Tarapore on

Nayak Committee on SSIs

Considering the contribution of the SSI sector to the overall industrial production, exports and employment and also recognising the need to give fillip to this sector, a special package of measures was devised by RBI (during April 1993) to ensure adequate and timely credit to this sector. While doing so the recommendations of the PR Nayak committee were taken into account. Examination of bank finance profile of working capital to the small scale sector by the committee has revealed that this sector as a whole received a level of working capital which was only 8.1% of the its output. The village industries and the smaller tiny industries among them could get working capital finance to the extent of only about 2.7% of their output.

The salient features of the package are set out below:

  • Banks have been advised to give preference to village industries, tiny industries and other small scale units in that order, while meeting the credit requirements of small scale sector.
  • The banks should step up the credit flow to meet the legitimate requirements of the SSI sector in full during the 8th 5-year plan. For this purpose the banks should draw up annual credit budget for the SSI sector on a bottom-up basis. Each branch of the banks should prepare an annual budget in respect of working capital requirements of all SSIs before the commencement of the year. Such budgeting should cover (a) functioning units which already have borrowing limits with the branch (b) new units and units whose proposals are under appraisal and (c) sick units under nursing and also sick units found viable after discussion/ feedback received from the borrowing units. The budget should take into account, among other relevant aspects, normal sale growth, price rise during the past year, anticipated spurt in business etc.
  • It is desirable that a single financing agency meets both the requirement of the working capital and term credit for small scale units. The Single Window Scheme of SIDBI enables the same agency SFC or commercial bank, as the case may be, to provide term loans and working capital to SSI units having a project outlay upto Rs. 20 lac and working capital requirement upto Rs. 10 lac. The banks have been advised to adopt this approach.
  • At present norms for inventory and receivable are applicable to all units enjoying aggregate fund based working capital credit limits of Rs. 10 lac and above from the banking system. Units enjoying limit of Rs. 10 lac and above but upto Rs. 50 lac are subject to the 1st method of lending. Henceforth for the credit requirements of village industries, tiny industries and other SSI units having aggregate fund-based working capital credit limits upto Rs. 50 lac (subsequently raised to Rs. 1 crore and Rs. 200 lac during April 1997, to Rs.400 lac during August 1998 and further to Rs.500 lac during May 1999) from the banking system, the norms for inventory and receivables and also the 1st method of lending will not apply. Instead such units may be provided working capital limits computed on the basis of a minimum of 20% of their projected annual turnover for new as well as existing units.
  • The banks may satisfy themselves about the reasonableness of the projected annual turnover of the applicant on the basis of annual statements of account or any other documents such as returns filed with sales-tax/revenue authorities and also ensure that the estimated growth during the year is realistic. These SSI units would be required to bring in 5% of their annual turnover as margin money. In cases where output exceeds the projections or where the initial assessment of working capital is found inadequate, suitable enhancement in the working capital limits should be considered by the competent authority as and when this is deemed necessary. Drawals against the limits should be allowed against the usual safeguards so as to ensure that the same are used for the purpose intended. Banks will have to ensure regular and timely submission of monthly statements of stocks, receivables etc. and also periodical verification of such statements vis-a-vis physical stocks.
  • The banks can lend on the basis of 1st method of lending to those units (companies/ organisations) which are engaged in marketing/trading of products of SSI, village and cottage and tiny sector units. This would be subject to the condition that 100% dealing is with the above mentioned products. If there are dealings with other products also, then the relaxation of application of 1st method of lending will be only to that portion of the marketing business relating to products manufactured by above category of units. It is also a condition that dues of such units are settled by such borrowers within a maximum period of 30 days from date of supply and it is to be certified by the statutory auditors of the borrowing units on a quarterly basis.

    Action on Nayak Committee recommendations by RBI:
  • Banks should take immediate steps to ensure full adherence in letter and spirit by all their branches and controlling offices to the RBI guidelines. With a view to ascertaining the position regarding implementation of these guidelines by the branches, banks themselves should carry out special studies on an annual basis on as large a sample or branches, as possible. The findings of the these studies should be reported to RBI periodically indicating among others, the steps taken for rectifying the deficiencies, if any, observed in the process.
  • The procedure and time frame laid down for disposal of loan application received from SSI borrowers should be strictly enforced. Whenever application for fresh limits/enhancement of existing limits was not considered favourably by the sanctioning official or where the limits applied for are proposed to be curtailed, the same should be referred to the next higher authority with all relevant particulars, to ensure scrutiny by any independent authority and the latter should confirm the decision of the sanctioning official or otherwise dispose of the same, within a time bound manner. Another alternative which would also help eliminate delays inherent in the consideration of the proposal by the successive tiers in the hierarchy and facilitate timely decisions on credit proposals it would be for banks to adopt a system of Committee approach, in which decisions are taken by the competent authority after a structured discussions with the branch managers and also the authorities at the intervening levels.
  • Problems faced by the SSI sector in regard to bank finance, to a large extent could be solved if the branch level officials have the right aptitude, skills and orientation. In understanding their role, the branch managers/officials at the branches should be made aware of the importance of small scale sector from the point of view of creation of additional employment opportunities, exports etc. A healthy growth of the sector will facilitate smooth loan recovery in the SSI borrowal accounts. Further, timely assistance will prevent these accounts from becoming sticky. The aforesaid aspects should therefore, form part of the inputs in the training imparted to the banks’ staff. There should an interaction between the banks’ staff and the SSI borrowers as part of the training programmes. Banks may also consider awarding trophies to branches for the outstanding performance in financing SSI units as a mark of public recognition.
  • One of the complaints frequently voiced by the SSI units pertains to insistence by some banks on compulsory deposit mobilisation as a quid pro quo for the sanction of credit facilities to the units. While enlisting the cooperation of banks’ customers for deposit mobilisation cannot be faulted, insisting on deposit mobilisation of stipulated amounts as a precondition to the sanction of credit or otherwise, has no justification.
  • The 2nd All India Census of SSI (1988) carried out by the Development Commissioner(SSI), Govt. of India, has revealed that there were 85 district in the county each with more than 2000 registered SSI units with Industries Deptt. of the State Govt. and another 110 districts each having between 1000 to 2000 registered SSI units. RBI decided during July 1993 that while SFCs would act as the principal financing agency for SSIs in 40 out of the 85 districts referred to above to take care of both the term loan and working capital requirements of all new SSI units which can be financed under Single Window Scheme (SWS) of SIDBI, the commercial banks should act as the principal financing agency under the SWS in the remaining 45 districts, as well as in rest of the country. Banks should also consider converting such of the branches as having a fairly large number of SSI borrowal accounts, into specialised branches.

