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1.

Introduction

1.1 Definition of Micro, Small and Medium Enterprises:


The MSMED Act 2006, defines the micro, small and Medium Entreprises based on the
following things
a.investment in plant and machinery if engaged in manufacturing or production, processing or
preservation of goods
b. investment in equipment for entreprises engaged in providing or rendering of services
Nature of entity
Micro
Small
Medium

Investment in
P&M(Manufacturing Unit)
>25 Lakhs
25-500 Lakhs
500-1000 Lakh

Investment in P&M(Service
Unit )
>10 Lakhs
10-200 Lakhs
200-500 Lakhs

Financing is necesary at every stage of business life cycle. It helps MSMEs to set up
operations, to expand their scale of business and to develop newer products. India is having a
well-developed financial system, consisting banks, non-banking financial companies,
financial Institutions and also venture capital companies. All these institutions cater to not
only manufacturing businesses but also to service oriented units. Various schemes are being
implemented by various banks and financial institutions to cater to the financing needs of the
Micro, Small &Medium sized businesses.
1.2

Funding for MSMEs:

It is very difficult for MSMEs to arrangs adequate finance for their operations for their
continuous running and to expand and grow. These units can raise finance by various
methods mentioned below.These sources are for long term capital requirement and for short
term capital requirement too.
i.

Sources for Long Term Capital:


a. Reinvestment of Profits

Profit making entities generally appropriate some part of their profits to reserves.This is
regarded as reinvestment of profits or ploughing back of profits.These are regarded as a part
of owners capital since theseare formed out of the profits.It acts as self financing of
business.These reserves can be put to use for following purposes:

Expansion of the undertaking


Meeting out the working capital requirement for special purposes
Replacement/ upgradation of obsolete assets
Repayment of old debts.
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It has following advantages:

Lower dependence of external sources of credit


Increased credit worthiness of the business
Increased debt raising capacity
Adoption of stable dividend policy
Ability to withstand difficult times

b. Loans from Commercial Banks/Financial Institutions


For setting up a new business medium and long tern loan can be easily availed from a
commercial bank/financial institution.These organisations can also cater to the
requirement of funds for modernisation and renovation.These loans are generally
secured.The interest paid on such loans in some cases can also be availed for incoma
tax deductions.
c. Public deposits
The Companies Act,2013 permitscompanies to accept deposits from the general
public for a period not more thn 3 years. These sources could meet up short term and
medium term finance requirements. Under this companies invite their shareholders/
employees/ general public to deposit their savings with the company.It is gaining
popularity because of the following reasons:
Higher rate of interest
Easy method for mobilisation of funds
d. Issue of shares
Liability of a shareholder is limited to the facevalue of the shares held by him. Such
shares are easily transferable. Private company cannot ask general public to subscribe
for its shares. Shares of private company are not freely transferable. A public
company does not have such type of restrictions. Shares are of broadly two types:
Equity
Dividend rates for these type of shares depends on the availability of profits
and are at the discretion of Board of Directors.So there is no fixed liability on company.These
have voting rights and so are treated as owners of the company.

Preference Shares
These shares carry a fixed rate of dividend with them are is payable to them
only if thr company makes profits. Therse dont have any voting rights
attached. There is no compulsion on company for payment of dividend.
e. Issue of debentures
Companies have the authority to raise money via debentures. Rate at which interset is
payable to the denture holder is decided at the time of issue of debenture. These have
a charge on the property or assets of the companywhich provide the necessary
security. The interest payable on debenture is a charge on profit i.e., even if their is no
profit company is liable to pay interest.These are meant mainly to fund a long term
requirement.These do not carry any voting rights.
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ii.

Sources of Short Term Capital


a. Trade credit
In course of business, organisation use to purchase raw materials, machinery,
other required components from a number of vendors. These payment can be
made within a period of 3-6 months and it adds to the liquidity of the entity.This
type of credit facility is directly linked with the level of business. If the sale/
production is more then this implies more purchases of inputs and in turn more
credit availability.
b. Factoring
Credit sales is a common phenomenon is the business. The debtors to whom the
sales is being made remain outstanding till tcertain period has elasped as decided
in the sales agreement.i.e. till the dues are collected from the debtors.Such debts
can be assigned to a bank for collection sake once it reaches the due maturity date
while the bank will extend some part of the debt immediately which varies from
80-85% of the total amount. This way bank acts a factor.The cahrges payable to
factor are treated as cost of raising the funds. It is a important tool for raising the
funds from receivables.
c. Discounting Bills of Exchange
It is a very common method for raising credit for short duration. Credit sales lead
to generation of bills of exchange.These bills can be discounted with the bank
before the maturity date. Certain charges have to be paid to bank for this service
called as Bank Discount.These rates are governed by RBI.The amount of charges
is deducted from the value of bill and is treated as finance charges.

d. NTREES - Trade Receivables Engine for E-discounting


SIDBI and NSE have joined hands to set up an electronic platform for e-discounting
of accounts receivable of suppliers, particularly MSMEs. The platform called,
NTREES, replaces the paper- Based on physical mechanism with e-trading which
will make discounting of bills transactions cost-effective, expeditious, and more
transparent. The initiative is designed to address the liquidity issues Of the suppliers;
particularly MSMEs in an effective and efficient manner and in the bargain make it a
self-sustaining platform. One of the main challenges facing the MSMEs today is
meeting capital requirements at reasonable costs. NTREES is a unique and exciting
platform to address these challenges for MSMEs

e. Bank Overdraft and Cash Credit


It is a common method adopted by companies for meeting short-term financial
requirements. Cash credit refers to an arrangement whereby the commercial bank
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allows money to be drawn as advances from time to time within a specified limit. This
facility is granted against the security of goods in stock, or promissory notes bearing a
second signature, or other marketable instruments like Government bonds. Overdraft is
a temporary arrangement with the bank which permits the company to overdraw from
its current deposit account with the bank up to a certain limit. The overdraft facility is
also granted against securities. The rate of interest charged on cash credit and overdraft
is relatively much higher than the rate of interest on bank deposits.

2.

