ABSTRACT

MSME financing is about allocating funds to Micro, Small and Medium Enterprises
(MSME). Access to finance is one of the biggest pain points for MSMEs. Many of these
small business entities aspire to grow as large organizations in the future for which they
require proper funding facilities to develop and prosper. Though banks have identified
MSMEs as the thrust area for credit expansion, due to fear of credit risk, banks are reluctant
to provide credit to the sector. In order to address the credit, issue the present study of MSME
financing is undertaken. A sound project appraisal is required to reduce credit risk. In this
paper, a case of tempered glass manufacturing industry (an MSME) is analysed by checking
its financial viability. Primary data constitutes discussions with the bank officials and
financial statements of the customer. Secondary data includes reports issued by Ministry of
MSME and RBI. From the lenders point of view, ratio analysis and projected balance sheet
analysis is done to estimate the loan repayment of the borrower. Hence the financial viability
of the project is considered to be as one of the best techniques of financial management to
define the proper funding for a manufacturing unit. The main objective of this study is to
propose the conceptual framework to assess empirically the financial obstacles associated
with different stages of MSME Life Cycle in accessing the finance and also its impact on the
MSME Performance. The conceptual framework is based on the literature review on factors
affecting access to finance of MSMEs and its performance. This study mainly focuses on the
financial obstacles faced by the MSMEs during their Life cycle. Extant literature review on
the financial obstacles and Life cycle of MSME supports the framework. The other key
constructs like Firm attributes and Financing decision and its impact on accessing the finance
by MSMEs was also supported by the literature review. Additionally, the conceptual
framework developed is expected to be useful to policymakers in designing a policy for
MSMEs, and also for the academicians in developing an agenda for future empirical research

Key Words: Credit appraisal, MSME financing, financial viability, Ratio analysis.
 CHAPTER – I
INTRODUCTION
Micro Small and Medium Enterprises (MSMEs) contribute a major part of the industrial
activity in all countries of the world and MSME plays a catalytic role in the development
process of most of the countries. The growth of this segment has a multiplier effect on the
economy in view of huge employment generating capacity. According to Eniola and
Ektebang (2014) Small and Medium Scale Enterprises are acknowledged to own a prodigious
potential for Sustainable Development. The surplus of the manpower from larger
corporations was ready to be reinstated back to the employment, mainly through the growth
of MSMEs. The MSME sector in India is unbelievably heterogeneous in terms of the size of
the enterprises, a variety of goods and services produced and levels of technology employed.
As per the Micro, Small and Medium Enterprises Development Act of 2006, enterprises with
the capital investment (plant, machinery, and equipment) levels within 10 crore INR (for
services worth 5 crore INR) qualify as MSMEs. The MSME sector contributes in a
significant way to the growth of the Indian economy with a huge network of over 32 million
units, creating employment of about 70 million, manufacturing over 6000 products,
contributing about 45% to manufacturing output and about 40% of exports, directly and
indirectly. It is an acknowledged fact that the MSME sector will facilitate to realize the target
of the projected National Manufacturing Policy of raising the share of the manufacturing
sector in GDP from 16 % at present to 25% by the end of 2022.To ensure that MSMEs can
grow in tandem with the economy in this age of increasing globalization, it is essential to
resolve the issues faced by most of them. Despite the sector’s strategic importance for
industrialization and employment generation, as well as the opportunities that the Indian
landscape presents, MSMEs in India face several challenges. Technological obsolescence and
funding issues have been related to the sector for a long time. Also, constraints such as high
cost of credit, low access to new technology, poor ability to dynamic trends, lack of access to
international markets, lack of skilled manpower, inadequate infrastructure facilities, as well
as power, water, roads, etc. further as regulatory problems associated with taxation, labour
laws, and environmental problems are hampering the expansion of Indian MSMEs. The main
objective of this paper is to propose a conceptual framework to assess empirically the
financial obstacles associated with different stages of MSME Life Cycle in accessing finance
and its impact on MSME Performance. The paper consists of four sections. Section 2 begins
with a brief description of MSME definitions and types. Section 3 provides the conceptual
framework of the study. Section 3 elucidates literature review of firm-level characteristics,
financial obstacles faced by MSME, different sources of finance available to MSME and their
financing decision, different life cycle stages of MSME sector, accessibility of finance by
MSME and their performance. Section 5 concludes the study.

Any business requires funds for its existence. Money acts as the fuel for running the
organization. Large businesses carry a successful financial record and get an easy access to
the funds whereas for small businesses, funding is the biggest challenge. Development of
MSME sector holds a major share in the sustainable development of the economy. Many of
the large enterprises start their businesses as small industries and they need financial
assistance to grow up. In such a scenario banks act as intermediaries in order to serve the
financial needs of the small scale industries. Banks have started focusing on this segment,
since it is found to be more profitable compared to other segments of business as they have
greater growth opportunity. However, because of the credit risk, banks are reluctant to
allocate funds to MSME sector. Functioning in the dynamic environment, even the
companies that might be performing very well can suddenly incur losses and their loans may
turn into non-performing assets (NPA) to the bank. To avoid such a scenario, banks must
have proper credit appraisal system. A check on the credit worthiness and repayment capacity
of the borrower must be done. For this purpose, it is essential to include project appraisal
while doing credit evaluation. The purpose of project appraisal is to establish whether a
project is worthwhile in the light of its costs, in terms of resource commitments and the
expected profits from the project. In this study we shall explore the financial viability of the
project for the credit appraisal.

India is leading among the countries developing at an extremely fast pace. The IFC report
further claims that that one million individuals join employment on monthly basis in India.
The fortune of majority among such individuals depends upon the employment potential of
this sector. During the previous 10 years, this sector has provided the relative high rate of
development in India and in during the previous 5 years this sector have full-fledged at a
constant degree of 4.5%. As per the survey conducted in 2014 regarding economy, this sector
comprises of about 48 million firms and they establish 90% of the network of Indian
businesses. The involvement of MSMEs is extremely momentous in enhancing the
production of the nation, creating engagement of additional employees, increasing the
revenue and reserves, directing the funds and consequently, in leading the country in the
direction of advancement and prosperity. Presently this segment backs 17% of the Gross
Domestic Product in Indian economy is prospective to upsurge its involvement by another
5% in the following 3 financial years, precisely to be contributing 22% to the GDP of the
country approximately. Furthermore, the economic growth of India is predicted to nurture at
8% per year by 2020 and is scheduled to turn out to be the second rank on the basis of big
economies of the world by the year ending 2050. In the development story of economy of
India, the Micro, Small and Medium Enterprises

(MSME) sector have become an indispensable part leading to the attained of prominent
status. Their contribution in the socio-economic growth of the nation is very well recognized
by the researchers all over the world. With a vast network of more than 63.3 million
enterprises across industries MSME’s provides employment to 111 million people, which in
relation to size succeeds agricultural sector. It comprises 20.37a% businesses controlled
through females and 51 a% rural businesses. This segment produces 45 a% of the yield of
Indian industry and 40 a % of exports, therefore leading to a contribution of 11.5% to the
Gross Domestic Product (GDP) of India, surpassing the overall GDP growth of 8%.
Providing a variety of more than 8000 products and numerous services, the MSME sector in
India is remarkably diverse in regards of size and levels of technology involved.
Nevertheless, the sector has the dexterity to nurture at a tremendous pace. To offer stimulus
to the manufacturing sector, the current National Manufacturing Policy envisioned rising the
portion of manufacturing sector in GDP from current 16% to 25% by the end of year 2022.
The aptitude of the Indian entrepreneur to revolutionize and to thrive for solutions despite
various challenges of logistic, society and resources all over the country, the sector have
constant growing frequency of more than 10 a % during the last decade. This segment has
also provided an extraordinary support to the conventionally resource deprived societies and
marketplaces to organize their services and products by banking upon conventional or
hereditary aids and usage of limited resources, predominantly in countryside and
technologically weak zones. Besides this element, 94% of MSMEs are not yet registered (IFC
2012). In 2010, the Prime Minister of India appointed a task force to consider various issues
raised by MSME. The key issues identified by the task force was unavailability of required
amounts of finance at the desired times, excess rates charged for the finance provided by the
institutions, high and rigid requirements for the security and negligible exposure for raising
the capital through the issue of the capital (PwC, 2013). Finance is for the business; what
blood is for the body. It takes money to make money. Entrepreneurs need finance for their
businesses for various purposes, varying from the need for survival during the tough times to
multiply the success in good times (Fxeigenbaum, 2019). Finance is a tonic which fosters the
creation of enterprises and permits them to yield benefit of prospects to nurture, engage
labour’s and assist other enterprises and government through the payment of taxes (Duff,
2019). Still, the sector faces the issue of inadequate access to proper finance at proper times
which leads to a threat for the growth, power to compete, and employment generation
capability (Petersen & Rajan, 2002; Srinivas, 2005; Beck & Demirguc-Kunt,2006;
Sheshasayee, 2006; Beck, 2007; Ayyagari et al., 2008; Dogra & Gupta, 2009; Thampy, 2010;
Allen et al., 2012; Zaidi, 2013). The availability of the external credit for the new and small
business is in extreme poor condition (Hashi and Krasniqi, 2011). As the contribution of
MSME’s is crucial of the growth of economy of the nation, fulfilling the credit requirement
of this sector is the essential requirement. Additionally, this sector constitutes a large
consumer segment for the banking sector which they are not in a position to lose to other
alternative. It is the call of time now, to restructure the MSME lending procedures to address
their needs. Major reason for inadequate finance faced by the MSME are requirements of
collaterals, credits at extensively higher rates, complex procedures adopted by the financial
institutions till date, lack of symmetrical information, absence of required papers to support
soundness and the absence of knowledge regarding the loans and other options (Denholm and
Silver, 2008, Hashi and Krasniqi, 2011, Ghandi and Amish, 2014). On raising the question
why, the banks and the other financial institutions are not in a position to make utilization of
the modernized technology to fulfil the need of credit of this sector, the answer lies in the
conventional processes followed by the banks and they are lagging far behind their
counterpart novel phase fin-tech start up and alternate borrowing options (Cull et al., 2006).
Raising funds is more tough for this segment as the segment is not capable of representing
itself as large business with long horizon missions and visions, expanded business lines, and
sturdy financial bases (Cressy and Olofsson, 1997, Serrasqueiro, 2011). All above factors
along with the lack of transparency concerning the creditworthiness, forces the businesses to
depend mainly upon the finance from the informal sources (Gbandi and Amissah, 2014).
Majority times, the financial institutions encounter a big challenge in considering the loans to
this sector as a lesser risky option for the reason of the presence of high defaulting rate due to
the absence of information on financial statements and other relevant documents (Hashi and
Krasniqi, 2011). MSMEs have to tackle time restraints, approach several banks and
institutions for credit facilities and wait for months to get application approved. All of these
add up to their pressure levels. Moreover, if these firms are somehow able to manage to get
the approval for required credit from the banks, still the whole operation-cycle, starting from
the application work for loan approval to disbursement of loan, is a bothersome and time
taking task. On time availability and proper availability of funds is extremely important for
this sector to avoid barriers in their growth route, specifically in the initial and growth phases.

Statement of the Problem

The financial institutions and banks have a vital role to play in the different facets of the
project undertaken by the borrower. Credit appraisal system deals with the evaluation of
credit requests made by the borrower. Proper analysis of credibility of the application is to be
carried out by the bank before sanctioning loan to the borrower. Banks are responsible for
appraising the soundness of the project that requires financial assistance. This research
mainly focuses on the credit appraisal processes followed by SBH for sanctioning loans to the
businesses belonging to MSME sector. The study is undertaken to understand the lending
criteria and appraisal techniques for financing a project. The effective management of credit
and its critical components leads to the success and profitability for the financial institutions.

Objectives of the Study

The overall objective of the study on MSMEs access to finance is to answer difficulties in
accessing finance. The specific objectives are to study, analyse and recommend on:

 The main objective of the study is to understand the credit evaluation and appraisal
system adopted by Indian overseas bank (IOB) for disbursing loans to MSME sector.
 To study the present method of credit appraisal system followed by IOB.
 To study the financial viability of the project

Need for the study

The gap between financing needs and access to credit and harnessing full potential for
MSMEs and financial constraints for these enterprises

 Difficulties faced by the supply side while catering to MSMEs financial needs and
demand side while asking for loans
 The most beneficial mechanisms in decreasing/ closing the gap
 The difficulties faced by women entrepreneurs and women led MSMEs to access
finance, availability of special provisions for women entrepreneurs and ways to
support them
 Use of FinTech and digital finance in increasing access to finance
Scope of the study

The objectives for the study of work includes the following key contents to guide the scope of
study.

 Financial access for MSMEs

 Policy and regulatory framework
 Lending infrastructure and support
 Dedicated banks and funds
 Equity and related support
 Financial Technology (FinTech)
 Business models and partnerships
 Demand-side support

Limitation of the study

 Micro, small and medium enterprises (MSMEs) are key players on agriculture and
other value chain finance as they are the important engines for innovation, economic
growth and job creation.
 But they often encounter difficulties in accessing finance.
 Governments and related agencies over the years have been setting up mechanisms to
facilitate the flow of finance.
 The result has been an increase in financial inclusion but the extent to which the
financing gap has been reduced is not well known.
 CHAPTER-II

INDUSTRY PROFLE
The banking industry includes systems of financial institutions called banks that help people
store and use their money. Banks offer clients the opportunity to open accounts for different
purposes, like saving or investing their money. The banking industry is also valuable to the
economy, as it provides resources for individuals, families and organizations to use for
transactions and investments. One way that the banking industry does this is by organizing
and distributing loans for applicants that they can use for purposes like purchasing property,
starting a business or financing a college education. The banking industry is in a much
healthier place now than it was after the financial crisis of 2008. Total global assets climbed
to $154,211 in 2022, up 3.79 percent YoY from 148,583 in 2021, according to The Banker’s
Top 1000 World Banks Ranking for 2022. Banking is defined as “Accepting of deposits of
money from public for the purpose of Lending or Investment, repayable on demand or
otherwise and withdrawable by cheque, draft, or otherwise” With so much money to manage,
major banks such as JPMorgan Chase, Bank of America, Wells Fargo, and more are releasing
new features to attract new customers and retain their existing ones. On top of that, startups
and neo banks with disruptive banking technologies are breaking into the scene, and
traditional financial institutions are either competing with them or merging with them to
improve their customer experience. The modern banking industry is a network of financial
institutions licensed by the state to supply banking services. The principal services offered
relate to storing, transferring, extending credit against, or managing the risks associated with
holding various forms of wealth. The precise bundle of financial services offered at any given
time has varied considerably across institutions, across time, and across jurisdictions,
evolving in step with changes in the regulation of the industry, the development of the
economy, and advances in information and communications technologies.

