Micro Small and Medium Enterprises MSME.pptx

Micro Small and Medium Enterprises

1. Micro, Small and Medium Scale Enterprises (MSMEs) Prof. Nithin Kumar S Assistant Professor of Economics JSS Banashankari Arts, Commerce and Shantikumar Gubbi Science College Vidyagiri, Dharwad -580004

2. Introduction In India, the enterprises have been classified broadly into two categories : Manufacturing ; and Those engaged in providing/rendering of services . Nithin Kumar S 2

3. Manufacturing Enterprises The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and Regulation Act, 1951). The Manufacturing Enterprises are defined in terms of investment in Plant & Machinery . Nithin Kumar S 3

4. Service Enterprises The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment . Nithin Kumar S 4

5. Both categories of enterprises have been further classified into micro, small and medium enterprises based on their investment in plant and machinery (for manufacturing enterprises) or on equipments (in case of enterprises providing or rendering services ). Nithin Kumar S 5

6. The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under : Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below : Nithin Kumar S 6

7. A micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees ; A small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; A medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees . Nithin Kumar S 7

8. Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006 are specified below. Nithin Kumar S 8

9. A micro enterprise is an enterprise where the Annual turnover is less than Rs.5 cr . A small enterprise is an enterprise where the Annual turnover is between Rs . 5 Cr to Rs . 75 cr. A medium enterprise is an enterprise where the Annual turnover is between Rs . 75 Cr to Rs . 250 cr. Nithin Kumar S 9

10. The small scale industries sector consists broadly of Traditional cottage and household industries, and Modern small scale industries. Nithin Kumar S 10

11. "A cottage industry is one which is carried on wholly or primarily with the help of members of the family either as a whole or a part time occupation. A small scale industry on the other hand one which is operated mainly with hired labour, usually 10 to 50 hands". Nithin Kumar S 11

12. Difference Between Small Scale and Cottage Industries While small scale industries are mainly located in urban areas as separate establishments. The cottage industries are generally associated with agriculture and provide subsidiary employment in rural areas Small scale industries produce goods with partially or wholly mechanized equipment employing outside labour, the cottage industries involve operations mostly by hand which are carried on primarily with the help of the members of the family. Nithin Kumar S 12

13. Presently a small scale industry is defined as a unit having investment in plant and machinery up to Rs.5 crore. It also defines a tiny unity as an enterprise having an investment up to Rs.25 lakh . Nithin Kumar S 13

14. Importance of MSMEs in Indian Economy Employment Generation Self Employment Capital Light Equitable Distribution of Incomes and Wealth Advantage of Decentralization Mobilisation of Latent Resources Skill Light Import Light Quick Yield Support to Large Scale Industries Less Industrial Disputes Contribution to Exports Agent of Rural Development Free from Ecological Problems Capital Formation Nithin Kumar S 14

15. 1. Employment Generation The small scale industries are labour intensive. Accordingly , they have a substantially higher employment potential as compared to the large scale industries, which are generally capital intensive. Since capital is scarce and labour is abundant in India, small enterprises should be developed to enlarge the volume of employment and for absorption of the additions to the labour force . Nithin Kumar S 15

16. 2. Self Employment These industries offer limitless opportunities for self employment. This facilitates the creation of a wider entrepreneurial base. They represent a diffusion of economic power among a large number of small entrepreneurs. It is these self employed persons who are the backbone of the nation . Nithin Kumar S 16

17. 3. Capital Light Small scale industries are capital light, that is, they require relatively low capital than that required by large scale industries, because the capital output and capital labour ratio is comparatively very low. As there is scarcity of capital, it may be used to greater advantage in small industries in the early stages of development. Nithin Kumar S 17

18. 4. Equitable Distribution of Incomes and Wealth The equality argument suggests that the income generated in a large number of small enterprises is dispersed more widely in the economy than income generated in a few large industries. In this way small industries bring about greater equality of income distribution . Nithin Kumar S 18

19. 5. Advantage of Decentralization These industries can develop in almost all areas including backward, tribal, hilly and inaccessible areas. Moreover these are mostly set up to satisfy local demand, hence can be dispersed over all the states very easily. Thus small-scale industries help in reducing regional economic imbalances and also to solve the problems of concentration and congestion in the few industrial towns . Nithin Kumar S 19