INDUSTRY PROFILE

While banks have traditionally met short-term working capital requirements of industry,
development finance institutions (DFIs) have mainly catered to the medium to long-term
financing requirements. Industrial Finance Corporation of India (IFCI) was the first DFI
which was established to extend long-term finance to industry. This was followed by the
establishment of several DFIs, both in public and private sector.
DFIs can be classified as
i) term lending institutions such as Industrial Investment Bank of India (IIBI) Ltd, ExportImport Bank of India (EXIM) and Tourism Finance Corporation of India (TFCI) Ltd which
provide long-term finance to various sectors; and
ii) Refinance institutions such as National Bank for Agriculture and Rural Development
(NABARD), Small Industries Development Bank of India (SIDBI) and National Housing
Bank (NHB) which provide finance to banking as well as non-banking financial
intermediaries.
SIDBI provides direct, indirect and micro finance facilities.

Direct Finance: In the form of Term Loan Assistance, Working Capital Assistance,
Support against Receivables, Foreign Currency Loan, Scheme of Energy Saving for
MSME sector, equity support etc.
Indirect Finance: The Indirect assistance in the form of Refinance is provided to
Primary Lending Institutions (PLIs), comprising banks, State Level Financial
Institutions, etc. having a wide network of branches all over the country. The main
objective of Refinance Scheme is to increase the resource position of PLIs which
would ultimately facilitate the flow of credit to MSME sector.
Micro Finance: SIDBI provides micro finance i.e. credit to small entrepreneurs and
businessmen for establish their business.

Functions of SIDBI
1. SIDBI refinances loans extended by the primary lending institutions to small scale
industrial units, and also provides resources support to them.
2. SIDBI discounts and rediscounts bills arising from sale of machinery to or manufactured
by industrial units in the small scale sector.
3. To expand the channels for marketing the products of Small Scale Industries (SSI) sector
in domestic and international markets.
4. It provides services like leasing, factoring etc. to industrial concerns in the small scale
sector.
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5. To promote employment oriented industries especially in semi-urban areas to create more


employment opportunities and thereby checking migration of people to urban areas.
6. To initiate steps for technological up-gradation and modernisation of existing units.
7. SIDBI facilitates timely flow of credit for both term loans and working capital to SSI in
collaboration with commercial banks.
8. SIDBI Co-Promotes state level venture funds in association with respective state
government.
9. It grants direct assistance and refinance loans extended by primary lending institutions for
financing exports of products manufactured by small scale units.

Since almost all the DFIs were government-owned, their operations were marked by near
absence of competition up to 1990. Moreover, DFIs were extended funds at concessional
rates in the form of Long-Term Operations Fund of the RBI and government guaranteed
bonds on a long-term basis, with their maturity ranging from 10-15 years. Despite this, the
operations of DFIs became less profitable over the years. Thus, in order to impart market
orientation to operations of DFIs, various reform measures such as gradual phase out of the
market borrowing allocations of government guaranteed bonds and discontinuing the access
to low cost funds of RBI were announced in 1990s. Apart from this, prudential norms
pertaining to capital adequacy, income recognition, asset classification and provisioning
were recommended in 1994.

Between the period 1993 to 1998, DFIs took several measures such as offering innovative
products and diversification of activities into new areas of business viz. investment banking,
stock broking and custodial services to cope with the increased competition. However,
softening of interest rates and slowdown in industrial activity in the second half of 1990s
had adverse impact on the asset quality of DFIs. With declining interest rates, high cost of
funds raised by DFIs in the past became a cause of concern. Despite increase in cost of
funds, DFIs had to lend at a very competitive rate due to increased competition from banks
which ventured into project financing, in turn, resulting in decline in spread and profitability
of DFIs. Further, in January 2001, the RBI permitted reverse merger of ICICI with its
commercial bank subsidiary. This was followed by conversion of IDBI into a banking
company on October 1, 2004. The conversion of these two large DFIs into banking
companies led to the decline in share of DFIs in infrastructure project finance. The earlier
mentioned developments led to substantial decline in financial assistance sanctioned and
disbursed by DFIs during initial years of the current decade. On an average the financial
assistance sanctioned and disbursed by DFIs declined to Rs 389.1 bn during FY02-FY07 as
compared with Rs 836.8 bn during FY96-FY01. The financial assistance sanctioned by
DFIs, however, witnessed an upturn during FY08-FY09 owing to increased sanction by
investment institutions (especially LIC). During FY09, the financial assistance sanctioned by
DFIs witnessed an increase of 70.2% (y-o-y) while disbursements witnessed an increase of
almost 93.3%.

The intensification of global financial crisis and consequent liquidity crunch in the domestic
financial system led the RBI to take a slew of measures in order to provide liquidity support
to DFIs. For instance, the RBI provided refinance facility of Rs 160 bn (includes Rs 70 bn
for SIDBI, Rs 50 bn for EXIM Bank and Rs 40 bn for NHB) to DFIs to facilitate on-lending
to Housing Finance Companies (HFCs), NBFCs, mutual funds and exporters. Under the
refinance facility, Rs 213.98 bn were drawn up to June 26, 2009, while total disbursements
amounted to Rs 153.12 bn (up to June 26, 2009). The refinance facility had as many as
5,283 beneficiaries including 33 State Finance Corporation & Banks, 22 NBFCs and 14
HFCs.

In addition to this, the ceiling on aggregate resources mobilised by SIDBI, NHB and EXIM
Bank was raised to 12 times of net owned funds (NOF) for SIDBI & NHB and 13 times of
NOF for EXIM Bank. This led to a 9.1% increase in resource mobilisation by DFIs during
FY09. Further, the umbrella limit was raised for EXIM Bank & NHB and select DFIs were
allowed to offer marker related yield to maturity.