ORGIN OF BANKING INDUSTRY

The concept of banking may have begun in the times of ancient Assyria and Babylonia with
merchants offering loans of grain as collateral within a barter system.

Lenders in ancient Greece and during the Roman Empire added two important innovations:
they accepted deposits and changed money.
Archaeology from this period in Iran, ancient China and India also shows evidence of money
lending. Religious temples became the earliest banks because they were seen as safe places to
store money. Before long, temples got into the business of lending money at interest, much as
modern banks do. By the 18th century, many governments gave banks a free hand to operate,
based on the theories of economist Adam Smith Established in 1894, First Bank was founded
by Sir Alfred Jones, a shipping magnate from Liverpool, England. With its head office
originally in Liverpool, the Bank commenced business on a modest scale in Lagos, Nigeria
under the name, Bank of British West Africa (BBWA). First Bank of Nigeria Limited (“First
Bank”), established in 1894, is the premier Bank in West Africa, Nigeria's number one bank
brand and the leading financial services solutions provider in Nigeria. The Bank was founded
by Sir Alfred Jones, a shipping magnate from Liverpool, England. Bank of India was founded
on September 07, 1906 by a group of eminent businessmen from Mumbai. The bank was
under private ownership and control till July 1969 when it was nationalized along with 13
other banks. The Bank of Hindustan (1770-1832), set up by the agency house of Alexander
and Company in the year 1770 was the first bank established in India. Functions of banks
There are multiple functions of banks. The most important ones include:

 Safety deposits: banks are a relatively secure place to deposit money and safeguard assets
while earning some interest on these deposits.

 Interest on deposits: commercial banks pay interest on deposits that differ based on the
type of account. For current accounts, this rate may be significantly lower compared to
savings accounts. During inflation, interest rates are very important for maintaining the real
value of your savings. For example, a 4% inflation rate will decrease the value of you
savings. However, if banks are paying an interest rate of 6% then the real value of your
savings will increase.

 Loans: lending money is an important source of banks’ profit. Banks use the deposits to
lend money to worthy individuals and businesses for investment or expansion. For example,
if a bank pays 4% on deposits but lends money at 8%, the difference makes up the profit for
the bank. Banks need to keep sufficient liquidity to meet the demands of the customers to
withdraw their money.
 Credit creation: banks can regulate money supply or create credit with the deposits of the
customers by advancing them as loans while adhering to some regulatory requirements.

 Other services: banks also provide miscellaneous services to customers: ATMs, advice on
financial matters, international money transfers, and a range of other services, insurance and
safety lockers for keeping tangible assets such as jewellery, important documents, etc.

NEEDS OF BANKING INDUSTRY

I. To provide the security to the savings of customers.

ii. To control the supply of money and credit.

iii. To encourage public confidence in the working of the financial system, increase savings
speedily and efficiently.

iv. To avoid focus of financial powers in the hands of a few individuals and institutions.

v. To set equal norms and conditions (i.e. rate of interest, period of lending etc.) to all types
of customers.

TYPES OF BANKS

COMMERCIAL BANK

A commercial bank is an institution that offers financial services to individuals and

businesses in the general public. Commercial banks often have physical branches that employ
tellers and consultants who can help perform banking tasks for clients. This can include
conducting deposits or withdrawals, organizing loans and creating protection for personal
assets. A commercial bank can also assist business clients with securing business loans that
they can use to fund their operations.

INVESTMENT BANK

An investment bank primarily serves large organizations, corporations and institutions that
need help with investments. Investment banks can help with tasks like organizing and
confirming mergers and acquisitions, issuing securities and helping businesses finance
projects that require large amounts of funding. Many investment banks employ highly
experienced financial analysts who can provide guidance and recommendations about which
investments clients might benefit from making.

RETAIL BANKS

A retail bank functions similarly to a commercial bank by providing financial services to

clients in the general public. However, a retail bank typically only serves individual clients by
helping them with their banking needs and doesn't take on businesses as clients. Retail banks
can assist individual clients with taking care of their money, accessing credit options and
making secure deposits. A retail bank can also open new checking and savings accounts for
clients, facilitate their personal loans and set up mortgages that can help them purchase pieces
of property.

EXCHANGE BANKS

Exchange banks finance mostly the foreign trade of a country. Their main function is to
discount, accept and collect foreign bills of exchange. They also buy and sell foreign
currencies and help businessmen to convert their money into any foreign money they need.
Their share in the internal trade of a country is usually small. In addition, they carry on
ordinary banking business too.

COMMUNITY BANKS

Community banks usually exist to serve clients in the general area where they operate. This
means that most community banks only take on clients who come from their communities,
which often results in community banks being smaller than other types of banks. By focusing
their services on members of the community, community banks can personalize the services
they offer and usually establish lasting relationships with the clients they acquire.

SHADOW BANKS

The shadow banking system consists of financial groups that aren’t bound by the same strict
rules and regulations that other banks have to comply with. Much like the standard regulated
banks, shadow banks deal with credit and different kinds of assets. But they get their funding
by borrowing it, connecting with investors or making their own funds instead of using money
issued by the central bank. Money market funds and hedge funds are two kinds of shadow
banks. More recently, they’ve been a source of controversy for quite a few people. Many
folks blame the less-regulated shadow banking industry for playing a role in the mortgage
crisis leading up to the Great Recession.

UTILITY OF BANKS

An efficient banking system is absolutely necessary for a country, if it is to progress

economically. The services that an efficient banking system can render a country are indeed
very valuable. Undeveloped banking system is not only an index of economic backwardness
of a country, it is also an important cause of it. The banking system can be useful in the
following ways, in addition to what has been mentioned in the functions of banks.

CENTRAL BANK

The central bank is the primary source for liquid resources that all banks in a banking system
use. Most countries have some sort of central bank that supports the rest of the banking
operations in the nation. In the United States, the central bank is called the Federal Reserve.
The Federal Reserve has several functions, like purchasing and selling securities, determining
how much money a bank can issue in loans, setting interest rates and helping banks borrow
funds.

TYPES OF BANK ACCOUNTS

The major types of bank accounts are –

SAVINGS ACCOUNT

The facilities of savings account are only for savings purposes, and a bank is liable to pay
interest on the funds which are deposited in the account. In India, the rate of interest for
savings accounts ranges from anywhere between 4% to 7%.

CURRENT ACCOUNT

The current account mainly contains liquid deposits that are utilized for business purposes
and not for savings or investments. No interest is paid on such an amount, and there are no
maturity periods as well due to the continuous nature of the account.

FIXED DEPOSIT ACCOUNT

A particular sum of money is deposited in a fixed deposit account for a given duration. If a
deposit is taken out before the maturity date, penalties will be imposed. Fixed deposits enjoy
higher interest rates. The interest rate is subjected to variation from bank to bank and also
periodic revisions.

RECURRING DEPOSIT ACCOUNT

In the case of a recurring deposit account, a deposit will have to be made by the account
holder at regular intervals for a specified period. The bank will have to pay the relevant rate
of interest when the amount is repaid after the fixed period. Common banking industry terms
Checking account: This is an account that clients can use to withdraw money to make
purchases and deposit money into. Many people use a checking account to pay for bills and
services and to receive their pay checks, often through direct deposit. Savings account: A
savings account is an account that clients can use to store money for periods of time. Savings
accounts often accrue interest, which can help clients increase their wealth, and they typically
limit the number of withdrawals a client can make from them each month. Overdraft fee: An
overdraft fee occurs when a checking account does not have enough funds to cover a
transaction after it's confirmed.

This typically involves an account going into a negative balance, which the bank can cover
and then charge clients for at a later date. Compound interest: This is interest that a bank adds
to a deposit over time, which can help clients grow their funds. Compound interest often
applies to savings accounts. Annual percentage rate (APR): The annual percentage rate is the
amount of interest a client can earn by keeping a certain amount of money in an account over
the course of a year. However, APR does not include compound interest. Routing number: A
routing number is a nine-digit value that connects a client to their bank. Routing numbers are
most often used in transactions like money transfers, wires and payments that use a bank
account directly rather than a card or cash.

RECENT TRENDS IN BANKING INDUSTRY

 

1) ELECTRONIC PAYMENT SERVICES – E Cheques 

 
Now-a-days we are hearing about e-governance, e-mail, e-commerce, e-tail etc. In the same
manner, a new technology is being developed in US for introduction of e-cheque, which will
eventually replace the conventional paper cheque. India, as harbinger to the introduction of e-
cheque, the Negotiable Instruments Act has already been amended to include;
Truncated cheque and E-cheque instruments. 
 
2) REAL ESTATE GROSS SETTLEMENT (RTGS) 
 
Real Time Gross Settlement system, introduced in India since March 2004, is a system
through which electronics instructions can be given by banks to transfer funds from their
account to the account of another bank. The RTGS system is maintained and operated by the
RBI and provides a means of efficient and faster funds transfer among banks facilitating their
financial operations. As the name suggests, funds transfer between banks takes place on a
‘Real Time' basis. Therefore, money can reach the beneficiary instantaneously and the
beneficiary's bank has the responsibility to credit the beneficiary's account within two hours. 
 
3) ELECTRONIC FUND TRANSEFER (EFT) 
 
Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make payment to
another person/company etc. can approach his bank and make cash payment or give
instructions/authorization to transfer funds directly from his own account to the bank
account of the receiver/beneficiary. Complete details such as the receiver's name, bank
account number, account type (savings or current account), bank name, city, branch name etc.
should be furnished to the bank at the time of requesting for such transfers so that the amount
reaches the beneficiaries' account correctly and faster. RBI is the service provider of EFT. 
 
4)  ELECTRONIC CLEARING SERVICES (ECS) 

Electronic Clearing Service is a retail payment system that can be used to make bulk
payments/receipts of a similar nature especially where each individual payment is of a
repetitive nature and of relatively smaller amount. This facility is meant for companies and
government departments to make/receive large volumes of payments rather than for funds
transfers by banks.
 5) AUTOMATIC TELLOR MACHINE (ATM) 
             
Automatic Teller Machine is the most popular devise in India, which enables the customers
to withdraw their money 24 hours a day 7 days a week. It is a device that allows customer
who has an ATM card to perform routine banking transactions without interacting with a
human teller. In addition to cash withdrawal, ATMs can be used for payment of utility bills,
funds transfer between accounts, deposit of cheques and cash into accounts, balance enquiry
etc. 
 
6) POINT OF SALE TERMINAL
 
Point of Sale Terminal is a computer terminal that is linked online to the computerized
customer information files in a bank and magnetically encoded plastic transaction card
that identifies the customer to the computer.
During a transaction, the customer's account is debited and the retailer's account is credited
by the computer for the amount of purchase.
 

7) TELE BANKING
              
Tele Banking facilitates the customer to do entire non-cash related banking on
telephone. Under this devise Automatic Voice Recorder is used for simpler queries and
transactions. For complicated queries and transactions, manned phone terminals are used.
 
8) ELECTRONIC DATA INTERCHANGE (EDI) 
 
Electronic Data Interchange is the electronic exchange of business documents like
purchase order, invoices, shipping notices, receiving advices etc. in a standard, computer
processed, universally accepted format between trading partners. EDI can also be used to
transmit financial information and payments in electronic form. 
 
IMPLICATIONS 
 
 The banks were quickly responded to the changes in the industry; especially the new
generation banks. The continuance of the trend has re-defined and re-engineered the banking
operations as whole with more customization through leveraging technology. As technology
makes banking convenient, customers can access banking services and do banking
transactions any time and from any ware. The importance of physical branches is going
down.  
 
CHALLENGES FACED BY BANKS
 
The major challenges faced by banks today are as to how to cope with competitive
forces and strengthen their balance sheet. Today, banks are groaning with burden of NPA’s.
It is rightly felt that these contaminated debts, if not recovered, will eat into the very vitals of
the banks. Another major anxiety before the banking industry is the high transaction cost of
carrying Non-Performing Assets in their books.

The resolution of the NPA problem requires greater accountability on the part of the
corporate, greater disclosure in the case of defaults, an efficient credit information sharing
system and an appropriate legal framework pertaining to the banking system so that court
procedures can be streamlined and actual recoveries made within an acceptable time frame.
The banking industry cannot afford to sustain itself with such high levels of NPA’s thus,
“lend, but lent for a purpose and with a purpose ought to be the slogan for salvation.”
 
The Indian banks are subject to tremendous pressures to perform as otherwise their
very survival would be at stake. Information technology (IT) plays an important role in the
banking sector as it would not only ensure smooth passage of interrelated transactions over
the electric medium but will also facilitate complex financial product innovation and product
development. The application of IT and e-banking is becoming the order of the day with the
banking system heading towards virtual banking.
 
As an extreme case of e-banking World Wide Banking (WWB) on the pattern of
World Wide Web (WWW) can be visualized. That means all banks would be interlinked and
individual bank identity, as far as the customer is concerned, does not exist. There is no need
to have large number of physical bank branches, extension counters. There is no need of
person-to-person physical interaction or dealings. Customers would be able to do all their
banking operations sitting in their offices or homes and operating through internet. This
would be the case of banking reaching the customers.
 
Banking landscape is changing very fast. Many new players with different muscle
powers will enter the market. The Reserve Bank in its bid to move towards the best
international banking practices will further sharpen the prudential norms and strengthen its
supervisor mechanism. There will be more transparency and disclosures. In the days to come,
banks are expected to play a very useful role in the economic development and the emerging
market will provide ample business opportunities to harness. Human Resources Management
is assuming to be of greater importance. As banking in India will become more and more
knowledge supported, human capital will emerge as the finest assets of the banking system.
Ultimately banking is people and not just figures.