20. 6. Mobilisation of Latent Resources The small scale industries are capable of mopping up latent and unutilized resources. A number of entrepreneurs are spread over small towns and villages of the country. Given the credit, power and technical knowledge, a large quantity of latent resources of the economy can be mobilised for purposes of industrial development . Nithin Kumar S 20

21. 7. Skill Light In India there is scarcity of skill also. But small enterprises do not require much skill. Besides the traditional occupations are managed by persons who have inherited the necessary skill . Nithin Kumar S 21

22. 8. Import Light Large industries require imported machinery raw-materials and some times skill also. This creates a problem in the balance of payments because the available foreign exchange resources are limited. On the other hand small scale industries use a relatively low production of imported equipment. A low import intensity in the capital structure of small scale industries reduces the need for foreign exchange . Nithin Kumar S 22

23. 9. Quick Yield In small scale industries the gestation period is short. In India, with a high inflationary potential need for rapid rise in the living standards. The importance of small scale industries can hardly be exaggerated . Nithin Kumar S 23

24. 10. Support to Large Scale Industries Small-scale industries can also play a useful role in the development of large scale industries. A number of products which are related to large enterprises can be produced and supplied by small units . Nithin Kumar S 24

25. 11. Less Industrial Disputes It is held that as most of the small enterprises are proprietary or partnership concerns, the relation between the workers and the employers is more harmonious in small enterprises than in large enterprises. As such, they are generally free from strikes and lockouts. Consequently there is less loss of output. Nithin Kumar S 25

26. 12. Contribution to Exports The fact that the village and small industries account for about one-third of our total export earnings shows how important they are to the Indian economy constrained by shortage of foreign exchange . Nithin Kumar S 26

27. 13. Agent of Rural Development Small scale industries help to increase the pace of rural development through the generation of additional employment opportunities and income, through its input and output linkages with the other sectors of the rural economy . Nithin Kumar S 27

28. 14. Free from Ecological Problems In recent years, the village and small industries have acquired more attention due to the very less ecological problems they create compared to the large industries. Nithin Kumar S 28

29. 15. Capital Formation Besides, making possible economics in the eve of the existing stock of capital small scale industries may also promote capital formation. The spreading of industries over the country would encourage the habits of thrifts and investment in rural areas. Besides , it also help to top local resources such as raw materials, idle savings . Nithin Kumar S 29

30. Problems of Micro, Small and Medium Enterprises Problem of Finance Problem of Raw Materials Problem of Marketing Problem of Power Problem of Dealing with Government Agencies Competition from Large-Scale Industries Under- Utilisation of Capacity Inefficient Human Factor Bogus Concerns Export Difficulties High Rate of Mortality Fear of De- reservation Nithin Kumar S 30

31. 1. Problem of Finance The scarcity of finance and credit is the main obstacle in the development of small scale industries. The credit worthiness of small industries is generally weak, and therefore, they fall into the clutches of the money lenders who charge very high rates of interest or else they borrow from the dealers of their goods who badly exploit them to sell their products at very low prices. Nithin Kumar S 31

32. 2. Problem of Raw Materials Scarcity of raw-materials has assumed the shape of (i) an absolute scarcity, ( ii) poor quality of materials, and ( iii) high cost. Very often, the small sector, unable to undertake bulk buying is forced to take whatever quantity is available at high prices and of whatever quality. Moreover small industries do not get raw materials on time. Nithin Kumar S 32

33. 3. Problem of Marketing Most of the small industries are forced to restrict their sales to the local market, tailoring their supplies to the local needs, for want of adequate co-operatives and other facilities for selling. Not infrequently, a lack of demand and accumulation of stocks leave them with no working capital to keep the production units moving. Moreover the difficulties of marketing lead the producer to devote less time to production, which in turn lead to little production and of low quality. Nithin Kumar S 33

34. 4. Problem of Power Shortage of power is one of the glaring problems faced by S.S.I units in recent years. There are two aspects of the problem. One , power supply is not always available to the small industry, and wherever it is available it is rationed out, limited to a few hours in a day. Secondly , unlike large industries, the small industry cannot afford to go in for alternative, like installing own thermal units, because of the heavy cost involved. Nithin Kumar S 34

35. 5. Problem of Dealing with Government Agencies It is an admitted fact that no type of state assistance is available in abundance, or at least adequate enough with relation to the needs. Therefore , there is a general practice to ration it out. In the process of rationing there is ample scope for discrimination, made possible by government rules, regulations, red- tapism and manipulation by the large industries. Nithin Kumar S 35