Small Industries Development Bank of India (SIDBI), which has given financial support to
over 500 new entities, today said it will further ramp up its capacity for Start-up India
movement.The bank is very active in supporting and promoting the entire startup ecosystem
in for making it more healthy, robust and strong, which is very crucial in fuelling Indias
economic growth trajectory, SIDBI Chairman and Managing Director Kshatrapati Shivaji
said. As a part of this exercise, SIDBI is also in the process of providing a collaborative
engagement web based platform which will not only provide single window availability of
information but also enable digitized flow of information across all the stakeholders in the
ecosystem viz. Angel networks, incubation centres, venture funds, mentors and industry
bodies, he said.
SIDBI, in the last 15 years, has financially supported over 534 companies through its
venture capital subsidiary and various other initiatives for startups.It established a whollyowned subsidiary SIDBI Venture Capital Ltd way back in 1999 through which it invested in
more than 90 early and growth stage enterprises from diverse sectors.Its venture capital arm
presently manages five venture capital funds with an aggregate corpus of Rs 1,500 crore.
Some of the successful startups assisted by the fund include Bill Desk.com, Manthan
Systems etc.
To continue with its support to the startups through Fund of Fund operations, India
Aspiration Fund (IAF), with a corpus of Rs 2,000 crore was launched by the Finance
Minister in August 2015 to enhance the equity availability to MSMEs.In a short time, an
amount of Rs 1,126 crore has already been recommended for sanction to 31 venture Capital
Funds (VCFs) out of which formal sanction has already been communicated to 18 Venture
Capital Funds (VCFs) for Rs 506 crore.
To facilitate Venture Capital Funds to raise requisite funds and achieve financial close,
SIDBI has also partnered with LIC of India as part of India Aspiration Fund. SIDBI has so
far supported 88 Venture Capital Funds with an aggregate commitment of Rs 2,211 crore.

These Venture Funds have invested in 612 enterprises with an equity support of Rs 9,600
crore, of which Rs 4,339 crore were invested in 531 MSMEs.
Small Industries Development Bank of India (SIDBI) has allocated 1,000 crore fund which
will now be distributed among 30 venture capital firms, through governments India
Aspiration Fund. This fund is designed for early stage startups.The amount was approved by
the SIDBI executive committee from 1,416 crore approved by its independent advisory
venture capital investment committee earlier.
SIDBIs Chairman Kshatrapati Shivaji said that it will take around 12 to 18 months for the
money to reach startups as due diligence takes time. He further said that as this is a long term
process of around 10 to 12 years, VC firms will have to scout for best companies which will
take time for closure.
We got many proposals from funds, out of which 35 proposals were recommended by the
VCIC to our executive committee. We have already approved 30 of the proposals worth Rs
1,000 crore.
Mr. Shivaji mentioned, These funds will be invested to startup units. Primarily, our aim is to
nudge them to make investments in the seed stage because that is when they need the
maximum support. Small Industries Development Bank of India (SIDBI) has extended risk
capital assistance of close to Rs 1,100 crore to 500 MSMEs. SIDBI, the financial institution
for promotion and financing of MSMEs, has roped in to accelerate MSME growth by
providing the assistance.
SIDBI contracted a line of credit of $500 million which includes $150 million for augmenting
risk capital financing in general and start-up financing in particular. Wildcraft, Smaash
Entertainment, Snow World, Force Fitness, and many more successful entities were included,
said an official release.
It is very active in supporting and promoting the entire start-up ecosystem for making it
healthier, robust and strong, which is very crucial in fueling Indias economic
growth trajectory said Kshatrapati Shivaji, Chief Managing Director of SIDBI.
As a part of this exercise, SIDBI is also in the process of providing a collaborative
engagement web-based platform which will not only provide single window availability of
information but also enable digitised flow of information across all the stakeholders in the
ecosystem he added.

3.

COMPANY PROFILE

SIDBI is an independent financial institution aimed to aid the growth and development of
micro, small and medium-scale enterprises (MSME) in India. Set up on April 2, 1990 through
an act of parliament, it was incorporated initially as a wholly owned subsidiary of Industrial
Development Bank of India. Currently the ownership is held by 33 Government of India
owned / controlled institutions. Beginning as a refinancing agency to banks and state level
financial institutions for their credit to small industries, it has expanded its activities,
including direct credit to the SME through 100 branches in all major industrial clusters in
India. Besides, it has been playing the development role in several ways such as support to
micro-finance institutions for capacity building and on lending. Recently it has opened seven
branches christened as Micro Finance branches, aimed especially at dispensing loans up to 5
lakh.
It is the Principal Financial Institution for the Promotion, Financing and Development of the
Micro, Small and Medium Enterprise (MSME) sector and for Co-ordination of the functions
of the institutions engaged in similar activities.
Mission
To facilitate and strengthen credit flow to MSMEs and address both financial and
developmental gaps in the MSME ecosystem.
Purpose
The purpose is to provide refinance facilities and short term lending to industries. It is
headquartered in Lucknow. Former Deputy Managing Director is Shri N.K. Maini. Dr.
Kshatrapati Shivaji is the new Chairman and Managing Director of the organisation.
History
Small Industries Development Bank of India (SIDBI), set up on April 2, 1990 under small
industries development bank of India act, is the Principal Financial Institution for the
Promotion, Financing and Development of the Micro, Small and Medium Enterprise
(MSME) sector and for Co-ordination of the functions of the institutions engaged in similar
activities. The Charter establishing it, The Small Industries Development Bank of India Act,
1989 envisaged SIDBI to be "the principal financial institution for the promotion, financing
and development of industry in the small scale sector and to co-ordinate the functions of the
institutions engaged in the promotion and financing or developing industry in the small scale
sector and for matters connected therewith or incidental thereto.
Achievements
SIDBI retained its position in the top 30 Development Banks of the World in the latest
ranking of The Banker, London. As per the May 2001 issue of The Banker, London, SIDBI
ranked 25th both in terms of Capital and Assets.