India's banking sector has made rapid strides in reforming and aligning itself to the
new competitive business environment. Indian banking industry is the midst of an IT
revolution. Technological infrastructure has become an indispensable part of the reforms
process in the banking system, with the gradual development of sophisticated instruments and
innovations in market practices. 
 
IT IN BANKING 
 
Indian banking industry, today is in the midst of an IT revolution. A combination of
regulatory and competitive reasons has led to increasing importance of total banking
automation in the Indian Banking Industry. Information Technology has basically been used
under two different avenues in Banking.

One is Communication and Connectivity and other is Business Process

Reengineering. Information technology enables sophisticated product development, better
market infrastructure, implementation of reliable techniques for control of risks and helps the
financial intermediaries to reach geographically distant and diversified markets. 
 
The bank which used the right technology to supply timely information will see
productivity increase and thereby gain a competitive edge. To compete in an economy which
is opening up, it is imperative for the Indian Banks to observe the latest technology and
modify it to suit their environment. Not only banks need greatly enhanced use of technology
to the customer friendly, efficient and competitive existing services and business, they also
need technology for providing newer products and newer forms of services in an increasingly
dynamic and globalize environment. Information technology offers a chance for banks to
build new systems that address a wide range of customer needs including many that may not
be imaginable today.
 
It is becoming increasingly imperative for banks to assess and ascertain the benefits of
technology implementation. The fruits of technology will certainly taste a lot sweeter when
the returns can be measured in absolute terms but it needs precautions and the safety nets. 

It has not been a smooth sailing for banks keen to jump onto the IT bandwagon. There
have been impediments in the path like the obduracy once shown by trade unions who felt
that IT could turn out to be a threat to secure employment. Further, the expansion of banks
into remote nooks and corners of the country, where logistics continues to be a handicap,
proved to be another stumbling stock. Another challenge the banks have had to face concerns
the inability of banks to retain the trained and talented personnel, especially those with a good
knowledge of IT. 

The increasing use of technology in banks has also brought up ‘security' concerns. To avoid
any pitfalls or mishaps on this account, banks ought to have in place a well-documented
security policy including network security and internal security. The passing of the
Information Technology Act has come as a boon to the banking sector, and banks should now
ensure to abide strictly by its covenants. An effort should also be made to cover e-business in
the country's consumer laws. 
Some are investing in it to drive the business growth, while others are having no
option but to invest, to stay in business. The choice of right channel, justification of IT
investment on ROI, e-governance, customer relationship management, security concerns,
technological obsolescence, mergers and acquisitions, penetration of IT in rural areas, and
outsourcing of IT operations are the major challenges and issues in the use of IT in banking
operations. The main challenge, however, remains to motivate the customers to increasingly
make use of IT while transacting with banks. For small banks, heavy investment requirement
is the compressing need in addition to their capital requirements. The coming years will see
even more investment in banking technology, but reaping ROI will call for more strategic
thinking. 
 The banks may have to reorient their resources in the form of reorganized branch
networks, reduced manpower, dramatic reduction in establishment cost, honing the skills of
the staff, and innovative ways of attracting talented managerial pool. The Government of
India and the Reserve Bank of India (RBI) on their part would strengthen the existing norms
in terms of governing and directing the functioning of these banks. Banks needs to strengthen
their audit function. They would be evaluated based on their performance in the market place.
It is in this context that we have invited the chief executive officers of Indian banks to
respond to the issues mentioned earlier
 

BANKING REGULATIONS

 The elimination of the Office of Thrift Supervision

 The creation of the Consumer Financial Protection Bureau (CFPB) to protect
consumers against abuses and unfair practices tied financial services and products
such as credit cards and mortgages
 The reassignment of responsibilities for agencies such as the Federal Deposit
Insurance Corporation
 The creation of the Financial Stability Oversight Council and the Office of Financial
Research to analyze potential threats to U.S. financial stability
 The expansion of the Federal Reserve’s powers to regulate particular institutions

BANKING INDUSTRY ANALYSIS

With so many different facets of the banking industry undergoing change, it’s crucial for
those connected to the banking industry to be informed and stay ahead. That’s why Insider
Intelligence covers it all with our Banking vertical to keep you up to date on the latest
banking trends and shakeups.
 CHAPTER-III
COMPANY PROFILE

3.1 INDIAN OVERSEAS BANK:

Indian Overseas Bank (IOB; established 1937) is a major bank based in Chennai (Madras),
with 1950 domestic branches and six branches overseas. Indian Overseas Bank has an ISO
certified in-house Information Technology department, which has developed the software
that 900 branches use to provide online banking to customers; the bank has a target to expand
online banking to 1200 branches by the end of financial year 2007-08. IOB also has a
network of about 600 ATMs all over India and IOB's International VISA Debit Card is
accepted at all ATMs belonging to the Cash Tree and NFS networks. IOB offers internet
Banking (E-See Banking) and is one of the banks that the Govt. of India has approved for
online payment of taxes. ™

HISTORY:

• 1937: Shri.M.Ct.M. Chidambaram Chettyar establishes the Indian Overseas Bank (IOB) to
encourage overseas banking and foreign exchange operations. IOB started up simultaneously
at three branches, one each in Karaikudi, Madras (Chennai) and Rangoon (Yangon). It then
quickly opened a branch in Penang and another in Singapore. The bank served the
Nattukottai Chettiars, who were a mercantile class that at the time had spread from Chettinad
in Tamil Nadu state to Ceylon (Sri Lanka), Burma (Myanmar), Malaya, Singapore, Java,
Sumatra, and Saigon. As a result, from the beginning IOB specialized in foreign exchange
and overseas banking (see below).

• 1960s: The banking sector in India was consolidating by the merger of weak private sector
banks with the stronger ones; IOB absorbed five banks, including Kulitali Bank (est. 1933).

• 1969: The Government of India nationalized IOB. At one point, probably before
nationalization, IOB had twenty of its eighty branches located overseas. After nationalization
it, like all the nationalized banks, turned inward, emphasizing the opening of branches in
rural India.

• 1988-89: IOB acquired Bank of Tamil Nadu in a rescue.

• 2000: IOB engaged in an initial public offering (IPO) that brought the government's share
in the bank's equity down to 75%.

• 2009: IOB took over Shree Suvarna Sahakari Bank, which was founded in 1969 and had its
head office in Pune. In 2001 it acquired the Mumbai-based Adarsha Janata Sahakari Bank,
which gave it a branch in Mumbai. Shree Suvarna Sahakari Bank has been in administration
since 2006. It has nine branches in Pune, two in Mumbai and one in Shirpur. The total
employee strength is estimated to be little over 100. ™

INTERNATIONAL EXPANSION:

• 1937-38: As mentioned above, IOB was international from its inception with branches in
Rangoon, Penang, and Singapore.

• 1941: IOB opened a branch in Malaya that presumably closed almost immediately because
of the war.

• 1946: IOB opened a branch in Ceylon.

• 1947: IOB opened a branch in Bangkok and re-opened others.

• 1948: United Commercial Bank (see below) opened a branch in Malaya.

• 1949: IOB opened a branch in Bangkok.

• 1963: The Burmese government nationalized IOB’s branch in Rangoon.

• 1973: IOB, Indian Bank and United Commercial Bank established United Asian Bank
Berhad in Malaysia. (Indian Bank had been operating in Malaysia since 1941 and United
Commercial Bank Limited had been operating there since 1948.) The banks set up United
Asian to comply with the Banking Law in Malaysia, which prohibited foreign government
banks from operating in the country. Also, IOB and six Indian private banks established
Bharat Overseas Bank as a Chennai based private bank to take over IOB's Bangkok branch.

• 1977: IOB opened a branch in Seoul.

• 1979: IOB opened a Foreign Currency Banking Unit in Colombo, Sri Lanka.

• 1992: Bank of Commerce (BOC), a Malaysian bank, acquired United Asian Bank (UAB).
3.2 XYZ PVT LTD: It is engaged in manufacturing of concrete mixing equipment’s such as
batching plants, transit mixers, concrete pumps, line pumps etc., relating to construction
industry used for preparation, transportation and laying of concrete, shot creating machine
used for concreting tunnels and recycling plants for conversion of waste concrete. The
infrastructure created by the company is considered one of the best of its kind keeping in
view the objective of achieving substantial level of localization in the manufacturing activity.
The company has branches across major cities and has stationed its resident engineers in
strategic locations. Almost all major construction companies are the regular customers of the
company. They are the leaders in ready mix concrete machinery with almost monopoly in the
line of their activity. With many high rise buildings and infrastructure projects taken up in
various parts of the country, there will be good demand for the company’s machinery. Since
the beginning, the company has been availing credit limits for both term funding and WC
purposes under multiple banking arrangement. The long term requirement of the bank was
met by the bank along with another reputed bank. During the year 2009, the company issued
non- convertible debenture of Rs.55 Crores for a period of 7 years, subscribed by the top
banks.

These debentures are secured by first charge on the FA of the company and as a term
lender; the bank gave NOC to the debenture trustees in this regard. Now the term loan availed
from IOB stand fully closed. The company has been enjoying credit facilities with the bank
for the past ten years. Besides IOB, the company has availed the facility from some of the
other top financial

CHAPTER-IV
REVIEW OF LITERATURE
Literature review helps to identify the similar works in particular area of study. It helps to
pass up the reinvention of discovered research. This survey helps to identify the gap in the
selected area of study.

MSME sector plays a significant role in the Indian economy over the past few decades as it
provides large employment opportunities at low capital cost. MSME sector is highly
heterogeneous in nature with more than 6000 varied products and services contributing to
45% of the total manufacturing output. In the forthcoming years, MSMEs can be a major
partner in the comprehensive growth of the economy (MSME, 2016). However, Micro
enterprises have to face arduous situations in their development process especially in
financing aspects. (Chaoa & Zongfanga, 2013) Though banks have understood that MSME is
a thrust area for credit expansion, credit risk is one of the main barricades to the banks. To
overcome the current situation most of the banks have adopted the guarantee loan system to
MSME sector (Chaoa & Zongfanga, 2013). The following are some of the related studies that
agree to the need for the credit appraisal system for MSME sector in banks.

Saravanan (2013) MSME financing is all about allocating funds to the Micro, Small and
Medium enterprises. The objectives of this study are to know the lending schemes for MSME
and to check the awareness of the customers regarding new schemes introduced. In this study
analysis is done on the borrower perceptions and awareness of the schemes and products of
SME. Most common obstacles faced by the MSME SECTOR are fluctuations in interest
rates. Reduction in the interest rates helps SMEs to opt for the bank loans. Another important
finding is through private banks charge high interest and service charges SME’s prefer them
because of their quality in the services and schemes can widen their SME department with
more man power and new credit products which increases the quality of services and can
easily address customer problems.

Srinivas (2014) in his article mentions that MSME sector improvement is noteworthy in
industrial sector as its contribution to economy is increasing. The objective of this study is to
have a big idea of MSME sector and also financial cooperation of the banks in MSME sector.
This study has followed mixed methodology. The major finding of this study is that banks
provide better services to MSME sector. In spite of many government policies and schemes
banks’ traditional method of lending is considered as safe for MSME.

Dr. Ram Jass (2015) in his article specifies that major part of the income for banks is through
lending loans and earning interests from them. This involves the credit risk, non-repayment
of the loans given to the borrowers due to many reasons like insolvency, unable to meet their
needs etc. Many banks have adopted Credit Risk Assessment Model which helps in assessing
the risk of loan repayment. This study has followed case study analysis and measured the
financial risk. One of the major findings of the study is that CGTMSE scheme has been
availed on primary securities. Interest rates are charged based on the investor grade of the
firm. For, more qualitative services banks are in a need to improvise their Credit Rating
Assessment Model.

Pallab & Dr. Munish (2016) in his article mentions that MSME is the backbone of the Indian
economy. The research focuses on the Non-Performing Assets of the bank and its impact in
the long run on bank’s financial position. Any overdue in the payment of principle and
interest amount is considered as a Non Performing Assets. The study is done to elucidate the
risk levels from current NPA’S of banks. Some of the macro factors like changes in the
market conditions and government policies are also reason for non-payment of loans. In order
to avoid NPAs banks should follow pertinent credit appraisal system.

Nancy Arora (2017) in her article explains that credit appraisal means valuation of credit
done before it is sanctioned to the borrower. The study is done to understand the four
parameters like finance, business, industrial and management in CRA model. CRA model is
used to assess the borrowers in simpler and regular models. The major finding of the study is
that the bank should assess the commercial and financial viability of the project before
sanctioning the loan.

Dr. Ram Jass (2018) in his article specifies that SME contribution to the national output is
increasing day by day. It contributes to 8% of Gross Domestic Product (GDP). This study
also finds out the major issues between the borrower and the lender, the bank. The study has
followed the mixed methodology. Major findings of his study are that MSMEs prefer bank
credit in the case of high financial needs. SME loan hub and SME loan factory can be
introduced in banks for further development in SME credit facilities.

Akila & Padmavathy (2019) in her article specifies that banks are extending their credit for varied
purposes. The study is done to know about the credit appraisal procedure of a bank in Chennai. Credit
appraisal system is to appraise the credit facilities to the customers and to ascertain the risk-return.
This study helped in identifying the causes for increasing the non- performing assets in the bank.
The study is done to find the institutional structure of credit delivery for MSME sector.
Significant finding of the study is that banks can follow an abridged application form for all
the credit customers which increase the speed of credit proposals. Credit appraisal system is
different for different banks. Instead they can follow a common simple procedure which is
understandable for all credit customers.

T Srinivas (2020) in his study focused on the financial cooperation between banks and
MSME sector. An important finding of this study is that banks provide better services to
MSME sector. In spite of many government policies and schemes bank traditional method of
lending is considered as safe for MSME.
 Research Methodology
Working Hypotheses
The hypothesis is a predictive statement that relates two variables. A null hypothesis will be used in
our study.