36. 6. Old Methods and Inferior Technique of Production Modern methods and techniques which have revolutionised industrial production have not as yet become an integral part of the set-up of India's small-scale and cottage industries. They are neither able to buy new equipment, not do they know much about new methods and technology. As a result their productivity remains low and the quality of goods is poor . Nithin Kumar S 36

37. 7. Competition from Large-Scale Industries . Large scale industries, organised as they are, on modern lines, using latest production technology and having access to many facilities can easily outsell the small producers. The small units are thus relegated to a disadvantageous position . Nithin Kumar S 37

38. 8. Under- Utilisation of Capacity A study by Arun Ghosh shows substantial under- utilisation of capacity in small-scale industries ranging from 45 to 60 in many cases. There are sick units too in this sector. This indeed is a serious problem . Nithin Kumar S 38

39. 9. Inefficient Human Factor The small-scale industries sector also suffers from inefficient human factor owing to the illiteracy, poverty, ignorance and out of date methods of cottage craftsmen . Nithin Kumar S 39

40. 10. Bogus Concerns A good number of the small-scale industries units in the country are bogus and they exist for the sole purpose of diverting their quotas of steel, aluminum, basic chemicals and other scarce raw materials in to the black market. Nithin Kumar S 40

41. 11. Export Difficulties The small-scale sector has contributed in a large measure to the gradual expansion and divergence of the country's export pattern. But in all this progress, the small scale sector still faces problems in exports which make it appreciable manner . Nithin Kumar S 41

42. 12. High Rate of Mortality Most of these units are marginal buyers of inputs and marginal sellers of output. Any factor that adversely affects the input or output situation tends to throw out a number of existing units from operation . Nithin Kumar S 42

43. 13. Fear of De- reservation A significant problem facing the small industries is that when they grow from small scale size and just pass the value limit in plant and machinery, the earlier protection available to them is withdrawn. They have to face open competition in every sphere of activity. Neither the banks nor the financial institutions look upon them with the benevolent attitude which they had hither to enjoyed. It has to compete openly with the large and medium sized units . Nithin Kumar S 43

44. The Government Policy Measures Institutional Assistance Financial Assistance Technical Assistance Training Assistance Marketing Assistance Industrial Estates District Industries Centers Supply of Raw-Materials Modernisation Fiscal Incentive and Reserving the Sphere Nithin Kumar S 44

45. Institutional Assistance To look after different aspects of the development programmes a number of central and state level institutions have been set up. First, there is Small Industries Development Organisation (SIDO) headed by the Development Commissioner (S.S.I) under the Department of Industrial Development. It has a network of 25 Small Industries service Institutions, 18 branch institutions, 41 extension centers, 4 regional testing centers. Nithin Kumar S 45

46. SIDO acts as a policy formulating, coordinating and monitoring agency for the development of small scale industries. It also seeks to provide technical, economic and management consultancy services to small entrepreneurs. Nithin Kumar S 46

47. Secondly there is the National Small Industries Corporation (NSIC), started in the year 1955. It provides machinery to small enterprises on hire purchase basis and assists in supplying raw-materials and in marketing . Nithin Kumar S 47

48. In addition several boards with adequate power and funds were set up. They are: The Cottage Industries Board . All India Handloom Board. All India Khadi and Village Industries Board. All India Handicrafts Board. The Coir Board. Central Silk Board. The Small Scale Industries Board. National Institute of Small Industries Extension Training ( NISIT) National Institute for Entrepreneurship and Small Business Development ( NIESBUD) Small Industries Marketing Corporation (SMIC ) Small Industries Development Corporation (SIDC ) Nithin Kumar S 48

49. Financial Assistance Apart from the central and state governments, whose budgetary support to small enterprises is channelized through the specialised agencies, the banking system comprising R.B.I, Commercial Banks, National Small Industries Corporations meet the financial needs of the small sector. Nithin Kumar S 49

50. Technical Assistance Technical assistance to small industry takes the form of identification of new lines of production provision of operational schemes, assistance in installing plant and machinery and in solving various production-problems from time to time. Nithin Kumar S 50

51. Training Assistance The SIDO and its associated facilities organize training programme aimed at in providing the technical skills of the workers and acquainting the entrepreneurs with advanced production and management techniques. A Village Industry Research Institute was set up to encourage research programme. An Institute for Advanced Training in Tool Design and Tool Making has been established at Hyderabad . Nithin Kumar S 51