Credit Guarantee Fund Trust for Micro and Small Enterprises popularly known as CGTMSE
is widely being used by many PSU Banks and Private sector banks to fund MSME sector.
During the year 2002-03 the aggregate sanction and disbursements of SIDBI amounted to
10,904 crore and 6,789 crore respectively. SIDBI has been permitted to raise finances up to
2,730 crore the year 2013 onward by the Reserve Bank of India.
Business Domain of SIDBI
The business domain of SIDBI consists of Micro, Small and Medium Enterprises (MSMEs),
which contribute significantly to the national economy in terms of production, employment
and exports. MSME sector is an important pillar of Indian economy as it contributes greatly
to the growth of Indian economy with a vast network of around 46 million units, creating
employment of about 106million, manufacturing more than 6,000 products, contributing
about 45% to manufacturing output and about 40% of exports, directly and indirectly. In
addition, SIDBI's assistance also flows to the service sector including transport, health care,
tourism sectors etc. MSMEs have also shown higher growth rate. Moreover, it is the MSME
sector which can help realize the target of proposed National Manufacturing Policy (NMP) of
raising the share of manufacturing sector in GDP from 16% at present to 22% by 2022.
The total MSME outstanding credit of the bank stood at Rs. 55,343 crore on March 31, 2015
as against Rs. 61,271 crore as on March 31, 2014. The cumulative disbursement by SIDBI to
the MSME sector since inception stood at over Rs. 3.90 lakh crore, benefiting more than 346
lakhs persons in the MSME sector.
SIDBI among Top 30 Development Banks of the World
SIDBI retained its position in the top 30 Development Banks of the World in the ranking of
The Banker, London. As per the May 2001 issue of The Banker, London, SIDBI ranked 25th
both in terms of Capital and Assets.
In its endeavor towards holistic development of the MSME sector, SIDBI adopts a Credit
Plus approach wherein, besides credit, the Bank also provides grant support for the
Promotion and Development (P&D) of the sector to make it strong, vibrant and competitive.
The P&D activities of the bank include Micro Enterprise Promotion, Entrepreneurship
Development, Cluster Development, Capacity Building of the MSME Sector, promoting
Responsible Finance among Micro Finance Institutions, Sustainable Finance to MSMEs
including Energy Efficiency, Environment Protection, etc.
Cumulative disbursements as at end March 2014 have crossed ` 3260 trillion ( 40.75 trillion)
benefiting more than 32 million persons in the MSME sector. The total outstanding portfolio
as at end March 2014 aggregated ` 612.71 billion (7.66 billion).
SIDBI also functions as a Nodal/ Implementing Agency to various ministries of Government
of India viz., Ministry of MSME, Ministry of Textiles, Ministry of Commerce and Industry,
Ministry of Food Processing and Industry, etc.
SIDBI has taken the initiative to promote several institutions viz., Credit Guarantee Fund
Trust for Micro and Small Enterprises, SIDBI Venture Capital, SME Rating Agency of India
Ltd and India SME Technology Services Ltd., for the benefit of the MSME sector.
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Micro Units Development & Refinance Agency (MUDRA) Bank, an initiative by


Government of India to support non-corporate small business, is proposed to initiate it as a
unit of SIDBI to benefit from SIDBIs initiatives and expertise.
Shareholding Pattern
The shares of SIDBI are held by thirty three institutions/public sector banks/insurance
companies owned or controlled by Central Government, with IDBI Bank Ltd, State Bank of
India and Life Insurance Corporation of India as its three largest shareholders.
Subsidiaries of SIDBI
1). SIDBI Venture Capital Limited (SVCL) : It was established in 1999 as an Investment
Management Company for managing Venture Capital Funds (VCFs)/Alternative Investment
Funds (AIFs). Over the year SVCL has evolved into one of the leading institutional
investment management companies in India having focus on the small and medium sector
companies of India.
SVCL at present, is acting as the Investment Manager for National Venture Fund for
Software and Information Technology Industry (NFSIT), SME Growth Fund (SGF) [first unit
scheme of SIDBI SME Venture Fund], Samridhi Fund (SF)[unit scheme of SIDBI Social
Venture Trust] and TEX Fund (TF)[a unit scheme of Laghu Vikas Trust].
SVCL has also invested in 80 early and growth stage companies from diversified structure
such as IT/ITES,service,retail,pharma,auto components,bio-fuels,textile & garments, logistics
etc. and sustainable social enterprises in sectors such as heathcare,financial
services,water,diary,agriculture and allied services etc. It has fully or partially divested its
investments in 43 out of 56 companies of its first 2 VCFs, viz. NFSIT and SGF.

2).SIDBI Trustee Company Limited (STCL): It was established in 1999 to carry out the
trusteeship functions in general and for Venture Capital Fund/Alternative Investment Fund.
STCL, at present, is acting as the Trustee for National Venture Fund for Software and
Information Technology Industry (NFSIT), SME Growth Fund (SGF), Indian Opportunities
Fund (IOF), Samridhi Fund (SF) and TEX Fund (TF).

Associates of SIDBI
1). Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) : It operates
Credit Guarantee Scheme(CGS) for Micro and Small Enterprises (MSEs) which guarantees
credit facilities upto Rs.100 lakhs extended by Member Lending Institutes(MLIs) to those
loans, which are not backed by collateral security and/or third party guarantees. Ministry of
Micro, Small and Medium Enterprises (MSME), Government of India and SIDBI contributed
Rs. 74.99 crore and Rs. 18.75 crore,respectively,to the corpus of CGTMSE during FY 201415, raising the corpus size to Rs. 2,389.04 crore.
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2).SMERA RATINGS LIMITED: SMERA which commenced operations in 2005, completed


6,629 SME Ratings during the financial year 2014-15. Cumulatively, since its incorporation
SMERA has assigned ratings to 34,385 MSME units up to March 31, 2015 spread across
various categories, industries and states. SMERA has been providing special attention to
micro and small enterprises which accounted for 69% and 30%, respectively of its total
ratings. After receiving accreditation in the year 2012 from RBI as an ECAI under BASEL
II norms, SMERA has completed 836 Bank Loan Ratings during the financial year 2014-15.
Cumulatively since receipt of accredition, SMERA has assigned 1,583 Bank Loan Ratings.

3). INDIA SME TECHNOLOGY SERVICES LIMITED (ISTSL):- An associate institute of


SIDBI offers technology advisory and consultancy services for projects/assignments related
to Energy Efficiency and Demand Side Management, Renewable Energy (particularly solar),
MSME Cluster Development and Evaluation Studies and Capacity Building Awareness
Creation & Skill Development with the help of its team of experts having extensive
experience in energy efficiency, MSME sector, banking, project finance, renewable energy
and project management. In this domain ISTSL also provides services such as providing
information on technology options, Match making, Finance Syndication, Business
Collaboration and organising seminars/meets and providing market support.