Hypotheses 1: Technological Innovation & MSMEs performance

H0: There is no impact of Technological Innovations on the performance of MSMEs.
Ha: There is an impact of Technological Innovations on the performance of MSMEs.
Hypotheses 2: Product Innovation & MSMEs performance
H0: There is no impact of Product Innovations on the performance of MSMEs.
Ha: There is an impact of Product Innovations on the performance of MSMEs.
Hypotheses 3: Process Innovation & MSMEs performance
H0: There is no impact of Process Innovations on the performance of MSMEs.
Ha: There is an impact of Process Innovations on the performance of MSMEs.
Hypotheses 4: System Innovation & MSMEs performance
H0: There is no impact of System Innovations on the performance of MSMEs.
Ha: There is an impact of System Innovations on the performance of MSMEs.

Approach
In our paper, a sample is studied to determine its characteristics and inferences are drawn on
the population characteristics. This has got an inbuilt qualitative approach wherein subjective
assessment of attitudes, opinions and behaviour with respect to innovation and MSMEs
performance are converted to quantitative data.

Findings
Reliability and Validity of the Measuring Tool Reliability:
A pilot study was carried out by collecting data points from 15 firms under MSME
manufacturing sector. To assess the reliability of the measuring instrument, Cronbach alpha
values are determined using SPSS (Statistical package for social sciences). The obtained
values of Cronbach alpha are tabulated in the table (2) given below.

Cronbach alpha values of innovation variables:

X1: Technological Innovation
X2: Product Innovation
X3: Process Innovation
X4: System Innovation

Cronbach alpha values of all the innovation variables

Innovation Variables No. of Items Cronbach Alpha
X1 10 0.859
X2 10 0.873
X3 10 0.910
X4 10 0.770

From the above table it can be seen that the measurement scale is highly reliable indicating
even the lowest value of Cronbach alpha being 0.770. For ensuring the validity further data
reduction will be carried out by confirmatory factor analysis (CFA). Overall Cronbach alpha
value for all items together is 0.853

Validity – Multitrait Multimethod Matrix

In the current research, the data collected from the pilot study was subjected for validity
analysis and the obtained result is mentioned in the table (3).

Average correlation between scores of innovation constructs

Pilot Study (15 data points)
X1 X2 X3 X4
X1 1 0.22 0.217 0.141
X2 0.22 1 0.160 0.32
X3 0.217 0.160 1 0.231
X4 0.141 0.327 0.231 1

Finally, when all these are put together, both convergent and discriminant validity could be
addressed simultaneously. Here, the four constructs of innovation are measured with different
items. In table, the highlighted correlations are within-construct ones. They are a reflection of
convergent validity and are the maximum compared to others. The non-highlighted
correlations are cross-construct, reflect discriminant validity, and are uniformly lower than
the convergent coefficients. This establishes convergent and discriminant validity. Hence, it
can be seen that the validity of the measuring instrument is ensured since the average inter
correlation between the scores of the same construct is the largest correlation in the matrix.
 MSME SECTOR

Micro, Small and Medium enterprises (MSMEs) have always been crucial for the economical
evolution of the whole globe. As much as 95% enterprise in this world are MSMEs –
described as enterprises employing <250 persons in their Labour force and having yearly
turnover of <€ 50 million (OECD, 2004) –that is responsible for providing private
employment of 60% (Ayyagari et. al., 2011). MSME’S portrays a pivotal role in any nation’s
economic and socio-economic growth by generating enormous jobs, making additions to the
GDP, reducing poverty, fostering innovation and providing the capability to cater to the
needs and development of industry (Cook, 2001; Demirgiic-Kunt, 2004; Boocock & Shariff,
2005; Krasniqi 2007; Kulkarni, 2008; Burgstaller & Wagner, 2015). The sector comprises
more than 80 % of the total industrial firms, provides employment to approximately 1.17
billion of labors world-wide, and are contributing as much as 40 % in the total manufacturing
production and exports, (IFC report, 2016). They are the reason for the spur in the creation of
new employment opportunities for the masses, providing stimulus to the growth rate of the
GDP of the nation and provides the material to the bigger firms (Mahajan and Sidhu, 2019).
They are the horse for the chariot of the growth of the societal and economic development of
the economy. This sector has proved to portray a lead role in providing countless job
opportunity, stimulus to the GDP growth, decreasing poverty, fostering innovation and
enabling the economy to cater the needs of whole industry (Cook, 2001; Demirgiic-Kunt,
2004; Boocock & Shariff, 2005; Krasniqi 2007; Kulkarni, 2008; Burgstaller & Wagner,
2015). The statistical data provides strong reasons to concentrate on the critical importance of
this sector and the reasons to make efforts to provide comprehensive economic growth. This
sector has been considered to have the capability to drive wage employment and
entrepreneurship. Across the globe, the government have paid due attention to MSME sector
due to its significant addition to social and employment equity (Boocock & Shariff, 2005;
Dalberg, 2011). MSMEs have been treated as spine for countries which are still thriving for
the development as the contribute towards the economical as well as social parameters. This
segment, though being denoted as micro and small, have been representing a substantial
fraction of the economy of the globe (Morris & Brennan, 2000). This segment is a chief cause
of employment generation, income increase and technology development (Kotey & Meredith,
1999). MSMEs possess immense power of growing from a struggling start up to a full-
fledged enterprise. There has been no distinction in the contribution to the growth and
development of the developed (i.e. UK, USA and Japan) and developing (i.e. India, China)
countries due to MSME’s. They are driving factors of the growth-story and evolution of a
nation (Ayyagari et al., 2011; Beck et al., 2005). Financial requirements of Micro, Small and
Medium Enterprises is a matter of anxiety equally to the proprietors and governments as they
aid to augment market’s evolution and progress. Subsequently, financing of this significant
sector is budding as a topic of interest among the various researchers all over the world.
Exemplary work done on this topic that already exists contains the following: “Michaleas et
al. (1998) in the United Kingdom, Hussain et al. (2006) and He and Baker (2007) in the
United States, Wu et al. (2008) in China, Haileselasie Gebru in Tigray (2009), Mac an Bhaird
and Lucey (2011) in Ireland, Demirbas et al. (2011) in Turkey, Lappalainen and Niskanen
(2012) in Finland, Klonowoski (2012) in Poland, Borgia and Newman (2012) in China,
Daskalakis et al. (2013) in Greece, and Mohamed Zabri (2013) in Malaysia”.Though there is
an existence of large respiratory of the work existing, but the exemplary work done in India is
very scarce (Dogra & Gupta, 2009; Singh et al., 2010). Thus, survey research is evolving in
the field of SME financing. A detailed scrutiny of the existing research conducted on this
topic discloses the fact that just a small number of researches are present about the capital
composition of MSMEs when equated with their larger counterparts. Cook (2001) pointed
out that “The United States and the United Kingdom are the major contributors to the studies
on finance in SMEs”. Thus, it gives a clear implication that the major researches done till
date have been undertaken in already developed economies.

MSME SECTOR IN INDIA

India is leading among the countries developing at an extremely fast pace. The IFC report
further claims that that one million individuals join employment on monthly basis in India.
The fortune of majority among such individuals depends upon the employment potential of
this sector. During the previous 10 years, this sector has provided the relative high rate of
development in India and in during the previous 5 years this sector have full-fledged at a
constant degree of 4.5%. As per the survey conducted in 2014 regarding economy, this sector
comprises of about 48 million firms and they establish 90% of the network of Indian
businesses. The involvement of MSMEs is extremely momentous in enhancing the
production of the nation, creating engagement of additional employees, increasing the
revenue and reserves, directing the funds and consequently, in leading the country in the
direction of advancement and prosperity. Presently this segment backs 17% of the Gross
Domestic Product in Indian economy is prospective to upsurge its involvement by another
5% in the following 3 financial years, precisely to be contributing 22% to the GDP of the
country approximately. Furthermore, the economic growth of India is predicted to nurture at
8% per year by 2020 and is scheduled to turn out to be the second rank on the basis of big
economies of the world by the year ending 2050. In the development story of economy of
India, the Micro, Small and Medium Enterprises (MSME) sector have become an
indispensable part leading to the attained of prominent status. Their contribution in the socio-
economic growth of the nation is very well recognized by the researchers all over the world.
With a vast network of more than 63.3 million enterprises across industries MSME’s
provides employment to 111 million people, which in relation to size succeeds agricultural
sector. It comprises 20.37a% businesses controlled through females and 51 a% rural
businesses. This segment produces 45 a% of the yield of Indian industry and 40 a % of
exports, therefore leading to a contribution of 11.5% to the Gross Domestic Product (GDP) of
India, surpassing the overall GDP growth of 8%. Providing a variety of more than 8000
products and numerous services, the MSME sector in India is remarkably diverse in regards
of size and levels of technology involved. Nevertheless, the sector has the dexterity to nurture
at a tremendous pace. To offer stimulus to the manufacturing sector, the current National
Manufacturing Policy envisioned rising the portion of manufacturing sector in GDP from
current 16% to 25% by the end of year 2022. The aptitude of the Indian entrepreneur to
revolutionize and to thrive for solutions despite various challenges of logistic, society and
resources all over the country, the sector have constant growing frequency of more than 10 a
% during the last decade. This segment has also provided an extraordinary support to the
conventionally resource deprived societies and marketplaces to organize their services and
products by banking upon conventional or hereditary aids and usage of limited resources,
predominantly in countryside

and technologically weak zones. Besides this element, 94% of MSMEs are not yet registered
(IFC 2012). In 2010, the Prime Minister of India appointed a task force to consider various
issues raised by MSME. The key issues identified by the task force was unavailability of
required amounts of finance at the desired times, excess rates charged for the finance
provided by the institutions, high and rigid requirements for the security and negligible
exposure for raising the capital through the issue of the capital (PwC, 2013). Finance is for
the business; what blood is for the body. It takes money to make money. Entrepreneurs need
finance for their businesses for various purposes, varying from the need for survival during
the tough times to multiply the success in good times (Fxeigenbaum, 2019). Finance is a
tonic which fosters the creation of enterprises and permits them to yield benefit of prospects
to nurture, engage labours and assist other enterprises and government through the payment
of taxes (Duff, 2019). Still, the sector faces the issue of inadequate access to proper finance at
proper times which leads to a threat for the growth, power to compete, and employment
generation capability (Petersen & Rajan, 2002; Srinivas, 2005; Beck & Demirguc-Kunt,2006;
Sheshasayee,2006; Beck, 2007; Ayyagari et al., 2008; Dogra & Gupta, 2009; Thampy, 2010;
Allen et al., 2012; Zaidi,2013). The availability of the external credit for the new and small
business is in extreme poor condition (Hashi and Krasniqi, 2011). As the contribution of
MSME’s is crucial of the growth of economy of the nation, fulfilling the credit requirement
of this sector is the essential requirement. Additionally, this sector constitutes a large
consumer segment for the banking sector which they are not in a position to lose to other
alternative. It is the call of time now, to restructure the MSME lending procedures to address
their needs. Major reason for inadequate finance faced by the MSME are requirements of
collaterals, credits at extensively higher rates, complex procedures adopted by the financial
institutions till date, lack of symmetrical information, absence of required papers to support
soundness and the absence of knowledge regarding the loans and other options (Vegholm and
Silver, 2008, Hashi and Krasniqi, 2011, Gbandi and Amissah, 2014). On raising the question
why, the banks and the other financial institutions are not in a position to make utilization of
the modernized technology to fulfil the need of credit of this sector, the answer lies in the
conventional processes followed by the banks and they are lagging far behind their
counterpart novel phase fin-tech start up and alternate borrowing options (Cull et al., 2006).
Raising funds is more tough for this segment as the segment is not capable of representing
itself as large business with long horizon missions and visions, expanded business lines, and
sturdy financial bases (Cressy and Olofsson,1997, Serrasqueiro, 2011). All above factors
along with the lack of transparency concerning the creditworthiness, forces the businesses to
depend mainly upon the finance from the informal sources(Gbandi and Amissah, 2014).
Majority times, the financial institutions encounter a big challenge in considering the loans to
this sector as a lesser risky option for the reason of the presence of high defaulting rate due to
the absence of information on financial statements and other relevant documents (Hashi and
Krasniqi, 2011). MSMEs have to tackle time restraints, approach several banks and
institutions for credit facilities and wait for months to get application approved. All of these
add up to their pressure levels. Moreover, if these firms are somehow able to manage to get
the approval for required credit from the banks, still the whole operation-cycle, starting from
the application work for loan approval to disbursement of loan,is a bothersome and time
taking task. On time availability and proper availability of funds is extremely important for
this sector to avoid barriers in their growth route, specifically in the initial and growth phases.

DEFINING THE SECTOR

In the absence of the proper definition, it is hideous task to understand the sole purpose of the
research. It becomes enormously difficult to interpret that what is the observer trying to
observe. Good and proper definitions are fundamental block for the researchers to have an
insight of how MSME’s behave (Mazzarol & Reboud, 2020). The main challenge to study
MSME’s on global level is to get a precise description of the term MSME (Headd & Saade,
2008). Around the globe, various countries have opted for various description of the term and
are implementing different conditions (Kushnir et al., 2010). At present there is no single
unanimously recognized description of the term (Storey, 1994; Tonge, 2001). During the
review of 217 articles published in peer reviewed journals from small business and
entrepreneurship journals, consisting of numerous high ranked academic journals, done by
Rebound et. al (2014), they found that 31a% of the papers provided no definition of this
sector and there was no steady style to the define this sector (Reboud, et. al., 2014). Precise
description will not just support the research, but it will a also have substantial effect on the
policies made by the respective governments, predominantly in regard with regulation,
taxations and saupporat (Keefe, et. al. 2005). Conditions used to categorize an enterprise as
an MSME is based upon the number of employees, sales, assets, type of location, and
monetary requirement (IFC Report, 2014). A study on defining MSME’s across 75 different
countries in Asia-Pacific region discussed that there were as many as 60 different definitions
(Zhang, 2013). 267 definitions were found to be used by different institutions in 155
economies, as per the IFC (2014) report. The most extensively used criteria for determining
the MSME is based upon the number of employees (92% of analyzed definitions). The next
most extensively used definition was on the basis of sales and assets (49% and 36%,
respectively). Only 11% used of alternative criteria such as amount of loan, formality,
experience, technology, manufacturing area, and primary investment amount, among others.
The similar findings were discussed in the reports of the research done by APEC in 2002 and
OECD in 2004.