52. 5. Marketing Assistance The marketing assistance provided by the government in the area has been in the following forms : 241 items have been reserved by the Directorate General of supplies and disposal for exclusive purchase from the small scale sector. A price preference up to 15 is given to small scale enterprises in public purchases. Assisting the products of small scale enterprises through opening sales emporia under the state owned co-operative and assisted co-operative societies . Nithin Kumar S 52

53. Provision of quality control and testing facilities, industrial information with a view to increasing the competitiveness of the products of small scale units. Setting up of trade centers for organising permanent exhibitions of small industry products. 6. Sales emporia have been set up under the state owned and assisted cooperative societies to assist sale of SSI products . Nithin Kumar S 53

54. 6. Industrial Estates An industrial estate may be defined as a tract of land developed and subdivided into plots according to a comprehensive plan with provision of roads, transport and public utilities with or without built up factories, sometimes with common facilities and sometimes without it for the use of a community of industrialists. Thus industrial estate is an attempt to provide on rental basis good accommodation and other basic common facilities such as water, power to groups of small entrepreneurs who otherwise find it difficult to secure these facilities at reasonable prices. At present there are around 700 industrial estates where, 14,000 small-scale units are functioning . Nithin Kumar S 54

55. 7. District Industries Centers District Industries Centers were introduced in 1978. They provide under one roof, all the services and support required by small and village entrepreneurs at a pre-investment and post- investment stage. District Industries Centre provides and arranges a package of assistance and facilities for credit guidance, raw- materials, training, marketing etc. including the necessary help to unemployed educated young entrepreneurs in general and customs services. At present 427 DIC's are operating to cover 431 districts Nithin Kumar S 55

56. 8. Supply of Raw-Materials In order to ensure the availability of the scarce raw-materials to small industries, the State SSIC's have been entrusted with the responsibility of distributing these materials through distribution depots located in different parts of each state. The small-scale units are also entitled to import raw materials according to the Import Trade Control Policy as announced every year . Nithin Kumar S 56

57. 9. Modernisation A programme of modernisation has been launched by the SIDO. The salient features of the programme are: Modernisation of management techniques including the modernisation of attitude and skills and personnel. Modernisation of products in terms of design standardisation . Modernisation of organisation structure. Modernisation of machinery and equipment Nithin Kumar S 57

58. 10. Fiscal Incentive and Reserving the Sphere Government has offered temporary protection by means of subsidy and by reserving the sphere of production exclusively for such industries. The number of such reserved items has gone up, to 839 during 1989. However at present only 21 items have been reserved for MSMEs. It granted tax holiday to new undertakings It also provided investment allowances, excise duty exemption etc. The government contributed to the development of ancillaries around 26 specified major industries . Nithin Kumar S 58

59. Impact of Globalisation on MSME Globalization May Be Defined As The Process Of Integrating Various Economies Of The World Without Creating Any Hindrances In The Free Flow Of Goods And Services, Technology, Capital And Even Labour Or Human Capital. Therefore, It Signifies Internationalization Plus Liberalization, Through Which The World Has Become A Small Global Village. Nithin Kumar S 59

60. Opportunities Exposure to foreign markets Emerging areas of business. Flow of foreign investment and technology Less government intervention Employment generation Better performance by the MSMES Better customer satisfaction Short and long term capital Export contribution Removal of regional disparity Better industrial relations Nithin Kumar S 60

61. Exposure to Foreign Markets Globalization has opened up the economy and integrated with the world economy. The MSMEs enjoy the benefits of selling their products and services to the world market rather than being confined into domestic or local market. The free economy leads to accessibility to bigger markets, greater linkages for MSMEs with larger & multi- national companies and marketing outfits, improved manufacturing techniques and processes to achieve maximum output and profit . Nithin Kumar S 61

62. Emerging Areas Of Business MSMEs have been able to identify many uncommon but highly promising business areas like outsourcing, medical transcription, clinical research trials, sub-contracting, ancillarization and many new technologies like biotechnology, nanotechnology etc., which are attractive for the new generation MSME entrepreneurs Nithin Kumar S 62

63. FLOW OF FOREIGN INVESTMENT AND TECHNOLOGY The MSMEs in India suffer from outdated technology and sub-optimal scale of operation. Many foreign companies have tied up with Indian MSMEs and helped them to use better technology, managerial skill etc. Thus , a proper collaboration between the small and large companies can help the small firms to develop technology base through Research & Development activities, contribution from the technological institutes, universities etc. Nithin Kumar S 63

