Dist, Chapter I.

18. “Marathwada At a glance” official note prepared by the Collectorate

Aurangabad for the use of Dist Planning Board.

19. Ibid.
 1.4
34

20. District Statistical Abstract, 1996, Chapter I.

21. Ibid.

22. Ibid.

23. VMIC Cooperative Prospective, Jan.-March, 1994, PP, 22-28.

24. “Review of Economic Development in Marathwada” A symposium

organized by Vaidhanik Vikas Mandal for Marathwada Dec. 1997.

25. Marshall, "Money, Credit and Commerce", P. 241.

26. Climatic Theory of Jevons' Sunspot, Psychological Theory of

Marshall, under consumption theory of J.A. Hobson, Monetary Theory
of R.J. Hawtrey, over investment Theory of David Rock, General
Theory of keynes and such other theories are illustrative in
explaining the causes of trade cycle.

27. Kulkarni. R.G. : Deficit Financing & Economic Development, 1966,

P.32.

28. Prasanna Chandra, Fundamental of Financial

Management, Tata McGraw-Hill, New Delhi, 1990, PP. 474
to 497.
1.4
35
1.4
36
1.4
37
1.4
38
1.4
39
1.4
40
1.4
41
1.4
42
1.4
43
1.4
44
1.4
45
1.4
46
1.4
47
1.4
48
1.4
49
 1.4
50

Bibliography
1. Alexander, P.C., Industrial Estates in India (Bombay : Asia
Publishing House, 1963).

2. Balakrishnan, g., Financing of Small Scale Industries in

India : 1950-52 (Bombay : Asia Publishing House, 1961)

3. Bandyopathyaya, Kalyani, Industrialization through

Industrial Estate (Calcutta : Book Land Private Ltd., 1969).

4. Basu, S.K., Place and Problems of Small Industries

(Calcutta : A Mukherjee & Co. (P), 1957).

5. Basu, S.K. Ghosh, Alak and Ray, Subrata, Problem and

Possibilities of Ancillary Industries in a Developing
Economy (Calcutta : The World Press, Pvt. Ltd., 1965).

6. Behari, Bepin, Rural Industrialization in India (New Delhi :

Vikas Publishing House Pvt. Ltd., 1976).

7. Bhagwati, Jagdish N., Indian Planning for Industrialization :

Industrialization and Trade Policies since 1951 (London :
Oxford University Press, 1970).

8. Bredo, William, Industrial Estates : Tool for

Industrialization (Bombay : Asia Publishing House, 1960).

9. Davenport, Robert W., Financing the Small Manufacturers

in Developing Countries (New York : McGraw-Hill Book Co.,
1967).

10. Dhar, P.N., Small-Scale Industries in Delhi : A Study in

Investment Output and Employment Aspect (Bombay :
Asia Publishing House 1958).

11. Gadgil, D.R., The Industrial Evolution of India (Calcutta :

Oxford University press, 1959).
 1.4
51
12. International Labour Office, Services for Small Industry
(Geneva : La Tribune De Geneva, 1961).

13. Jha, L.K., Shortages and High Prices : the Way out (Delhi :
India Book company, 1976).

14. Mahendra, K.L., “Small-Scale Industries and the Public

Sector”, Role of State Sector in Developing Countries (ed.)
(Delhi, People’s Publishing House, 1977).

15. Punjab & Delhi Chamber of Commerce and Industry,

Report on Punjab Industrial Power Conference : 18-19
August 1965, Chandigarh.

16. Ramakrishna, K.T., Finances for Small-Scale Industries in

India (Bomaby : Asia Publishing House, 1962).

17. Ramakrishnan, P., New Entrepreneurship in Small-Scale

Industry in Delhi (Delhi : Economic and Scientific Research
Foundation, 1975).

18. Ryan, F.A., Efficiency for Small Manufacturers (Bombay:

Asia Publishing House, 1962).

19. Saxena, R.C., Labour Problems and Social Welfare (Meerut

: Jain Prakash Nath & Co., 1965).

20. Sharma, Krishan Lal, Entrepreneurial Performance in Role

Perspective (Delhi : Abinav Publications, 1975).

21. Singh, Baljit, The Economics of Small-Scale Industries : A

Case Study of Small-Scale Industrial Establishment of
Moradabad (London : Asia Publishing House, 1961).

22. Singh, Nau Nihal, Scientific Management of Small-Scale

Industries (Bombay : Lalvani Publishing House, 1970.)

23. Singh, V.B. (ed.), Industrial Labour in India (Bombay : Asia

Publishing House, 1963).

24. Tambi, J.M.L., “Marketing Strategy for Small-Scale

Industries”, in S. Neelamegham (ed). Marketing
 1.4
52
Management and the Indian Economy (Delhi : Prominent
Printers, 1978).

25. Vinaik, M., Survodaya and Electricity (Madras : Kumarappa

Publications, 1959).