Distribution of number of countries criteria

The Table 1 below shows the divergence in the definition of the 15 selected countries. No
two definitions have been found to be same. Now you can well image the level of difference
in the criteria’s used and the pathetic work that the researcher might have to undertake to
compare the MSME’s of two or more economies, only because of the absence of a universal
definition.

Table 1: Official definitions of SMEs in selected countries

Three criteria are used by the International Finance Corporation (IFC- World Bank Group) to
classify MSME number of employees, total assets, and total annual sales. An enterprise must
fulfil the criteria of number of employees and at least one of the remaining criteria to be
considered as a micro, small, or medium enterprise.

Table 2: IFC MSME Definition

Enterprise Employee Size Assets Annual Sales

Size
Micro Less than 10 Less than 1 million USD Less than 1 million USD
Small 10-50 1 – 3 million USD 1 – 3 million USD
Medium 50-300 3 – 15 million USD 3 – 15 million USD

Normally the researchers and the academicians have relied on the official classification
systems used by governments, to classify MSMEs when doing the research (Al-Qrim, 2005;
Audretsch, 2002). The criteria used by the government of India to classify the MSMEs is
different from the definition followed by the World Bank. Till July 01, 2020 it was based on
the investment in plant and machinery and the type of the organization i.e. manufacturing or
service. This definition was established in the Micro, Small and Medium Enterprise
Development Act (MSMED Act) of 2006, to enable identification and facilitate development
of MSMEs. Before this act, MSME’s were collectively termed as Small-Scale Industries
(SSIs) under the Industrial Development and Regulation (IDR) Act, 1951.

Table 3: MSMED Act Old Definition of MSMEs

Enterprise Size Manufacturing Service

Investment in Plant & Machinery Equipment
Micro Up to ₹ 25,00,000 Up to ₹ 10,00,000
Small ₹ 25,00,000 to ₹ 5,00,00,000 ₹ 10,00,000 to ₹ 2,00,00,000
Medium ₹ 5,00,00,000 to ₹ 10,00,00,000 ₹ 2,00,00,000 to ₹ 5,00,00,000

On June 01, 2020 the government officially revised the definition of micro, small, and
medium enterprises to grant a unified description for all things related to taxation,
investment, and more. The changed definition was implemented via an amendment to refine
the business scenario for Indian MSME’s.The Union Cabinet approved the amendment to
change the criteria to classify MSMEs from “investment in plant and machinery” alone to
“composite of investment and annual turnover.”

Table 4: MSMED Act New Definition of MSMEs

Enterprise Investment in Annual turnover

size Plant and Machinery or Equipment

Micro Up to ₹ 1,00,00,000 Up to ₹ 5,00,00,000

Small ₹ 1,00,00,000 to ₹ 10,00,00,000 ₹ 5,00,00,000 to ₹ 50,00,00,000

Medium ₹ 10,00,00,000 to ₹ 50,00,00,000 ₹ 50,00,00,000 to ₹

250,00,00,000

Life Cycle of MSME

Churchill and Lewis (1983) developed a framework for identifying and studying the issues
that occur in small businesses over time and particularly through growth. They observed that
businesses of widely varying industries and sizes nevertheless experienced similar problems
and challenges at similar stages of development. Their model identified these key issues at
five stages of growth, beginning with the struggle for Existence, followed by Survival and
Success. Success, the stage at which the business is both profitable and stable, could lead to
either disengagement by the owner or to Take-off, which if successful, could lead to
Resource Maturity.

Kazanjian (1988) derived four distinct stages of growth from two case studies and argued that
as a firm grows, its product and market changes lead to corresponding changes in problem
management. He surveyed 105 high-technology firms, which self-categorized into one of the
four stages of business growth – Conception and Development, Commercialization, Growth,
and Stability – and identified major obstacles at each stage using ANOVA. Fluck et al.
(1998) find that the contribution of the firm owner increases initially and then decreases in
firms over 12 years old. The initial increase in the use of insider financing is explained by
firm owners employing retained earnings for investment because of potential difficulties in
raising external finance.

Firms often depend on informal sources of funding in the very early stages of their
development. External sources, however, become more important as firms start expanding,
and their availability can determine decisively the growth path of MSMEs.MSMEs need to
have access to appropriate finances throughout their life-cycle, from early-stage through seed
and venture capital, credit guarantees to progress in their growth. But only a very limited
number of innovative MSMEs with clear growth potential can access finance. Therefore, to
address this problem, the conceptual model developed in this study includes the impact of the
life cycle of MSMEs in accessing finance.

MSME Performance
Accessibility to finance is a need for all businesses. Lack of access to finance has been
identified as one of the major constraints to small business growth, (Carpenter et al, 2002).
There is a strong relationship between access to finance and the performance of MSMEs. The
inaccessibility of credit and capital is a major impediment to the development of MSMEs,
particularly because it prevents them from acquiring the new technology that would make
them more productive and more competitive. The literature review on Finance and
accounting evaluates MSME performance by applying financial ratios such as profitability
ratios, debt ratios, market ratios, and liquidity ratios, yet these are just the last performance
indicators, as they are in fact, influenced by how firms perform in terms of their efficiency
and productivity, and how inputs and product prices change (Amornkitvikai & Harvie, 2016).
MSMEs’ performance can also be measured using objective, subjective and operational
measures (Harash, Suhail, & Jabbar, 2014).
Vanacker, Collewaert, and Zahra (2016) relying on longitudinal data from 1,62,633 European
entities across 26 countries found evidence that slack financial resources (more than the
required minimum level for operational purposes) enhanced the entity’s performance level.
However, excess cash resources – which are usually viewed as easy to redeploy - benefit firm
performance, especially when firms operate in countries with weaker creditor rights.
Profitability is considered an important indicator of the performance of MSMEs who struggle
for survival, on top of proving their creditworthiness and solvability to their financiers.
Profitability is an excess of revenues over associated expenses for activity over a period,
which is seen by the ratios like gross profit margin and pre-tax margin (Odongo, 2014).
Though profitability ratios are important in measuring the performance of MSMEs, their
measurements are difficult in most MSMEs because of the lack of proper documentation
(Turyahebwa et al, 2013). Most of the MSMEs struggling to cover their debt cost which
survives on loaned capital. The firms are using their operating capital to cover their debt cost
which in turn decreases their level of profitability (Popa & Ciobanu, 2014). Profitability
measures help in assessing the success of a business undertaking. An undertaking that is not
generating profits/revenue cannot survive (Bitila, 2014).

The firm is said to be much profitable, it can pay back the owners in the form of return on
the investment made. The solvability ratio measures the creditworthiness of the firm and
determines the constraints on cash management and hence decrease profits (Popa & Ciobanu,
2014). The solvency position of the company determines the company’s ability to pay all
financial obligations if all assets are sold or continue viable operations after financial
adversity. Availability of finance determines the capacity of an enterprise in several ways like
the choice of technology, access to essential resources, and access to markets, which in turn
greatly influences the viability and success rate of a business (Mugunchu, 2013).

The MSMEs with better access to finance leads to higher productivity and profitability within
an economy. The MSMEs which do not have access to external funds due to stringent terms
and conditions of the bankers and financiers tend to tie to their credit and investment, this
leads to the possibility that capacity building is seriously impaired. The short-term loans are
not conducive to greater productivity while long-term loans may lead to improvements in
productivity. (Nderitu & Githinji, 2015). The literature reviewed in this section suggests that
access to and availability of finance plays a pivotal role in the performance of MSMEs.

ISSUES FACED BY MSME’S WORLDWIDE:

Lack of proper access to finance is seen to be a common problem that holds back the growth
of MSMEs. Therefore, it is crucial for MSMEs to have adequate access to finance in order to
grow and develop. Ailemen and Uchenna (2014) analyzed that provision of industrial estates
fitted with modern equipment and leased out should be given to MSMEs at subsidized rates
in order to substantially increase MSMEs output and also funding institutions, schemes and
funds directed at the MSMEs in Nigeria such as the Bank of Industry, the Small and Medium
Enterprises Credit Guarantee Scheme (SMECGS) etc should be sustained in order to improve
the access of MSMEs to credit. The problem of inadequate power supply, the exchange rate,
interest rate and inflation rate should be tackled to improve the MSME sector. Galinoma et al.
(2018) concluded that the government and the banking sector need to develop solid strategies
to support rural MSMEs in financing. It provides alert to the policy makers regarding the
need to re-visit the existing credit guarantee institutional scheme in Tanzania, mainly
SACCOS and give flexible attention to rural MSMEs for the growth. Government should
create an integrated rural financial system that will be more responsive to varied financing
needs of MSMEs at all stages. Indrayana et al. (2018) analyzed that Mobile Finance
Application for Micro Small Medium Enterprises has two main actors i.e. Administrators and
Users. The administrator can manage company profiles, users and chart of account settings
whereas user actors can make transactions in journals. Also automatic journal transaction
consists of revenue transaction and expense transactions which has general ledger, trial
balance, balance sheet and profit loss report. Chileshe and Afolabi (2018) concluded that
entrepreneurship education can develop greater recognition of specific behavioral factors
which may be affecting MSME access to finance. Theoretical framework needs to be
developed for understanding factors and their relationships and also might be influenced as
part of education process in the context of Ghana. They also suggested that identification and
testing of accurate nudges to be employed through an education process for influencing
financial behavior among Ghanaian MSME operators. Jasuni et al. (2018) concluded that to
get loans from microfinance or banking institutions, the owners of MSMEs must have
reasonable monthly profit or asset (in context of Indonesia). Also, the higher owner’s profit
and asset value, there is a greater chance of getting a loan. MSMEs should strengthen the
capital system through cooperation with banks or MFIs & large businesses in order to aid in
the form of CSR partnership financing program. Also, the communication network between
the government, financial institutions, big business and owners of MSME should be
improved and strengthened for the development of MSME segment. Sinarwati and Setiawina
(2018) analyzed the SWOT analysis of the craftsmen group (in the context of Indonesia) as
they have Strength: having raw materials with relatively cheap prices, labor at cheap prices,
good product quality. The Weaknesses of the craftsmen are low in quality workforce, less
innovative product design and limited market information. The Opportunities are capital
assistance in the form of soft loans from Village Owned Enterprise, government training and
mentoring programs. The Threat are strictly competition and low economic condition. They
recommended as craftsmen should make necessary steps to increase the quality of the Labour
by providing them product innovation training and online marketing programs. Wahyuni T.
(2018) concluded that the use of accounting applications with cloud computing technology
provides many more advantages for MSME and they should adopt accounting applications
with cloud computing technology. These factors are to be considered by MSMEs before
adopting cloud as ease of use, reliability, security and privacy, and sharing and collaboration.
Pramono et al. (2019) analyzed that for sharia business unit (UUS), Non-Performing
Financing (NPF), third party funds (DPK) and central bank policy rate are the independent
factors affected MSME financing (in the context of Indonesia). These independent variables
positively and negatively affect MSME financing funds. Also, for BUS (sharia commercial
banks), no. of offices, no. of employee and policy rate by BI effect the MSME financing
decision. Shelaby A. (2019) concluded that NGOs are likely to act as financial institutions
offering micro loans to beneficiaries in the areas where they serve, so, this variable impacts
the new establishments of MSMEs (in the context of Egypt). Also, the age of the household
head is moreover influencing the establishment of new MSME projects as the living costs are
increasing and the need for more income resources is mandatory as educated people are
having more rationale thinking which results to thinking of generating more income.
Omelogo Uchehara F. (2019) concluded increase in start-ups, business, technologies and
customer are small business boosting characteristics that could be amended to attain
justifiable rural growth in Nigeria and capacity building has been a variable factor for
sustainable MSMEs development in Nigeria. Also, entrepreneurial skills can engender
business start-ups and help in boosting indigenous technologies, business and customer
growths which affects the MSMEs too. Emmanuel et al. (2019) concluded that credible
business reforms should be in proper systematic order by the government at all levels to
facilitate ease of doing business and to minimize corruptions by public officials for MSMEs
owners (in the context of Nigeria). Also, financial institutions should be encouraged to
provide micro credits and loans to genuine and reliable MSMEs at lower interest rate with
flexible repayment plan. Government at all level should think about their future spending
deliberately to minimize borrowings in order to diminishing crowd out private investment.
Sugiarto I. (2019) concluded that the large number of MSMEs (in the context of Indonesia)
which fail in carrying out business is caused by several factors like limited capital, skills,
absence of a clear business plan, limited capital and also lack of mastery of information
technology. Also, right business plan and good alignment strategy have higher positive
impact on the development of MSMEs in Indonesian context. Doblas et al. (2019) concluded
that MSMEs in Butuan City Philippines participate in peacebuilding due to business related
results as financial and political reasons impede MSMEs to participate in peacebuilding. Also
increased participation in peace related activities stimulate noble motivations which has
increased the perceived difficulties of MSMEs in creating businesses for peacebuilding.
MSMEs should not only be inclusive but should establish two very important points i.e.
political cooperation and liberalization.