4). INDIA SME ASSET RECONSTRUCTION COMPANY LIMITED (ISARC) :- It was


promoted by SIDBI with the principal objective of acquiring non-performing assets (NPAs)
and to resolve them through innovative mechanisms with a special focus on the NPAs of
micro, small and medium enterprises sector(MSMEs). The company was incorporated on
April 11, 2008 and commenced its business operations on April 15, 2009. RBI has revised the
guidelines applicable to ARC vide the circular dated August 5,2014 after which acquisition
by ISARC and all other ARCs, as a whole, have come to a standstill, barring tactical
acquisition for debt aggregation. During the year, ISARC undertook due diligence in respect
of 52 accounts and submitted bid for 4 accounts. During the year, the company acquired 2
financial assets from 2 banks

5). MICRO UNITS DEVELOPMENT & REFINANCE AGENCY (MUDRA) :- The Union
Budget of FY 2015-2016 , Government of India has announced setting up of Micro Units
Development & Refinance Agency (MUDRA) with the objective of mainstreaming
micro/small business units by way of providing access to institutional finance to these own
account enterprises. This will not only help in improving the quality of life of these
entrepreneurs ,but will also contribute significantly to the employment generation thereby
achieving higher GDP growth .MUDRA will function as a subsidiary of SIDBI. The agency
has started with a corpus of Rs.20, 000 crore and credit guarantee corpus of Rs.3, 000 crore
and will refinance Micro Finance Institutions (MFIs) through a Pradan Mantri Mudra Yojna.
MUDRA was launched as a subsidiary of SIDBI on April 08, 2015 by Shri Narendar Modi,
Honble Prime Minister of India.
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4.

Project One

Understanding the funding requirement of Hotels & Hospitality Industry

4.1 Literature Review


Hotels and Hospitality Industry Review
The Indian tourism and hospitality industry has emerged as one of the key drivers of growth
among the service sector in the country.It hs contributed 12.5% in countrys GDP during year
2014-15.The sector is growing at the rate of 11.7% CAGR over the period 2011-12 to 201415.Tourism has significant potential considering the rich culture and historical heritage,
variety in ecology, terrains and places of natural beauty.This sector not only generates a lot of
foreign exchange but also is one of the largest employer in the country.
The industry is expected to generate 13.45 million jobs across sub-segments such as
Restaurants (10.49 million jobs), Hotels (2.3 million jobs) and Travel Agents/Tour Operators
(0.66 million). The Ministry of Tourism plans to help the industry meet the increasing
demand of skilled and trained manpower by providing hospitality education to students as
well as certifying and upgrading skills of existing service providers.
India has moved up 13 positions to 52nd rank from 65th in Tourism & Travel competitive
index.
Market Size

The number of Foreign Tourist Arrivals (FTAs) has grown steadily in the last three
years reaching around 7.103 million during JanuaryNovember 2015 (4.5 per cent
growth).
The number of FTAs in November 2015 was 815,000, registering an increase of 6.5
per cent over November 2014.
Foreign Exchange Earnings (FEEs) from tourism during January-November 2015
were Rs 1,12,958 crore (US$ 16.94 billion), registering a growth of 1 per cent over
same period last year.
The number of tourists arriving on e-Tourist Visa during the month of October 2015
reached a total of 56,477 registering a growth of 1987.9 per cent or ~21 times as
compared to 2,705 tourists in October 2014.
Online hotel bookings in India are expected to double by 2017 due to the increasing
penetration of the internet and smart phones#.

Investments
The tourism and hospitality sector is among the top 15 sectors in India to attract the highest
Foreign Direct Investment (FDI). During the period April 2000-September 2015, the hotel
and tourism sector attracted around US$ 8.48 billion of FDI, according to the data released by
Department of Industrial Policy and Promotion (DIPP).
With the rise in the number of global tourists and realising Indias potential, many companies
have invested in the tourism and hospitality sector. Some of the recent investments in this
sector are as follows:
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Fairfax-owned Thomas Cook has acquired Swiss tour operator Kuoni Group's
business in India and Hong Kong for about Rs 535 crore (US$ 80.3 million) in order
to scale up inbound tour business
US-based Vantage Hospitality Group has signed a franchise agreement with Indiabased Miraya Hotel Management to establish its mid-market brands in the country.
Thai firm Onyx Hospitality and Kingsbridge India hotel asset management firm have
set up a joint venture (JV) to open seven hotels in the country by 2018 for which the
JV will raise US$ 100 million.
ITC is planning to invest about Rs 9,000 crore (US$ 1.35 billion) in the next three to
four years to expand its hotel portfolio to 150 hotels. ITC will launch five other hotels
- in Mahabalipuram, Kolkata, Ahmedabad, Hyderabad and Colombo - by 2018.
Goldman Sachs, New-York based multinational investment banking fund, has
invested Rs 255 crore (US$ 38.3 million) in Vatika Hotels.
Japanese conglomerate SoftBank will lead the Rs 630 crore (US$ 94.5 million)
funding round in Gurgaon based OYO Rooms.
MakeMyTrip will acquire the travel planning website Mygola and its assets for an
undisclosed sum, and will together look to focus on innovating the online travel
segment.