64. Less Government Intervention As the economy is mainly market driven; there is less Govt. intervention, red tapes, less control on import and export etc. The MSMEs would be allowed to work in a free environment created by the concept of Globalization . Nithin Kumar S 64

65. Employment Generation Being labour-intensive in nature, the MSMEs make significant contribution in employment generation and expanding industrial network in rural areas. This sector takes care of the traditional skills and knowledge based small and cottage industries. The workers inherit and transfer skills from generation to generation. The handicrafts and other products produced by this sector have good demand in market. The MSMEs have been a good source of employment generation and can be even more if the sector gets support in terms of mixture of technology, capital and innovative marketing techniques etc . Nithin Kumar S 65

66. Better Performance By The MSMEs Before globalization, the MSME sector was a highly protected sector. Suddenly , after globalization they discover that many of such protective measures were withdrawn and they have to fight for their existence in the market. This competitiveness in domestic and global market may bring out superior performance . Nithin Kumar S 66

67. Better Customer Satisfaction As the domestic market gets competitive, small and medium firms try to satisfy the consumers in every possible way. They try to produce products as per the needs and preferences of the consumers and satisfy the customers in best possible way. Nithin Kumar S 67

68. Short And Long Term Capital In a liberalized economy, banks would try to find out new possibilities of giving credits to increase their profitability. Thus , supply of funds may be easier. Development in money market would initiate development in capital market . Nithin Kumar S 68

69. Export Contribution The products produced by MSME sector (like sports goods, readymade garments, woolen garments and knitwear, plastic products, processed food and leather products, handicrafts etc ) have an excellent foreign market. As per the results of fourth MSME census (2006-07), this sector has registered an export earning of Rs 202017 crores in 2007-08. Nithin Kumar S 69

70. Removal Of Regional Disparity People from remote areas have the tendency to migrate to urban areas in search of jobs. This creates excessive pressure on urban areas and initiates social and personal problems. This problem can be addressed by setting up a network of micro, small and medium enterprises in economically backward areas. MSME sector can take care of local needs, improve economic condition of the area and most importantly, can bring a qualitative change in the economy of the country . Nithin Kumar S 70

71. Better Industrial Relations The MSMEs are less prone to industrial disputes. However , the truth behind the scene is the workers in small sectors are mostly from unorganized sector and cannot raise their voice collectively. Nithin Kumar S 71

72. Constraints Financing problems Poor technology base Cut throat competition Lack of infrastructure facilities Lack of skilled workers Marketing and distribution problems Delayed payments Nithin Kumar S 72

73. Financing Problems Financing has always been a major problem for the small and medium industries in India. The MSMEs mostly depend on internal sources of finance (personal savings, loan from relatives, and loan from local money lenders) than that of institutional financing by banks and other financing institutions . Nithin Kumar S 73

74. Poor Technology Base There exists considerable heterogeneity among the MSMEs in India. A small percentage of firms operate with sophisticated technology base whereas majority of firms use outdated technology. They suffer from low productivity and poor product quality. Due to their small size, they cannot enjoy large- scale production economies . Nithin Kumar S 74

75. Cut Throat Competition The MSMEs face ruthless competition from the large domestic firms and multinationals armed with improved technology, managerial ability, skilled workers, marketing skills, better product quality, and wide range of products. The small firms find it difficult to maintain their existence as the cases of merger and acquisition are continuously increasing . Nithin Kumar S 75

76. Lack of Infrastructure Facilities Lack of infrastructure facilities includes inadequate power supply, transportation, water supply etc. Small firms cannot bear the cost of setting up independent power supply unit. They have to depend on irregular power supply from the electricity boards. Inadequate transportation system increases cost of production. The MSMEs producing beverages, tobacco products, medicines etc face the problem of inadequate water supply . Nithin Kumar S 76

77. Lack of Skilled Workers Though India has no shortage of human resource, most of them are unskilled workers. Large firms pay higher remuneration and employ skilled workers. The MSMEs have to operate with unskilled or semi-skilled workers. Thus , the MSMEs suffer from low managerial capabilities . Nithin Kumar S 77