ISSUES FACED BY MSME’S IN INDIA

Kumar et al. (2009) focused over the point that MSMEs portray a noteworthy part in the
progress of any economy. Government should provide facilities of infrastructure, technology
incubators and development of industrial parks under cluster development programmes of
MSME, boost entrepreneurship and aptitude in management, deliver training to skilled staff
to progress efficiency in production, funding R&D for economic development, technology
development for the growth of MSMEs sector in India. Sahapathi and Khana (2011) focused
on the different factors which are obligatory for the progression of MSMEs. This sector
should elevate their technologies and alter to manage with powerful competition and rising
costs. Sharma V. (2011) analyzed that SMEs should use all medium of branding techniques
very wisely in order to achieve success and need to be customer-centric, innovative and
focused on building their brand strategy.Also suggested that if SMEs want to survive and
succeed in an aggressive business landscape then Government initiatives combined with a
well-structured marketing effort and branding should be provided and used in the effective
way. Bhavsar and Kalam (2012) emphasized of entrepreneurship for the generation of
employment. Gakhar and Kour (2012) examined that the MSMEs plays a major part of the
development of the country like India which has more population and has also the biggest
part of the young workforce. Goyal et al. (2012) analyzed that MSMEs units have faced a
number of problems which turn the units as sick units. Also, investment blocked in sick
MSME rose year on year with rise in the total investment. Jain and Jain (2012) analyzed that
financial assistance in state of Uttarakhand to encourage industries and develop industrial
infrastructure. Sarathy and Silambarasan (2012) founded that small-scale industry are not
workable due to technical knowledge, changing the mood of the market, the inability of
finance and market risks. Also, attributes such as business and practical knowledge,
analytical ability, search skills, foresight, communication, delegation and organizational skills
need to be acquired by MSMEs for entrepreneurial success. Venkatesh and Muthiah (2012)
analyzed that the SMEs are still hampered by the problems of finance, marketing and low
quality. Bose B. (2013) found that unorganized sector continues to take credit heavily from
the informal financial sector. Srinivas (2013) found that Vijaya bank is offering more than
seven schemes to MSMEs sectors and studied the new products offered by the Vijaya bank to
MSMEs sector to identify the financial assistance of the Vijaya bank to MSMEs. Pandey V.
(2013) founded that the business can be a shift from Ludhiana to Rajkot because there are
more facilities provided to business owners by Government to Rajkot as there are some
problems faced by MSMEs in Ludhiana. Bai and Gunasundradevi (2013) analyzed that the
major problem with MSMEs entrepreneurs is their lack of understanding of the procedural
problems regarding applying for loans and availing of funds from the financial institutions.
Also suggested that procedures for applying bank loan must be made simple and easy to
understand by the MSME owners and there should not be any unreasonable delay in
sanctioning loans by financial institutions. Government should take necessary steps to
achieve excellence in the formulation and implementation of industrial policies which will
encourage the MSMEs entrepreneur. Kumar A. (2014) analyzed the problems and the
prospects of small scale and cottage industries in Utter Pradesh, where large and medium
scale industries are completely absent. Anuradha J. (2014) emphasized that the importance of
marketing management in small scale industries are increasing and products are sold
effectively in the markets. Biswas A. (2014) concluded that MSMEs face several obstacles
and hindrances in accessing investment from the banking and other financial organizations.
Chaudhary G (2014) focused on the fact that banks have faced various problems when they
are granting their loans to MSMEs as these MSMEs work in the unorganized sector so that
they do not create their proper balance sheets. Chandraiah and Vani (2014) explained the
role, performance of the sector, policies which are adopted by the government for MSMEs
and problems faced by this business in the Indian economy. Ilahi S (2014) focused on
recommendations which are also given, and the process of providing facilities should be
better and effective support system for MSMEs. Katia (2014) concluded that government
should take initiative for the registration of these MSMEs so that proper awareness and
benefits should be given to them. Kiss and Zagyi (2014) submitted that the transcend
importance from the economic force of village handicraft in terms of the stimulation of
business sustainability. Kushalakshi and Raghurama (2014) concluded that the government,
banks and other financial institutions should promote MSMEs sector by providing policy
support, efficient finance and also policies for poverty reduction, employment generation,
financial inclusion and overall inclusive growth of the economy. Laha A (2014) discussed
that the provision of this credit access to entrepreneurs will help in the transformation of
micro to small and to medium enterprises and it will speed up the path of rural
industrialization of the economy. Munda and Swain (2014) concluded there is a need for
making handloom, handicraft sector, weavers need further capacity building, the need of
special training for weavers, development of handloom mark, the issue of photo identity
cards, insurance of family members, etc. Patil and Chaudhari (2014) analyzed that MSMEs
faces so many problems while competing with other largescale industries. Santra S (2014)
discussed the initiatives taken by the government to make stronger the Small-Scale Industries
in the West Bengal state of India. Singh and Singh (2014) concluded that there is a need to
appreciate and review the needs of MSMEs business for their sustainable growth. Singh and
Singh (2014) suggested that if banks, financial institutions and the government will take
initiatives for MSMEs it will reduce the problems of this sector and provide servicing to this
sector, challenges will be solved out and economic growth will be increased from 8% to 10%
for next decade. Suneetha and Sankaraiah (2014) suggested that financial problems are
solved to improve entrepreneurship development of women. Bai J.Mary (2014) analyzed that
financial institutions had a favorable impact on the entrepreneurs of micro small medium
enterprises and variables like building, machinery, vehicles, raw materials, finished goods,
working capital, capacity utilization, production, sales and profit of the industries are
increased by the getting support from the financial institutions to the MSMEs. Dhale et al.
(2015) suggested that there is need to assess prospects and issues in the MSMEs to increase
funding from the financial organizations, financial inclusion of MSMEs should be given
more focus which will be giving better results in the future. Also, policy makers of MSMEs
sector should give due consideration for designing good policies and appropriate procedure
for policy implementation. Mangla et al. (2015) explained the IT adoption in MSME sector in
North India and suggested that IT adoption is influenced by information exchange with
customers, strong competition and also government policies. Also, MSME sector needs to
improve its productivity and quality, reduce costs and innovate to tackle the future
competitions and be economically viable. Ghosh and Nandi (2015) highlighted the demand
for equity finance and debt finance in the MSME industry and recommended the data on the
basis of which MSME can decide whether there can be a possible chance of entering into the
stock market by the MSMEs for equity financing or not. Also, MSMEs need to be educated
enough to keep proper documentation and awareness of the MSME Act 2006 which is a
major challenge the policy makers face while reforming the size and financing MSMEs in
India. Ghosh A. (2015) recommended that MSMEs should be given access to equity finance
and SEBI should look forward to launching a new index for MSMEs in order to have proper
data management and equity infusion which can take place in MSMEs from various
industries. Also found that the approval of finance and disbursement is not appropriately
made in the industries, and the loan outstanding and the application ratio is quite high in the
MSME sector in India. Katait S. (2016) analyzed whether internal or external environmental
factors determine business success and failure of small-scale industry. Small Scale Industry
should take necessary steps for proper management of time, finance, production and labor
prevent failure for success and government should support in smooth running of the SSI.
Mishra and Singh (2016) highlighted the importance and benefits of Six Sigma
implementation to different organizations for improving the quality of the product which
ultimately results in the improvement of the competency power which is essential in today’s
world. Also suggested that with the use of Six Sigma, rejection rates will be reduced for any
industry and challenged the saying that Six Sigma has more significance only in large
companies. Choudhury and Goswami (2016) concluded that registration status has an
influence over preference for bank loans and also security requirement is the main problem
experienced by the borrowers, others are application procedure, pre and post sanction and
repayment procedure. The main reason for not borrowing from banks by MSMEs are lack of
assets as collateral security, repayment burden, high level of interest rates and security
requirements. Mathiraj et al. (2017) concluded that Government has taken initiatives for
MSME sector to make them vibrant and significant player in development of the Indian
economy, like Enactment of MSME Act (2006), locking of products to be manufactured only
by the MSME sector. Also, Indian SMEs have to encounter various issues like unavailability
of sufficient funds on proper times, proper technology, ineffective marketing, scarce
resources and lack of skilled employees. Sahithi and Akanksha (2017) concluded that even
startup company has the capability to achieve the higher profits in limited span of time, the
location of the manufacturing plant plays a major role in development of the particular
company. Also, it is good for the company to have higher interest coverage ratio as higher the
interest coverage ratio better is the performance of the company. Ahmed and Ahmed (2018)
suggested that infrastructure, transportation and huge investment in MSMEs are the way to
promote the industrial scenario in J&K. Directorate of Industries and Commerce, SIDCO
SICOOP and JKEDI need to attract the youth of the state to develop MSME sector in the
state, also government should develop the lagging sector of the state. There are some serious
issues encountered by MSME in J&K like absence of skilled Labour, marketing for finished
products, expensive transport, erratic electric power supply, political instability, problem of
finance, new technology. Rai and Badugu (2018) concluded that the demonetization exercise
resulted to an immediate decrease in the profit margins of entrepreneurs within the MSME
sector. Ilahi S. (2018) recommended that Government should step ahead to help the owners in
selling product so that they may get good price which encourages them for the business, loan
taking process should be made simple, transparent and less time consuming so that the
producers or entrepreneurs can take the proper advantage of the same, both the government
and non-government organizations should take appropriate initiative for the upliftment of the
technology used in MSMEs in order to compete in the international market, government
should take appropriate steps to control the corruption practices in the market especially in
the prices and availability of raw material for MSMEs. Venkateswararao P. (2018) concluded
that Andhra Pradesh Government had taken various measures in recent MSME policy to
provide an appropriate eco-system for encouraging MSMEs and also for attracting new
investments into the MSMEs. The government also constituted an MSME Facilitation Desk
including helpline to provide one-stop solution to all MSME related queries or grievances
which results to better reach and coordination between the Government and the MSME
sector. They also provide measures like helping MSMEs in quality certification, assisting in
patent and trademark registration, quality improvement measures programs and awareness to
the MSMEs etc. Roy and Das (2018) emphasized on the different initiatives taken by
government for MSMEs, some of them are: The Micro Units Development & Refinance
Agency Ltd (MUDRA) scheme with the tag “fund the unfunded” which aim to act as the last
mile financiers, Pradhan Mantri Jan Dhan Yojana (PMJDY) was initiated to provide access to
different financial services through the basic savings accounts of the individual, RBI’s Trade
Receivables Discounting System (TReDS) as digitization which helps MSMEs get access to
easy capital by auctioning their receivables, also seven of India’s largest banks have
collaborated in a Blockchain-powered trade finance initiative which is led by Indian IT giant
InfoSys. Gupta et al. (2018) concluded that the relevance of relationship banking towards
banking preference for applying loan and complicated procedures which bothers MSME
more during the entire process of loan application. Also, high collateral requirement for
granting loan which is an important factor adding towards financing problem for small
concerns which can be resolved by promoting credit guarantee scheme with public and
private sectors collectively. They have recommended that MSMEs should be prompted to go
for compulsory credit rating at time of registration of firm in order to reduce problem of
information asymmetry which would help in reducing time taken in loan sanction process and
cost charges by bankers for perception of risk associated with small firms. Saini et al. (2018)
concluded that the willingness of the banks or financial institutions to support MSMEs have
increased over the last few years resulting in increased financial assistance to MSME sector.
Providing adequate collateral security to the bank acts as a big hurdle for MSMEs in getting
financial assistance which can be solved using credit guarantee scheme of Govt. of India
acting as a guarantor for the loan. In Himachal Pradesh now, this particular scheme is popular
which provide guarantee cover to the tune of ₹ 1440 billion provided by government. Though
financing MSME is time consuming and costly, still banks consider MSME commercially
viable and quite less risky. Ilahi S. (2018) concluded that there are only 20% ownership of
female entrepreneurs and they are concentrated only at micro level enterprises. Major
changes in attitudes and mindsets of people are required rather than development of schemes
and opportunities for women. Government should design the curriculum which will impart
the basic knowledge along with holistic policy and procedure for implementation of the same
in order to accomplish the full potential of female entrepreneurs. Awareness program must be
conducted on a greater scale to make women aware about their unique identity, existence,
nurturance and also their role in the development of economy of the country. Baby S. (2019)
concluded that most of the borrowers find no significant difference in their employment,
income and position of the asset even after getting enough bank credit. Also, mandatory
practice of e-governance should be implemented which applies the use of IT to the computing
process to bring SMART (Simple Morale Accountable, Responsible and Transparent)
governance. E-governance helps in redefining the mechanism of maintaining customer
database, monitoring transactions, assessing the impact of credit and helps the banking
system perform its basic functions. Murugeswari K. (2019) concluded that entrepreneurs
should enhance knowledge on financial management terms in order to avail the facilities of
different Government Schemes. Entrepreneurs can collect the useful information from the
District Industries Centre about the various schemes provided by the Government for starting
and developing the business of MSMEs as government provide Entrepreneurs Development
Programme Training and guidance regarding subsidies and loan availability for MSMEs.
Government should provide simple and transparent system for loan processing;
comprehensive consumer protection framework should be initiated for MSMEs. Chaudhary
and Aditi (2019) concluded that concluded that demonetization decision brought the
condition of social and economic unrest in India. Demonetization left negative impact on
small scale industries like manufacturing industry lost 30% jobs and 55% revenue, also
unbanked villages, small businesses badly affected due to demonetization, it had negative
impact especially on the sectors where cash transaction are often practiced and SME is one of
them where most of the transactions carried out in cash. Borad and Patel (2019) concluded
that modern concepts of management like ‘‘Kaizen’’, 'Five S', 'Six Sigma' are being
implemented in a progressive company or multinational business environment, it is not used
or implemented in MSMEs. If MSME units are trained about this Kaizen related theoretical
knowledge then the unit's production process, the quality of the product and the productivity
can improve which is necessary for MSMEs to compete in this industrial competition. Also
there are strategies which is to be framed for MSMEs like innovation in the sector, leadership
with technical motivational style of management, Forming industry networking with
suppliers and other stakeholders, Integrated Information Systems, joining the competition in
foreign market, ownership of trademarks and patents, engagement in research and
development in production of new products to achieve the market needs. Rana and Vibha
(2019) concluded that MSME sector is facing difficulty in finding buyers for its products in
national and international marketplaces, so there is need to upgrade technology and put more
focus on innovation strategies in this MSME sector. Government should make plan to aware
entrepreneurs about schemes towards strengthening of MSMEs sector and introducing many
policies. Banks and Financial institutions should improve their rules and regulations to
provide funds or loans on good rate of interest to the MSMEs so that they can raise funds
easily and help in the country’s economy. Boateng et al. (2019) concluded that the MSMEs
sector contributes as 40% to 50% of India’s total export and also contribute 30% share of the
Gross Domestic Product (GDP) and an average of 32% of the Gross Value Added (GVA). As
the majority of MSMEs operates in the rural areas so the government should provide reliable
access to infrastructure like electricity, water in rural areas for smooth functioning of the
MSMEs. Also, government should focus on aggressive education and knowledge programme
to increase awareness of the various available sources of funding for MSMEs to
entrepreneurs. Rai et al. (2019) concluded that due to the implementation of the 2016
demonetization policy in India, it had impacted on the trading activities of the MSMEs in
respect of payment mode made by customers to the MSMEs owners.