    Important banking operational clarification on Nayak Committee Recommendations

    The implementation of recommendations of Nayak Committee, relating particularly to the assessment of working capital, gave rise to certain operational problems. Reserve Bank has clarified these issues on the following lines:
  • The assessment of credit limits for all borrowers enjoying aggregate fund based working capital limits of less than Rs. 1 crore from the banking system, is to be done both as per the traditional method and on the turnover basis and the higher of the two limits is to be fixed as the permissible bank finance. However, the neither the inventory norms stipulated under Tandon Committee apply nor the PBF is subject to ceiling as per the first method of lending. In cases where the limits determined by the traditional method are less than 20% of the turnover, the assessment will have to be re-examined. Nayak Committee has stated that the working capital below the minimum level of 20% may be justified under special circumstances in which the requirement is demonstratively lower than the minimum level as in the case of ancillary units.
  • Where the working capital cycle is shorter than 3 months, the working capital required would be less than 25% of the projected turnover. In such case it is not required to still give PBF at 20% of the turnover.
  • If the liquid surplus available with the borrower is higher than 5% of the turnover, as stipulated under the recommendations, the limits can be fixed at a lower level than 20% of the turnover keeping in view that the genuine requirements of the unit are met adequately. If a unit has been managing its working capital efficiently, the limits can be set at a lower level.
  • The units having longer operating cycle for working capital than three months, should be provided proper limits to operate at a viable level taking into account the recommendation that 20% of the turnover is the minimum stipulation and not the maximum.
  • In case of seasonal industries the distinction between the peak and non-peak level of turnover has to be considered instead of annual turnover.
  • The creditors and other current liabilities are among the sources of funds required for building up the current assets and will be treated in the same manner as in the traditional method.
  • The borrower’s contribution (margin) will be 5% of the turnover in all cases except where the working capital cycle is not taken at three months. The margin will proportionately increase with the increase in the period of operating cycle. Care is to be taken that the proportion of margin to bank finance should be maintained in the ratio of 1:4 or even higher in case of availability of higher liquid surplus. If the borrower is not able to bring in minimum contribution of 5%, as a general rule, no dilution should be allowed except in special circumstance like sick units or when permitted being desirable due to peculiar circumstances in the sanction.
  • The sub-limits against the various components of stocks and receivables should be fixed taking into account the existing norms of inventory and receivables as bench mark and bankers should adopt flexible approach on case to case basis in a realistic manner while assessing the credit needs. While allowing deviations, the sanctioning authority must ensure that proper justification is available and given.
  • With regard to the aspects like allowing drawing power on the basis of stocks and receivables’ statements or calling data on actual turnover on a monthly basis or calling of certificate from auditor’s every 6 months in respect of actual sales, it has been clarified that calling for sales data on monthly basis and comparing with the drawings in the account would be helpful particularly in the matter of arriving at effective operational limits as also in the monitoring the borrowal accounts. The drawing power in any case is to be allowed on the basis of monthly stock statement.
  • In order to check the validity of projections for turnover, in case of existing units sales data pertaining to actuals of last five years, estimates for the current year and projections for the next year together with the true analysis of the industry to which the borrowing unit belongs would also be useful. Other relevant information i.e modernisation or expansion of the existing manufacturing capacity, Govt. policy on taxation and other relevant internal and external factors also need to be taken into account.

    Seven Point Action plan

    Govt. of India in budget for 1995-96 announced a 7 point action plan as under:
  • Time bound action for setting up specialised SSI branches in 85 identified districts of high small industry density.
  • Adequate delegation of powers at the branch and regional level.
  • Banks to conduct sample surveys of their performing SSI accounts to find out whether they are getting adequate credit.
  • Steps to be taken to see that as far as possible composite loans (covering both term loans and working capital) are sanctioned to SSI entrepreneurs.
  • Regular meetings by banks at Zonal and Regional levels with SSI entrepreneurs.
  • Need to sensitize bank managers and reorient them regarding working of the SSI sector.
  • Simplification of procedural formalities by banks for SSI entrepreneurs.

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