78. Marketing And Distribution Problems Marketing is probably the most neglected and less explored problem for Micro and Small firms. Most of them do not have any well formulated marketing strategy, market research programmes, innovative advertisement techniques etc. Most of the MSMEs do not have adequate monetary support to develop marketing section and many are not aware of modern low-cost marketing techniques (blogging, sending mails, developing website for the company ). Nithin Kumar S 78

79. Delayed Payments The small firms find it difficult to recover their dues from the large firms and even from Government departments due to complex payment procedure and corruption. Due to lack of funds, they cannot employ credit collection machineries (like factoring services). The large firms force them to offer long credit period and even pay advance to ensure timely supply of materials . Nithin Kumar S 79

80. Large Scale Industries In India

81. Structure of Large Scale Industries in India During the British period very few large-scale industries were developed in India. During the post-independence period large scale industries started to grow with the introduction of planning in India. The progress of industrialization since 1951 has been a striking feature of Indian economic development. Over the last nearly 60 years, industrial production went up by about five times, making India the tenth most industrial country of the world . Nithin Kumar S 81

82. Large scale industries are those industries whose investment on plant and machinery is in excess of medium scale industries, that is above Rs . 10 crores . These organisations also employ more than 500 labourers. They carry on production on a large-scale on modern line. These industries are organised and managed under Joint Stock Company form of organisation. Nithin Kumar S 82

83. Major Large-Scale Industries in India Sugar Industry Cotton Textile Industry Iron and Steel Industry Nithin Kumar S 83

84. Sugar Industry Sugar industry is one of the major organized industries of India . After Russia, Brazil and Cuba, India is the 4th largest producer of sugar in the world. It ranks second among the agro based industries. Sugar industry had its origin in 1903 when a sugar factory was established each in Bihar and Uttar Pradesh . Its contribution to the revenues of both the Central and the State Governments in the form of various taxes is quite high. It provides direct employment to about 3.25 lakh workers. The industry contributes an estimated Rs.1600 crore annually to the Central and State exchequers . Nithin Kumar S 84

85. Production of Sugar in India Year Production (in Million Tones) 1950-51 1.1 1970-71 3.7 1990-91 11.8 2000-01 18.5 2010-11 24.3 2011-12 27.4 Nithin Kumar S 85

86. Cotton Textile Industry The cotton industry is one of the major large scale and oldest private sector industries in India. The first cotton textile mill came up in Calcutta in 1818. The real growth of the industry started with the setting up of the Bombay Spinning and Weaving Mills in 1854. The initial location of the cotton textile industry was in the city of Mumbai. Nithin Kumar S 86

87. The cotton textile industry in India is having its three distinct categories in the organized sector: spinning mills, coarse and medium composite mills, and fine and super fine mills . Nithin Kumar S 87

88. Production of Fabrics in India Year Production of Cloth (in Million sq meters) Percentage Share Mill Sector Decentralised Sector Total Mill Sector Decentralised sector 1950-51 3730 1010 4740 79 21 1970-71 4050 3550 7600 53 47 1990-91 2590 20340 22930 11 89 2000-01 1670 38563 40233 4 96 2010-11 2205 60337 62542 3 97 2011-12 2313 58140 60453 4 96 Nithin Kumar S 88

89. Iron and Steel Industry The iron and steel industry is the "key" of basic industry of the country. Indeed , steel is the backbone of all development, industrial as well as agricultural sector. India has many intrinsic advantages in the production of steel. Some of the richest iron ore mines with the highest iron content are to be found in India . Nithin Kumar S 89

90. Production of Steel Industry Year Production (in million Tones) 1950-51 1.0 1980-81 6.8 1990-91 9.6 2000-01 30.3 2010-11 66.0 2011-12 73.4 2020-21 82 Nithin Kumar S 90

91. Financing of an Industry

92. Introduction Finance is considered to be the life-force of industry. Although India is a developing economy the progress of industry is very slow. This is mainly due to lack of adequate finance. Hence , without getting adequate finance industrial development is not at all possible. All industries, whether large or small require finance for the organization of real resources for production . Nithin Kumar S 92

93. Meaning of Industrial Finance The term "industrial finance" is used to convey the organization of various types of finance needed by industries for their activities concerned with the production of goods and services. Modern industries are capital-intensive and they require huge amounts of capital for investment. Money invested in industries will have to be managed systematically with accurate planning without any interruption for the smooth functioning and the growth of business. Nithin Kumar S 93