MSME Policy and guidelines

Classification of MSME:
As per the provision under MSMED act, 2006 GoI, Ministry of MSME has recently revised
the classification criteria of MSME units. From 01.07.2020 both investment in plant and
machinery and Turnover has to be reckoned for classification of MSME units as follows
irrespective of manufacturing or services units:

Type of Enterprises Investment in Plant & Machinery Turnover

Micro Up to 1 Cr Up to 5 Cr
Small Up to 10 Cr Up to 50 Cr
Medium Up to 50 Cr Up to 250 Cr
  Composite criteria of investment and turnover shall apply for classification of
enterprises. If an enterprise crosses the ceiling limits specified for its present category
in either of the two criteria of investment or turnover, it will cease to exist in that
category and be placed in the next higher category but no enterprise shall be placed in
the lower category unless it goes below the ceiling limits specified for its present
category in both the criteria of investment as well as turnover.
 All units with Goods and Services Tax Identification Number (GSTIN) listed against
the same Permanent Account Number (PAN) shall be collectively treated as one
enterprise and the turnover and investment figures for all of such entities shall be
seen together and only the aggregate values will be considered for deciding the
category as micro, small or medium enterprise.

Calculation of Investment in Plant and machinery or Equipment:

 The calculation of investment in plant and machinery or equipment will be linked to
the Income Tax Return (ITR) of the previous years filed under the Income Tax Act,
1961.
 In case of a new enterprise, where no prior ITR is available, the investment will be
based on self-declaration of the promoter of the enterprise and such relaxation shall
end after the 31st March of the financial year in which it files its first ITR.
 The investment of the Enterprise in land and building Furniture fittings is to be
excluded while calculating the Investment in Plant and Machinery.
 Information as regards turnover and exports turnover for an enterprise shall be linked
to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the
GSTIN.
 The turnover related figures of such enterprise which do not have PAN will be
considered on self-declaration basis for a period up to 31st March, 2021 and
thereafter, PAN and GSTIN shall be mandatory.

Calculation of Turnover:

 Exports of goods or services or both, shall be excluded while calculating the turnover
of any enterprise whether micro, small or medium, for the purposes of classification.
 Information as regards turnover and exports turnover for an enterprise shall be linked
to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the
GSTIN.
 The turnover related figures of such enterprise which do not have PAN will be
considered on self-declaration basis for a period up to 31st March, 2021 and
thereafter, PAN and GSTIN shall be mandatory.

Other Important aspect:

 In case of an upward change in terms of investment in plant and machinery or

equipment or turnover or both, and consequent re-classification, an enterprise will
 maintain its prevailing status till expiry of one year from the close of the year of
registration. In case of reverse-graduation of an enterprise, whether as a result of re-
classification or due to actual changes in investment in plant and machinery or
equipment or turnover or both, and whether the enterprise is registered under the Act
or not, the enterprise will continue in its present category till the closure of the
financial year and it will be given the benefit of the changed status only with effect
from 1st April of the financial year following the year in which such change took
place.

UDYAM Registration for MSME:

 Implemented from July 1, 2020 to facilitate of MSMEs as per new definition.

 Enterprise should register online in the Udyam Registration portal on a declaration
basis.
 Details of Aadhaar, PAN and GSTIN are required for UDHYAM Registration (no
need for uploading these documents).
 All existing enterprises registered under previous UAM till June 30, 2020 shall
remain valid till March 31, 2022.
 Udyam Registration may also Integrated with GeM, Trend’s (optional).
 On registration, an enterprise will be assigned a 16-digit permanent identity number
to be known as ‘Udyam Registration Number” Eg: UDYAM-JH-00-0123456.
 An e-certificate, namely, “Udyam Registration Certificate” shall be issued on
completion of the registration process.
 UR is mandatory and no enterprise shall file more than one Udyam Registration. i.e.,
any number of activities including manufacturing or service or both may be specified
or added in one Registration.
 Udyam registration is free of cost and compulsory to - various schemes and benefits.
 Ministry of Micro, Small and Medium Enterprises vide Office Memorandum (OM)
No. 5/2(2)/2021-E/P & G/Policy dated July 2, 2021, has decided to include Retail and
Wholesale trade as MSMEs for the limited purpose of Priority Sector Lending and
they would be allowed to be registered on Udyam Registration Portal
 Ministry of MSME, GOI has launched Udyam Assist Platform (UAP), and specified
that certificates issued by UAP to informal Micro Enterprises (IMEs) Shall be treated
at par with Udyam Registration.
 Champions Control Rooms, offices of the MSME-DI, DIC shall act as Single
Window Systems for facilitating the registration process and further handholding the
MSMEs in all possible manner.
 Further, Bank has advised for migration of interest rate for the eligible MSME
trading accounts from the existing MCLR to RLLR with the same spread over the
RLLR with the existing spread over MCLR. Branches/RO to ensure that the interest
rate on the eligible trading accounts classified as MSME are linked to RLLR. All the
existing trading accounts qualifying new definition of MSME to be reclassified as
MSME and interest rate to be linked to RLLR.
Other finance to MSME:

The following loans are also classified under MSME.

 Loans to entities involved in assisting the decentralized sector in the supply of inputs
to and marketing of output of artisans, village and cottage industries.
 Loans to co-operatives of produces in the decentralized sector viz artisans, village and
cottage industries.
 Loans sanctioned by banks to MFIs for on lending to MSME sector as per the
condition specified.
 Credit Outstanding under general credit cards (including artisan credit card Laghu
Udyomi Card, Swarojagar Credit Card and weaver card).
 Overdraft extended by bank up to Rs. 10000/- under Pradhan Mantri Jan Dhan Yojana
accounts provided borrower’s house hold income doesn’t exceed Rs. 1.00 lakh 7
 in rural area and Rs. 1.60 lakh for non-rural areas. These overdrafts will qualify as
achievement of the targets for lending to micro units.
 In terms of the recommendations of the Prime Minister’s Task Force on MSMEs,
banks are advised to achieve:
 20 per cent year-on-year growth in credit to micro and small enterprises,
 10 per cent annual growth in the number of micro enterprise accounts and
 60 per cent of total lending to MSE sector as on corresponding quarter of the
previous year to Micro enterprises.

ISSUE OF ACCESS TO FINANCE

In India, the total addressable demand for external credit is estimated to be ₹ 37 trillion while
the overall supply of finance from formal sources is estimated to be ₹ 14.5 trillion Therefore,
the overall credit gap in the MSME sector is estimated to be ₹ 20 – 25 trillion. At an
aggregate level, the banking sector has credit outstanding to MSMEs of approximately ₹ 17.4
trillion as on March 31, 2019. SCBs account for 90% of the share of this, although NBFCs
have grown at a healthy rate in recent years. Current situation of the MSME’s in India
discloses the fact that they are running their operation in an extremely exigent environment.
They are facing the issues on various fronts and out of them all, the consistent and major
hinderance is that of the non-availability of the adequate finance as testified by experts from
the industries and examined by the researchers (PwC, 2013). The problem of funding the
start-ups or fresh investments is solely dependent upon the factor that what amount of
funding is being accessible by the entrepreneurs of these firms and how much out of it is
made available to them at the time required. Further, the part played finance have been
always considered to be major factor in the decision-making aspect of the development of
these firms in the whole world (Cook, 2001). Various researchers have claimed that the
availability of the proper amount at the proper time has proved to be a major obstacle faced
by these MSME’s in India and in the complete world. (Petersen & Rajan, 2002; Srinivas,
2005; Beck & Demirguc-Kunt,2006; Sheshasayee, 2006; Beck, 2007; Ayyagari et al., 2008;
Dogra & Gupta, 2009; Thampy, 2010; Allen et al., 2012; Zaidi, 2013). This is not a hidden
fact that in the countries that are developed provide various options of access to finance and
relevant information and data at a extremely convenient and fast platforms, when compared
to the developing countries like India which are at the embryonic phase of MSME financing.
The scarcity of having poor and unsatisfactory research work done relating to the aspect of
the financing of MSMEs in India is specifically owing to the unattainability of the authentic
and issued information. This is because this sector is not required to issue their information to
the public which creates ambiguity hampers the potential research. Another aspect relating to
the service sector businesses in this segment is that as they lack the access to finance more
when compared to the manufacturing firms, since they have lesser tangible assets. In simple
words, the firms operating in the service sector faces more stringent constraints for the credit
when compared to their manufacturing counterparts (Cressy and Olofsson, 1997). One of the
issues could be that it is highly difficult for the lending bodies to do the valuation of the
intangible assets when compared to the tangible assets. Thus, it could be implied that there is
the difference grounded upon the factor that the lenders are providing the credit to
manufacturing or to the service sector businesses (Serrasqueiro, 2011). A unique feature of
MSMEs in India is that 931% does not have any accessibility to any kind of the external
funding and just 51 % of them are able to utilize the credit provided by the institutions and
mere 21 % of them are able to access the finance from others. Taking into the consideration
of registration, only 111 % were able to have an access to the finance provided by the
institutions (Ministry of MSMEs 2009). Funding decision, choosing a specific of category of
funds primarily hinge on accessible funding options in the financial structure, inclinations of
administrative and availability to funds. Such decision is among one of the crucial decisions
of any business irrespective of the magnitude, business, etc. It is due to the element that
curvival of a firm has a straight association with business funding and its impact over the
competitive advantage of the firm (Heng and Azrabijani, 2012). Businesses require finance to
run. Still, certain business has to encounter ample struggle in procurement of finance as
compared to the others. In spite of huge contribution in creation of wealth as well as
employment (Newman et al., 2013; Van Caneghem and Van Campenhout, 2012), MSME’s
faces several hindrances in acquiring required finance (Boocock and Wahab, 2001). Though
MSMEs endlessly improve the monetary interest of a nation, the struggle in retrieving funds
reduces their evolution and progress (Beck, 2007; Beck & Demirguc-Kunt, 2006; Klonowski,
2012; Petersen & Rajan, 2002; Wagenvoort, 2003; Woldie, Mwitta, & Saidimu, 2012;
Ayyagari et al., 2008; Wu, Song, & Zeng, 2008). In views by Green, Kimuyu, Manos &
Murinde (2002), investment assists as the glue that jointly fixes all essentials of MSMEs. On
comparing this segment with the larger counterparts; the funding preferences of MSMEs have
not been properly taken up for the purpose of research. In work done by Zingales (2000) it
has been emphasised that focus over the bigger enterprises have directed the research on the
path of ignoring the remaining world: the undeveloped and minor businesses that lacks
accessibility in arranging the funds through public markets. The part played by the money has
been mentioned as a main significant characteristic for the growth of MSMEs (Cook, 2001).
Availability of proper funds at the proper timings is one among the biggest issues that these
firms encounter on regular basis all around the globe, India no exception to this (Beck, 2007;
Beck & Demirguc-Kunt,2006; Petersen & Rajan, 2002; Ayyagari et al., 2008; Zaidi, 2013;
Allen et al., 2012; Thampy, 2010; Dogra & Gupta, 2009; Seshasayee, 2006; Srinivas, 2005).
 Table 5: Outstanding credit demand and supply of MSMEs—projected by planning
commissions: (incrore)

There is no scarcity of evidences to prove the fact that this sector have to encounter more
constraints in respect to growth and the adequate access to a formal source of external
financing when compared to their larger counterparts. (Beck & Demirguc-Kunt, 2006). The
reasons mention for the high degree of dependence upon arranging the funds through internal
sources in the literature of the research done in the countries all over the world by the
academicians and the researchers are: absence of transparency in the proper information
(Berger & Udell, 1998), unavailability regarding the historic data of trading (Cassar, 2004),
and last but not the least there is extremely huge hazard of failure (Huyghebaert & Van de
Gucht, 2007). The difficulty in accessing the finance among the firms has been recorded very
well in research done by various researchers and academicians namely Obwona and Mugume
(2001), Kasekende and Opondo (2003) and Ishengoma and Kappel (2008). Absence of
adequate access to the funds hampers not just the formation of novel firms, it also restricts the
evolution of current firms. As a result this provides proper reason to the query that why the
employment generation in concentrated in the informal micro firms having the low
productivity (Olawale & Garwe, 2010). Interrogating the other aspects for non-availability of
the proper funding to this sector revels the lack of collateral offered by these firms due to
their smaller size in form of capital assets (Galindo & Micco, 2005), hence the inefficiency of
this sector to provide necessary collateral to the funding agencies also restricts the amount of
funds provided to this sector on comparing it with the other sectors (Beck, Demirguc-Kunt, &
Levine, 2008).