Government Initiatives
The Indian government has realised the countrys potential in the tourism industry and has
taken several steps to make India a global tourism hub. Some of the major initiatives taken by
the Government of India to give a boost to the tourism and hospitality sector of India are as
follows:
The Union Cabinet has approved the signing of Memorandum of Understanding
between the Ministry of Tourism of India and the Ministry of Trade Industry and
Tourism of Colombia in order to boost cooperation in the field of tourism between the
two countries.
The Central Government has given its approval for signing of a Memorandum of
Understanding (MoU) between India and Cambodia for cooperation in the field of
tourism with a view to promote bilateral tourism between the two countries.
Ministry of Tourism has sanctioned Rs 844.96 crore (US$ 142 million) to States and
Union Territories for developing tourism destinations and circuits during FY 2014-15,
which includes projects relating to Product/Infrastructure Development for
Destinations and Circuits (PIDDC), Human Resource Development (HRD), Fairs and
Festivals & Rural Tourism.
The Heritage City Development and Augmentation Yojana (HRIDAY) action plans
for eight missions cities including Varanasi, Mathura, Ajmer, Dwaraka, Badami,
Vellankini, Warangal and Amaravati have been approved by HRIDAY National
Empowered Committee for a total cost of Rs 431 crore (US$ 64.7 million).
Government of India plans to cover 150 countries under e-visa scheme by the end of
the year besides opening an airport in the NCR region in order to ease the pressure on
Delhi airport.
Under Project Mausam the Government of India has proposed to establish cross
cultural linkages and to revive historic maritime cultural and economic ties with 39
Indian Ocean countries.
Road Ahead
Indias travel and tourism industry has huge growth potential. The medical tourism market in
India is projected to reach US$ 3.9 in size this year having grown at a CAGR of 27 per cent
14

over the last three years, according to a joint report by FICCI and KPMG. Also, inflow of
medical tourists is expected to cross 320 million by 2015 compared with 85 million in 2012.
The tourism industry is also looking forward to the expansion of E-visa scheme which is
expected to double the tourist inflow to India. Rating agency ICRA ltd estimates the revenue
growth of Indian hotel industry strengthening to 9-11 per cent in 2015-16. India is projected
to be the fastest growing nation in the wellness tourism sector in the next five years, clocking
over 20 per cent gains annually through 2017, according to a study conducted by SRI
International.
(Exchange Rate Used: INR 1 = US$ 0.015 as on December 17, 2015)

Agras Hotel and Restaurent Industry


Due to proximity of New Delhi and being a International city Status due to Taj
Mahal Agra is developed as tourist centre, Centre for Shoe Industry, educational hub over
the period of time. Agra is also known as the Handicraft City. Foundry Industry is also age
old .The city is under supervision of a permanent Committee of Honble Supreme
court for monitoring pollution level. An area known as Taj Trapezium Zone was made to
check the pollution level around Taj Mahal. Hence Pollution free Industry has a lot of
potential for setting up industries to attract people to settle.
Since the only Large Scale unit in Agra is more of service nature hence scope of
vendorisation / ancillarisation is very limited. The more investment in large sector shall
provide more opportunities for vendorisation in MSE sector.

Keeping the above facts into mind the study has been conducted to understand the finance
requirement of entities in service sector and how could SIDBI cater to those requirements.

15

Sr No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Business
Budget hotels and
restaurant
Star and chain hotel
Small hospital /
private clinics
Hospitals more than
30 beds
Diagnostics/
Pathology Center
BPO/KPO
Advertising Agencies
Salons
Transport Agency
Logistics Services
Warehouses
Auto Rental
Agencies
Auto workshops/
dealers
Gymnasiums
Professionals CAs,
CS, Advocates
Saloons and Spas

Number
168
55
185 (homeopathy and
allpoathy)
60
23
4
17(scalable)
30
16
5
74
>200
57
7((investment->10
L))
3000 (practicing
units and on payroll)
8 (investment->10 L)

Budget Hotels:
Agra has more than 168 budget hotels where the tariff starts from Rs 500 per passenger
night.These hotels normally have less than 30 rooms.
Observations:
a. In such cases, Capex is very high while working capital could be managed from the
revenues generated but because of seasonal nature of the business they face problems.
b. These hotels lack required the documents and so it is difficult for them to get funds.
c. Most of the promoters of this hotels have started this business as their second business
and treats this as a medium for money laundering.
d. Due to procedural delays and red tapism, getting the required approval is a time
taking process.
Finances:
a. Promotors usually invest their capital for the establishment of such units. If there is a
requirements of funds they dont directly approach to the banks. There application for
loan reaches to bank via CA or Advocate or and middle man who would be charging
some commission from the promoter as his remuneration.
16

SIDBIs Intervention:
a. SIDBI could give them bill discounting facility.
b. They could take funds for their expansion(TL/Revolving term loan/ Line of Credit)

Star And Chain Hotels:

Observation:
a. These are built and operated by large business houses and are being done as
primary business.
b. City has around 55 star and chain hotels like Jaypee hotel, Raddison Blue,
Oberoi Amarvilas etc to name a few.
Since these business houses are based in Tier 1,Tier 2 city these people use to
approach the bank from their city. Generally such banks are approached by them for
two reasons:
a. For construction of the hotel (TL)
b. For expansion of the asset (TL)

17

Conclusion:

The study revealed the following conclusions which have to be tackled


Enhancement of investment limit in Micro, Small & Medium Enterprises Keeping
in mind the the country is a start up nation several industries which started decades
ago have crossed the threshold limit for being the MSME and they now have to forgo
the benefits that they moght have got from being a MSME hence they require revision
of MSME limit.
Better road connectivity- Since these industry(tourist) depends largely on road
connectivity poor road is a bane for their business.
Availability of uninterrupted Power Supply at lower rate-The city undergoes a lot of
powercut which has to be removed and this eats up a significant portion oftheir
revenues.
Various central/ state departments are operating similar nature of activities/
schemes with varying subsidy/ limits, required to be consolidated- Because of the lack
of sync in different ministries of GOI it becomes very difficlut for a business person
to run the business
Attractive Industrial Policy of neighboring state.
State Industrial Policy: It must be declared.
Better Technology Up gradation Scheme with some mechanism for tracking
of application status may be available on line.
Interest subsidy to Micro enterprises to attract more entrepreneurs to start new
venture.
More benefit to micro level enterprises under CGTMSE scheme- The benefit of
CGTMSE is difficult for medium entreprise to take. The rate which they have to pay
is comparatively more.
Better loan scheme for self employment for educated unemployed youths- In order to
eradicate the problem of unemployment the need of the hour is to to formulate a
policy so as the unemployed educated youth of the country can start a business
venture.
Implementation of online submission of Entrepreneurship Memorandum-With the
Udyog Number coming into exixtence it is now easy for them but still they have to
submit.
Various DC (MSME) schemes must be more entrepreneurs friendly.

18

5.