94. Types of Finance Short-Term Finance Medium-Term Finance Long-Term Finance Nithin Kumar S 94

95. Short-Term Finance Short-term finance usually refers to the funds required for a period of less than one year. Short-term finance required to meet variable, seasonal or temporary working capital requirements. Nithin Kumar S 95

96. Medium-Term Finance The period of one year to five years may be regarded as a medium-term. Medium-term finance is usually required for such purposes as permanent working capital, modernization, repairs, replacements, to purchase small tools, implements, small expansions etc. Nithin Kumar S 96

97. Long-Term Finance Long-term finance is one which is to be repaid over a long period, extending from 5 years to 10 or 15 years and even more. Long-term finance is required for procuring fixed assets, for the establishment of a new business, for substantial expansion of existing business, for the construction of buildings, to purchase costly machineries etc. Nithin Kumar S 97

98. Internal Sources of Finance Shares or Share Capital Ploughing Back of Profit Reserves Nithin Kumar S 98

99. External Sources of Finance Debentures Public Deposits Commercial Banks Indigenous Bankers Term Lending Institutions Foreign Capital Nithin Kumar S 99

100. Sources of Industrial Finance Nithin Kumar S 100

101. Internal Sources of Finance

102. 1. Shares or Share Capital In India, many large scale industries are set up as joint stock companies. These companies have the right of issuing shares for building up fixed capital. A large part of fixed investments comes from different types of shares such as ordinary, cumulative and non- cumulative preference shares. Shares are issued in small denominations of ten rupees so as to enable the largest number of people to participate in providing long-term finance . Nithin Kumar S 102

103. 2. Ploughing Back of Profit Another important internal source of finance for industries is the savings generated internally in the form of retained earnings by the process of ploughing back of profit. A profitable company may retain with it a part of the net profits as undistributed profits to strengthen the financial position of the company, or to meet some of the present or future financial requirements of replacement, modernization and expansion . Nithin Kumar S 103

104. 3. Reserves Business units accumulated a part of its own profits in the form of reserves. Reserves are undistributed profits of the business units. For meeting emergencies funds could also be raised through the reserves. The reserves can be used for a limited and specific purpose in emergencies only . Nithin Kumar S 104

105. External Sources of Finance

106. 1. Debentures The term debenture is defined as, a document under the company's seal which provides for the payment of a principle sum and interest thereon at regular intervals which is usually secured by a fixed or floating charge on the company's property or undertaking which acknowledge a loan to the company. Debentures are credit instruments which are widely used by companies to raise medium and long term funds. The buyers of debentures are the creditors of companies. Industries accumulated a part of its financial need in the form of debentures . Nithin Kumar S 106

107. 2. Public Deposits Another source of industrial finance is the deposit raised from the public. In recent years, many industrial firms have joined hands in inviting deposits from public for one to three years by offering attractive rates of interest. The public invests in such fixed deposits in industries. But this method of finance is not very reliable. The main defect of this source of finance is that these deposits may be withdrawn at any moment and cannot be used for long term investment projects. Nithin Kumar S 107

108. 3. Commercial Banks In India commercial banks are offering loans on cash credit basis on the security of stock and on the additional guarantee of the managing agent. The commercial banks are generally advancing short-term loans for meeting working capital needs of the industries in the form of overdraft, and cash credit facilities against government securities and pledge of stocks . Nithin Kumar S 108

109. 4. Indigenous Bankers In India indigenous bankers have been rendering important services to industry in time of their difficulty. But these indigenous bankers charged very high rates of interest. Their capacity to lend money is also very limited. Therefore , indigenous bankers never formed good sources of industrial finance. Nithin Kumar S 109

110. 5. Term Lending Institutions After independence, realizing the urgent needs of industry, various term lending institutions have been developed by the Government to advance loan in order to meet financial requirement of the industries. These institutions include Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Development Bank of India (IDBI) , Industrial Reconstruction Corporation of India, (IRCI), State Financial Corporations and State Industrial Development Corporations at state level in different states, Besides, Life Insurance Corporation of India (LICI) and Unit Trust of India (UTI) are also providing a good amount of loan to Indian industries . Nithin Kumar S 110

111. 6. Foreign Capital Apart from the above external sources, industries also borrow foreign capital for meeting their medium and long term financial requirement. The World Bank, Aid India Club in Paris and loans given by different foreign companies also has helped the Indian industries to meet their financial needs . Nithin Kumar S 111

112. Nithin Kumar S 112 Thank You