Table 6: Credit Flow to MSME sector

Amount in $ billion
Amount o/s as an year Public Private Foreign Schedule bank Non-banking
end sector sector banks commercial company finance
banks banks
March 2014 7583.7 2471.22 344.30 10399.30 85.76
8
March 2015 8526.8 2815.48 367.87 11710.26 286.48
9
March 2016 8205.4 3590.85 363.67 12160.17 880.13
8
March 2017 8970.7 4123.07 456.89 13478.98 900.10
6
 March 2018 9679.8 4648.97 576.08 14879.96 964.05
9
March 2019 9938.9 5909.90 688.58 15879.07 999.99
0

DIFFICULTIES OF MSME REGARDING INSTITUTIONAL LOAN:

Micro, Small and Medium businesses encounter various issues in getting credit facilities from
the banks and the financial institutions. The banks and the financial institutions require
various information and the financial statements and takes many weeks to decide on
providing credit to this sector. This sector does not seem lucrative to the banks and the
financial institutions because of the lack of adequate collateral or the guarantee offered by the
owners. Moreover, if these firms are somehow able to manage to get the approval for
required credit from the banks, still the whole operation-cycle, starting from the application
work for loan approval to disbursement of loan, is a bothersome and time-consuming task.
The procedure is so complex, and the attitude of the institutions is so hostile that majority of
the entrepreneurs who are either not at all literate or semi-literate, hesitate to utilize these
facilities (Singh and Singh, 2014). On comparing the sector to the bigger enterprises,
MSME’s encounter greater struggle in arranging collateral and guarantee requirements and
security requirement for credit facility. With regard to the SME lending, informal institutions
have a greater edge over the informal institutions. By eliminating the informal lending sector,
the loans will not be provided in efficient manner because of adverse selection effect (Yifu
and Xifang, 2006). It is very important for the success of MSME’s that they have the
adequate access to the finance. But as much as 70% of the funds of the SME’s in Nigeria are
financed through the informal sector (Gbandi and Amissah, 2014). Lack of guarantee, risky
environment, absence of experience and capital is a major obstacle encountered by the
MSME’s in getting the desired loan facilities (Reddy, 2007). The reason acting as the main
hinderance in the availability of finance to these firms is the unattainability of the authentic
and issued information. This is because this sector is not required to issue their information to
the public which creates ambiguity hampers the potential research (Vegholm and Silver,
2008). A study conducted in the Great Britain, discussed that there is negligible difference of
literacy in the source of finance. The small business owners have to face the more difficulties
in arranging the finance and have to be depend upon the “bootstrapping” as a source of
finance (Irwin and Scott, 2010). The financial institutions and the banking sector are not
interested in endorsing the accessibility of credit for entrepreneurs, neither they are taking
any measures to make credit availability for MSMEs easier (Price et al., 2013). Banks do not
find this segment lucrative enough, for them smaller is the size of firm greater is the risk
involved in lending to this sector (Taylor and Bradley, 1994). Also, it is noted that there is
significant difference in the availability of credit through the formal route to the business on
the basis of its turnover and the type of business. The banking sector prefers to lend more to
the larger and bigger firms with proven track records, proper statements and presence of
adequate collaterals. These firms face issue in providing the collaterals required, thus they
lack the required access to the finance (Hashi and Krasniqi, 2011). An issue relating to the
service sector businesses in this segment is that as they lack the access to finance more when
compared to the manufacturing firms, since they have lesser tangible assets. In simple words,
the firms operating in the service sector faces more stringent constraints for the credit when
compared to their manufacturing counterparts (Cressy and Olofsson, 1997). One of the issues
could be that it is highly difficult for the lending bodies to do the valuation of the intangible
assets when compared to the tangible assets. Thus, it could be implied that there is the
difference grounded upon the factor that the lenders are providing the credit to manufacturing
or to the service sector businesses (Serrasqueiro, 2011).

DIFFICULTIES OF BANKS IN LENDING TO MSMES

Rates of Non-Performing Loans (NPL) with regards to this sector have been facing
tremendous increase (TransUnion CIBIL 2017; TransUnion CIBIL-SIDBI 2018).

Table7: Increase in NPL rates among MSME’s

Type March 2016 March 2018

Micro 7.9% 8.8%
Small And Medium 9.8% 11.2%

The similar trend has been observed in the banking sector also, as observed in the RBI reports
of financial stability the levels of NPL faced by the banks have increased from 7.6% for year
ending on March 2016 to 11.6% for the year ending on March 2018 (RBI reports 2016, 2017,
2018). The rate of NPL in this sector can be seen to be much higher as compared to the
previous years. Talking about the Micro and SME sector individually, it can be said that the
rate of NPL among micro sector is still lower when compared to the overall rate of the NPL.
The banking sector of India at present does not poses the adequate technology and the
required infrastructure to address the concerns of MSME borrowers for such low amounts,
higher volumes, and higher transaction costs (CII 2018). As the small businesses are
heterogeneous in nature and lacks in providing symmetrical information and reports, banks
have to encounter a tough issue to set standards for measuring the possibility of providing the
loans. Depending upon the manual data entries and making the utilization of conventional
Excel sheets mostly leads towards the poor maintenance of information and takes much more
time to inform the verdict to borrowers. Absence of the adequate amalgamation of poor
information administration along with the unorganized loan appraisal and disbursal system
makes the credit process cumbersome. Moreover the banking sector seems to have adopted
the “credit rationing” for this sector because of the non-availability of the adequate financial
information, nonsufficient amount of assets to be provided as collaterals, lack of adequate
amount of guarantee, absence of proper records of accounting, and business vision, mission
and plans, consequential leading to increase in the constraints for the credits. The financial
institutions should be treating this sector like their own child. They should take the innovative
initiatives for this sector to develop at a faster pace (Vegholm and Silver, 2008). It has been
well established in the literature that the nations with modernized financial structure provides
these firms with the more easy and convenient access to the external funding. Thus,
establishing a relationship between the modernization of financial structure, availability of
finance, and the feasibility of SMEs success (Cull et al., 2006). Moreover, the researchers
have claimed that technology used for the credit lending are the major factors that impact the
successful implementation of the policies made by the government and the strength in
financial structure of the nation (Berger and Udell, 2006). Government should focus on
priority basis to find out the factors influencing their access to adequate finance and come out
with a policy to improve their access to the finance (Gbandi and Amissah, 2014).

FACTORS DETERMINING MSME LENDING

There are numerous factors influencing the lending to the MSME’s. Some of the factors
gathered from the review of the literature undertaken are discussed here. The increase in the
competition have a positive relationship with the increase in relationship of the bank lending
towards the MSME’s (Mercieca et al.,2009). This have been supported by the various
researchers all around the globe, numerous theoretical frameworks have acknowledged
competition as a crucial aspect that influencing the lending attitude of the banks (Petersen &
Rajan 1995; Haselmann et al. 2004). Further the increase in competitiveness leads to easiness
in the accessibility of a much more service options provided by the banks (Mudd 2013). It
also aids in preventing the adoption of malpractices such as “credit rationing” used
extensively in monopoly and oligopoly scenarios (Berger et al. 2001). On the same grounds,
a study conducted in 74 different countries provided a strong evidence to study and
understand the impact of competition. Using the concentration ratio, a methodology was
devised and used. It suggested that higher is the concentration of the banks in a given
area/country, higher are the option available for MSMEs to access the credit through formal
sources (Berger et al., 2004). The legal context also has a crucial effect upon the MSMEs on
the basis of the size of the business or the bank ownership (Beck et al., 2008). A study
conducted for analyzing the degree of exertion faced during the process of getting the loans
taking into view the legal comprehensiveness and legal efficiency for all businesses in the
economies going through the evolution phase. It discusses that the smaller is the size of the
business higher are the barriers produced by legal environment like steadiness of guidelines,
competence of contract execution and conduct in the tribunals. The European Bank for
Reconstruction and Development (EBRD) ethics makes it a piece of cake for registration,
collaterals, transparency of laws relevant to insolvency, and its efficiency (Skosples, 2012).
Another route by which the Government aids in accessibility of the credit is credit policies
(Berger & Udell 2006). The regulations relevant to the credit policies aids in relaxing the
stubborn conditions applied by the financial institutions providing incentives like subsidizing
of interest and credit guarantee schemes (Harvie et al. 2010). The other factor is that the
banking sector does not have the access to the adequate information regarding the MSME
borrowers (Frame et al. 2001). This reduces the reliance of the bank in providing supports or
alters their choices to ask for additional collaterals (Berger et al. 2007). The informal or the
social relation among the loan providing officer and the owner of the business is observed as
the other significant factor (Lehmann & Neuberger 2001). The relationship the bank works as
the effective substitution for operative defense from “credit rationing” (Berger et al. 2001) as
extended relationships with clienteles aid the financial institutions to resolve irregular data
and segment risks with them (Stiroh & Strahan 2003). Few researchers suggest ways that are
steady with solid data of debtors (Petersen & Rajan 2002). Such as the ratio analysis from
their financial statements, such as cash flow and profit and loss and balance sheet (McKenzie
& Wolfe 2004), or the use of financial leverage (Mercieca et al. 2009). Few researchers have
further viewed guarantee and collaterals as a determining factor after bearing in mind banks
that implement asset-based advancing methodologies (Berger et al. 2007; Haselmann
&Wachtel 2010). Other major factors involved in taking lending decision are the
characteristics of the business like management (McKenzie & Wolfe, 2004) or the age of the
business (De Young et al. 2008). The size of the business is extensively taken to be crucial
factor for accessibility of finance (Scott & Dunkelberg 2001). Thus, we can summarize that
the major factors impact the lending decisions are size, competition, legal structure, credit
policies, information asymmetry, collaterals and age of firm.

GREATER MSME GROWTH

In the recent years, various new polies have been announced by the government to support
this sector. During the previous year, the Finance Minister of India Mr. Arun Jaitley declared
the inauguration of a novel gateway for the fast-track credits for MSMEs. Financial
Institutions below this scheme will provide the credit in just a matter of 60 minutes without
the necessities of in-person visit to the branches by the owners. On the requirement of the
documents front, all that is required to be submitted is the tax details like GST and income
tax. Further the whole operating cycle of this loan requires only 8 days. Small Industries
Development Bank of India (SIDBI) have also established a portal with Indian Overseas
Bank State Bank of India, Punjab National Bank, Bank of Baroda, Indian Bank, and Vijaya
Bank. It provides credit to these MSMEs without the requirement of any guarantee or
collaterals. World Bank provided $5.5 billion loan in 2015, to support this segment in India
and aid in its holistic development. Under this scheme credit of $2.65 billion until March
2017 have been disbursed to the Indian MSME’s. In lines to the above, the Indian
government have Provided numerous schemes to aid and support this segment namely
Pradhan Mantra Mudra Yojana (PMMY), Credit Guarantee Fund Trust for Micro and Small
Enterprises (CGTMSE), etc.
 Organisational Structure of IOB

Chief Regional Manager

CM (Admin) CM (Inspection) CM (Business)

PLANNING Senior Manager

MARKETING GAD Credit loan
1.OFFICER Credit 2
1.OFFICER 1.officer
1.CLERK 2.service manager
1.clerk
3.officer
1.clerk

Accountant & Management Manager Security Officer

1.Officer officer
1.clerk Manager
clerk
 PAD ACC
3.officers
2.clerk 2.officers

Indian Overseas Bank

SWOT

Strengths of Indian Overseas Bank

 Located Across Various Locations: The geographic existence in various

states works as one of the major strengths of the organization. It infers the business’s
reach to the target market and ensures easy accessibility. The locational advantage can
boost the competitive positioning of the firm in various paths, such as lower cost,
improved accessibility, or enhanced brand vision.
 Competitive Interest Rates: To draw clients, Indian Overseas Bank maintains
its fees at competitive rates. To support the small industries, the interest rates on
MSME and agricultural loans, as well as service fees, are kept modest depending
upon the economic climate of the country.
 Frequent Geographical Expansions: Every year, Indian Overseas Bank adds
new branches to extend its presence, with a particular emphasis on rural areas to
attract new customers and provide basic financial services under the financial
inclusion scheme. 
  Easement of Cash Withdrawals: Indian Overseas Bank also has 3,000+ ATMs
situated across the country that one can use for simple transactions without having to
go to the branch every time.
 Presence in Foreign: IOB has overseas branches in Colombo, Malaysia & Sri
Lanka which gives IOB a strong advantage over competitors.
 Customers as Main Priority: They emphasise providing benefits to customers.
IOB’s main motive is customer satisfaction that’s why IOB comes up with effective
financial solutions and home loan services.

Weaknesses of Indian Overseas Bank

 Poor Inventory Management: The company may fail due to poor inventory

management practices. The scarcity or excessive inventory can either result in cash
shortage or inadequate current assets which negatively affect the liquidity position
and impairs the overall business performance.
 Insufficient Budget: Insufficient budget for the marketing and publicity activities
reduces the firms’ ability to broaden the customer base and motivate repeat purchases.
Less expenditure on research and development activities can weaken the company’s
performance due to poor local/international market awareness.
 Poor Management: The decision-making in the Indian Overseas Bank takes too
much time, resulting in expensive delays in introducing new services in the market.
Poor project management methods can internally undermine the ability of the
organization to successfully unlock new branches or widen the product line.
 Poor Customer Service: India’s banking industry is fiercely competitive and the
bank’s client service is one of its distinguishing features. Indian Overseas Bank has
failed to provide excellent customer service. Customers are frequently dissatisfied
with the way bank employees respond to inquiries and provide services. Furthermore,
online banking services are not sufficiently established.

Opportunities for Indian Overseas Bank

 Population Growth: The exponential expansion in the population, and especially

in the prevailing or potential customer sectors is a great growth chance for the
business organization. The shifting of customer needs, tastes, and preferences can
work as an opportunity if the business organization has favourable market knowledge.
 Aggressive Use of Social Media: The emergence of e-commerce and social
media marketing as a fashion can be a great opening for Indian Overseas Bank if it
can assure strong online existence on different social media networking sites.
 Subsidies: The subsidies procured by the government and other policies to make
the business environment more helpful are favourable external environmental factors
for Indian Overseas Bank. 
 Transformation in Customers: Lifestyle and standards mean more
consumption of consumer goods and services, and more opportunities to facilitate the
purchase.
  Interest Rates: Reduction in the interest rates make fundraising and financing at
lower cost simpler for the business organization.

Threats to Indian Overseas Bank

 Amendments in Regulations: The changing regulatory framework and preface

of different stricter regulations assess a major threat to the Indian Overseas Bank. It
makes adherence to legal standards more complicated for the business organization.
Incapability to adjust to changed regulations increases the risk of expensive lawsuits.
 Private Sector Banks are Increasing Its Competition:  Private sector
banks are developing novel investment packages and thereby gaining market share
among retail consumers.
 Economic Crisis: As a result of the economic crisis, clients are not saving money
in banks, reducing bank liquidity and making it difficult to operate efficiently.
 Changing Policies: Banking policies are governed by Reserve Bank of India
(RBI) laws and regulations, therefore any changes made by the RBI have a direct
impact on the bank’s operations.
 External factor: The climb in inflation increases the cost of production and
influences business profitability.
 Poor Economic Conditions: The deteriorating economic conditions affect
business execution when they directly affect the customers’ spending habits and
purchasing power.