26. Warrior, K.K., Small-Scale Industries in Sivakasi and Sattur

(Planning Commission, 1957).
1.4
53
 1.4
54

“A Study of Financial Management of Small

Scales Industries in Marathwada”

Thesis Submitted to
Swami Ramanand Teerth Marathwada University
for the award of Degree of Doctor of Philosophy,
in the faculty of Commerce & Management Science.

By
Shri. B.V. Lonikar
M.Com., M.Phil.

Head, Department of Commerce,

S.R.T. College, Ambejogai.

Under the Guidance of

Dr. V.V. Mahajan
M.Com., M.Phil., Ph.D.

Reader & Head,

Department of Commerce,
Nutan Mahavidyalaya, Sailu
Dist. Parbhani.

March 2002
cdl
v
 cdl
vi
Content of Thesis
“A Study of Financial Management of Small
Scales Industries in Marathwada”
Chapter No. Title Page
No.

Declaration by Student ii – ii
Certificate By Guide iii – iii
Acknowledgement iv – iv
List of Tables v–v
Chapter – I Introduction, Objectives, Nature, Scope 1.1 -
and Research Methodology of Thesis 1.34

Chapter – II Development of Small Scale Industries 2.1 –

and their Finances 2.31

Chapter – III Conceptualities of Financial 3.1 –

Management in Proposed and 3.46
Established SIUs

Chapter – IV Management of Working Capital by SIUs 4.1 –

4.24
Chapter – V Borrowings, Subsidies, Incentives & Hire 5.1 –
Purchasing 5.46

Chapter – VI Institutional Finances to SIUs 6.1 –

6.24
Chapter – VII Facts About Financial Management of 7.1 –
Sick SIUs 7.78

Chapter – VIII The Four Case Studies Revealing A 8.1 –

State of Finances of Sick SIUs 8.19

Chapter – IX Summary, Conclusions and Suggestions 9.1 –

9.53
Bibliography B-1 – B-
3
 457

Declaration by Student

I the undersigned declare that the thesis

entitled “A Study of Financial Management
of Small Scales Industries in Marathwada” is
genuine work prepared by me and no part of this is
submitted elsewhere for award of any degree or
diploma or such other course. This work is
completed under the guidance of Dr. V.V. Mahajan,
Reader & Head, Department of Commerce, Nutan
Mahavidyalaya Sailu, Dist. Parbhani.

(B.V. Lonikar)
Candida
te
March 2002.
Place : Ambejogai.
 458

Dr. V.V. Mahajan

M.Com.,
M.Phil.,Ph.D.
Reader & Head,
Dept. of Commerce,
Nutan
Mahavidyalaya, Saliu
Dist. Parbhani

Certificate By Guide

Certified that the work incorporated in the

Thesis “A Study of Financial Management of
Small Scales Industries in Marathwada”
submitted by Shri. B.V. Lonikar is carried out by the
candidate under my supervision. The materials
obtained from other sources, have been duly
acknowledged in the Thesis.

(Dr. V.V. Mahajan)

Research
Guide
Place : Sailu
Date : March 2002.
 459

Acknowledgement
It is my prime duty to acknowledge Shri Dr. V.V.
Mahajan, Reader & Head, Department of Commerce,
Nutan Mahavidyalaya, Sailu Dist. Parbhani for his
valuable guidance in the subject of Thesis. Dr. Mahajan
is source of inspirations to me and he has always
encouraged me for completion of this research work.

I take an opportunity to thank Sarvashri Late Prin.

B.K. Subnis; Adv. R.S. Desphande, Secretary; Adv. S. G.
Sohani, President; Adv. V.K. Chousalkar, Vice – President;
and Adv. S.R. Sonwalkar Joint Secretary from Yogeshwari
Education Society, Ambejogai for their constant
assistance and encouragement throughout the course of
this research. I may fail in my duties, if I forget Sarvashri
Dr. Jayant Joshi, HOD; Dr. L.R. Nagargoje, Registrar; Prin.
Dr. B.B. Jadhav; Dr. K.B. Laghane, Dean; Prof. N.S. Jalde,
Prof., P. S. Kulkarni and Prof. K.G. Deshpande who
helped me lot.

I am deeply indebted to members of family i.e. Smt.

Yamutai, Mother; Sow. Shailaja, my wife; Chi. Vallabh my
son; Ku. Snehal my daughter. I am also thankful to my
brothers & Sisters Sow. Nalini Shamkalyan Deshpande; &
Sow Jaishree S. Mokashi; Mrs. Alka Mahajan (wife of my
Guide) and Sow. Manda Ramesh Kauthekar for their
affectionate co-operation .

(Mr. B.V. Lonikar)

 460

List of Tables

Table No. Title of Table

1 2

Table No. 1.1 Small Scale Industries Registered And

: Operated in Aurangabad

Table No. Classification of the Small Scale Units

1.2. : Selected for study

Table No. 2.1 Small Industry Growth : 1989/90-1994-

: 95

Table No. 2.2 Growth of Unorganized Manufacturing

: 1989/90-1994-95

Table No. 2.3 Financial Infrastructure of Small Industry

:
Table No. 3.1 Entrepreneurs, Opinions about the
: factors influencing financial
Management
461
462
463
464