Project Two

Due Diligence Practices in Banks


It is mandatory for every bank to do the due diligence so as to ensure that funds are not
disbursed for purpose other than what it has been assigned for.
It usually includes the following things:
1. PAN detailsPAN- as per Income tax act and companies act 2013, every person who is making is
required to have a PAN number which is unique and denotes the vital information
about the person.
Person as defined under the Income tax Act 1961,section 2(31), includes:
o An individual
o HUF
o Company
o Firm
o AoP/BoI
o Local Authority
o Artificial judicial person not falling in the above categories.
2. CIN- Every company is assigned a distinguishable 21 alphanumeric code which acts
as its identity.
CIN Number is comprises of 6 parts.
CIN number starts with L if it is a listed company else U.
The next five digits represents the industry in which the company is doing
business.
The MCA has a number allotted for every category or industry. The two letters after that
denote the states where the company is registered. Ex MH is for Maharashtra. Only two states
in India have more than one RoC. These states are Maharashtra and Tamil Nadu. Companies
registered in Mumbai are denoted with MH while those registered in Pune are denoted with
PN. There are 23 RoC in total.
The four digits thereafter denote the year the company was incorporated in.
The subsequent three letters denoted the classification of the company i.e. whether the
company is a public company or a private limited company . Eg. If the CIN have letters FTC
it means the company is a subsidiary of a foreign company or GOI which denotes that the
company is owned by government of India.
The last six digits of the CIN Number represents the registration number of the company
issued by RoC.
Effective from 1st April 2015, all companies are required to cite the CIN number in all
communications.

19

3. DIN- DIN stands for Directors Identification Number. Every person who wishes to
act as director is supposed to apply for DIN. This DIN helps financial institutions to
see all the entities where the person is acting as director.
Commercial CIBIL can also be accessed through this.
4. Valuation of Assets for Collateral-Except for CGTMSE, under other schemes the
client is required to give a asset as collateral/ security which could be used by banks
to recover their debts if the clients fails to repay.
5. MCA- Ministry of Corporate Affairs has now made it possible to access the master
data of the company. Under the MCA 21 initiative they have now put all the
information on web which could be accessed from MCA Master Data.
This has facilitatated public to see the required information from their home. Earlier
getting this information was a tedious task, It use to take minimum 5 working days to
get this information. At times it also happens that the details sought were not
furnished.
Advantages of MCA 21
Easy accessibility
Green initiative
24x7 Accesibility(could be accessed even on non working days and after official
working hours)
Transparency
6. CIBIL Ratings-It acts as the financial report card for the borrower. Entity providing
the funds necessarily undergoes the CIBIL check which helps them to decide whether
to or not to provide funds,
A CIBIL score beyond 650 is considered to be good.
These rations are provided by external agencies and so are considered to be unbiased
to a larger extend but then their authenticity is always under question. This gave birth to
internal rating tools development for credit rating.
7. Use of Financial Ratios - Ratios help to do the analysis quickly. SIDBI considers 19
important ratios and some derived ratios which vary on case to case basis for
repayment.
8. Viability/ feasibility study- This plays a significant role when the client company is
into a new business. Keeping the Start Up Trend in mind SIDBI is bound to do the
feasibility study for such business on its own. Along with this, market study is also
done in such a way that it clearly indicates the targeted market and market segment to
whom its going to target.
9. Project Report- It is required for both new and existing companies. It indicates where
the company see itself two years from now. It also has the details of the project where
the funds being used are going to be applied.
10. Sales Forecast- It is required to ensure the repaybility of interest for the client.
20

11. Professional Competency of the director(s)- A business could be run properly if its
being managed by those who could manage it professionally. They have right set of
educational background and experience in that industry would be an additional
advantage.
12. Analysis of balance sheets- These help the banks to see the financial operations and
changes in Capital Structure of the company so as to ensure the the business is
operating fine. Analysis is carrried on with the help of CART(for existing units)
and/or by RAM (for newer units; with projections from CMA Tally)
13. SWOT Analysis- Bankers are required to do the swot analysis for any prospective
clients so that they can assess its potential better. It helps them to see and check how
could the entity earn ans sustain in a longer run.
14. Competitors analysis-In order to validate the financials of the company and to see that
the comapny is earning as per the industry averages companies working in the same
field are studied.
15. Past sales analysis (VAT returns)- It is now a days very easy for companies to report
income from other sources as sale and they furnish a inflated figures for their sales. It
ultimately increases their bottomline. VAT returns act as a proof for the sales and
VAT for VATable goods in case if the company is selling non VAT goods then each
bank has their own guidelines.
In case of a service unit Sales Tax Return or GAR 7 challan is the valid proof.
16. SIDBIs Rating ToolIt is mandatory for SIDBI to monitor and rate the performance of their clients on
monthly/quarterly/ half yearly/ annually. The time frame for rating depends on the following
parameters:

Quantum of loan sought/disbursed- In case when the quantum of loan sought is more
than 5 crores then the file is to be approved from regional office (DGM) while if the
requirement is less then 5 crore it is at the discretion of SIDBIs branch officer
(AGM).

In order to minimise the risk it is therefore required to review them continuously. Also as per
the policy of SIDBI an officer in SIDBI gets a promotion if his cases are performing well
except for the cases when they are being affected by external factors (government decisions,
change in judicial policies)

Amount outstanding- The amount outstanding in the particular portfolio is also a


reason that they have to review the asset regularly. If a asset is performing well
throughout his tenure its CIBIL scores increases and he is likely get top up loans /
refinancing at comparatively lower rates.

Scheme under which loan has been provided- Schemes play a vital role for banks to
decide the review of a asset. Under some schemes like Stand Up India, Start Up India
21

or CGTMSE it is mandatory for SIDBI to review their assets once in every quarter.
Ths report is then cascaded to RO which undertakes and departmental enquiry if the
clients rating has deteriorated.

Quality of the asset (standard/ sub- standard/ non performing)- Standard assets are
required to be rated as often as often as non performing assets.
Interest payment schedule ( monthly / quarterly/ half yearly/annually )- Assets are
required to be rated as per the instalment schedule so as under floating interest rates
they can enjoy lower rates. If the repayment is good then it is very likely that the
client could get comparatively lower rate of interest.
Re-schedulement of loan- Clients apply for top up loans or seek re-schedulement
which is totally at the discretion of Branch Manager but it undergoes a thorough
check as the company might use the funds for some non business purposes.
Refinancing- Re financing refers to the process when the the existing client applies
for more loan. In such a case it is easier for them to get the loan from their previous
banker. It is also easier to sanction the loan since they have seen the operations of the
business.

Apart from the following cases in some cases it is there by legal pronouncements that assets
are to be rated daily (eg. Stone crushing Units / Mines ).

22

Conclusion:
Banks are advised to do the datailed due dilidence process so as to check that the company is
working well not only on paper but in reality. Banks have witnessed severeal cases of bogus
companies being formed to seek the loan from banks.Now a days since there are strict actions
being taken by RBI bankers are putting more efforts for analysis so then they could minimise
the risk of default.
With detailed enquiry if there is any discrepency detected then the bank may not sanction the
loan or may be the sanctioned amount would vary from the applied amount.
These also enables bank to asses the credit worthiness of the creditor as if they could be able
to repay the debt.

23

6.

Project Three

SARFAESI Act ,2002 (in special context to Mithraj Medicare Private Limited)
Introduction
SARFAESI is an acronym for Securitisation And Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002.It is used by banks for recovery of bad loans
recovery(NPA). It could be done in case when such NPAs are backed bu securities charged
by way of hypothecation or mortgage or assignment.In case of the default banks can seize the
securities(except agricultural land) without intervention of the court.SARFAESI is effective
only for secured loans where bank can enforce the underlying security.In these cases
intervention of court is not required unless the security in invalid or fraudulent.
In case if the asset in not secured i.e. if that is not backed by any asset the bank has to move
to the court to file the case against against the defaulter.
The SARFAESI Act, 2002 gives powers of seize and desist to banks.The act provides for
sale of financial assets by banks and financial institutions to Asset Reconstruction
Companies(ARC) .RBI has given gudelines for the process to be followed for sale of
financial assets to ARCs.Banks can give a notice in writing to the defaulting borrower
requiring to discharge its liabilities within 60 days. If the borrower fails to comply with the
notice, the Bank may take recourse to one or more of the following measures:

Take possession of the security for the loan


Sale or lease or assign the right over the security
Manage the same or appoint any person to manage the same

Background of the act


Before this SARFAESI Act recovery of the default loans was recovery of Debts due to Banks
and Financial Institutions Act 1993.It was based on the recommendation of Narsimham
Committee-I were submitted to the government.Debt Recovery Tribunals and Debt Recovery
Appelate Tribunals were created only after this.However there were several loopholes in this
act and these were used by borrowersas a getaway.
This made the government to form another committee under Mr. Andhyarujina for reforms in
banking sector and changes in legal structure.This committee recommended to enact a new
legislation for the establishment of SARFAESI Act for taking the possession of NPA. Now it
was possible for creditors(secured) to recover their dues with the intervention of the
court.However as soon as the Act was passed its implementation was challenged in the court
and this made its coming into existance for two years. In the Mardia Chemicals v. Union
Bank of India , the Hon. Supreme Court upheld the validity of the SARFAESI Act.
Right of Borrowers:
Observations made it clear that SARFAESI Act was able to provide the effective measures to
the secured creditors for recovery of the their dues withour compromising with the rights of
the borrower.
The borrower at any point of time before the conduction of auction of the asset remit the dues
and avoid loosing the security.In case of use of illegal act is being done by the Authorised
24

Officer he will be liable for penal action.In those cases the borrower is entitled to get
compensation for such acts
The borrowers will be entitled to get compensation for such acts. For redressing the
grievances, the borrowers can approach firstly the DRT and thereafter the DRAT in appeal.
The limitation period is 45 days and 30 days respectively.
Pre-conditions
The Act stipulates four conditions for enforcing the rights by a creditor.
The debt is secured
The debt has been classified as an NPA by the banks
The outstanding dues are one lakh and above and more than 20% of the principal loan
amount and interest there on.
The security to be enforced is not an Agricultural land.
Methods of Recovery
According to this act, the registration and regulation of securitization companies or
reconstruction companies is done by RBI. These companies are authorized to raise funds by
issuing security receipts to qualified institutional buyers (QIBs), empowering banks and Fls
to take possession of securities given for financial assistance and sell or lease the same to take
over management in the event of default. This act makes provisions for two main methods of
recovery of the NPAs as follows:
Securitisation:
Securitisation is the process of issuing marketable securities backed by a pool
of existing assets such as auto or home loans. After an asset is converted into a
marketable security, it is sold. A securitization company or reconstruction company
may raise funds from only the QIB (Qualified Institutional Buyers) by forming
schemes for acquiring financial assets.
Asset Reconstruction:
Enacting SARFAESI Act has given birth to the Asset Reconstruction
Companies in India. It can be done by either proper management of the business of
the borrower, or by taking over it or by selling a part or whole of the business or by
rescheduling of payment of debts payable by the borrower enforcement of security
interest in accordance with the provisions of this Act. Further, the act provides
Exemption from the registration of security receipt.
This means that when the securitization company or reconstruction company
issues receipts, the holder of the receipts is entitled to undivided interests in the
financial assets and there is not need of registration unless and otherwise it is
compulsory under the Registration Act 1908. However, the registration of the security
receipt is required in the following cases: There is a transfer of receipt The security
receipt is creating, declaring, assigning, limiting, extinguishing any right title or
interest in a immovable property.

25

References:
www.smallb.in- http://smallb.sidbi.in/%20/fund-your-startup-business%20/modesfinancing-startups
www.sidbi.in In order to understand the basics of the SIDBI so as to understand the
overall organisation structure and the functioning of the bank.
www.incometaxindia.gov.in It helped to understand the details of company and
related provisions
https://www.cibil.com/- It is required to assess the final credit score of the applicant.
http://asi.nic.in/ www.msmeagra.com To check for the different policies of the government.
http://www.mca.gov.in/mcafoportal/showCheckCompanyName.do- It facilitated to
verify details of the companys constitution.

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