Notes On Problems Of Financing Small Scale Industries:

The small scale industrial enterprise constitutes the backbone of the developing economy. They play a vital role in the economic development of a country like India where large numbers of people are either unemployed or under-employed.

However, despite of its immense potentiality, small scale industries have not been able to contribute substantially to the economic development particularly because of many problems faced by these units. Some of these problems are discussed below:

1. Problems Relating to Capital Market:

Inadequacy of capital and credit has always been a major problem of small scale industries due to the following reasons:

  1. Small scale units do not have ready access to capital market because of their small size.
  2. The amount of profit that they earn is very nominal to repay the loan.
  3. Often, they approach small lenders who charge high interest rate.

The small enterprises, because of these reasons continue to be financial weak.

2. Problems Relating to Production:

Lack of finance creates problems for the small scale industries in the field of production

  1. They face problems in acquiring quality raw materials at cheaper rates.
  2. Often, they do not get raw materials in time and as such fail to produce the required quantity in time.
  3. They use outdated equipments and because of their production techniques their productivity suffers.
Problems Relating to Marketing:

Small scale industries, for marketing of their products, face problems in marketing because of the following reason:

  1. They are usually made bound to sell their products to the money lenders at reduces rates because of the lack of co-operative societies or other facilities of selling.
  2. Even if they are made free to sell their products in the open market, they often do not get the right price because of their weak bargaining power.
  3. They are financially weak to cover the period.
Financing of Small Scale Industries:

The various sources of financing of small scale industries are as follows:

1. Commercial Banks:

The Commercial Banks provides cash-credit and over draft facilities to businessman who have current account with the bank. The commercial banks also discounts bill Inorder to enable the industrial concern o secure the capital needed by them. The commercial banks also provide working capital as per the recommendation of the Chore Committee and tendon Committees.

2. Public Deposit:

Public Deposits are short term deposits ranging form 12 months to 36 months as per the provisions of the RBI. It considered as a dependable source of finance because of its easy availability and less observance of formalities.

3. Development Banks:

The various development banks like IDBI, ICICI, IFCI, and SFC provide direct and indirect finance on different terms and conditions. It also provides foreign exchange to industrial concerns as per their requirements.

. Foreign Equity Participation:

Finances are also made available through equity participation. Following economic liberalisation policy, private foreign capital has already entered in our country in the form of supplier of finance to various industrial and business.

5. Indigenous Bankers:

These banks provide industrial credit especially to the Cotton Textile Mills. But its range of operation is limited and its financial involvement is also insignificant in consideration to other sources of finance.

Problems of Financing Small Scale Industries:

1. Nature of Deposit:

The Commercial Banks accepts short term deposits form the public which are repayable on demand and can be withdrawn without giving any prior notice, thus the banks hesitate to grant loans to small scale industrial units.

2. Ratio Requirement:

The Commercial Banks in India have to follow the directives of the RBI. The RBI directs the Commercial Banks from time to time to keep more amounts of cash in the form of ‘Cash Reserve’ and ‘Statutory Liquidity Ratio’. The ratio is also given by the RBI. The banks have to follow these guidelines which reduce its cash reserve and create problems in financing the Small Scale Industrial Units.

3. Credit Control Policy:

The RBI also observes the credit extending policy of the Commercial Banks which further creates problems in financing the SSI sectors.

4. Security of Assets:

The Small Scale Industrial Units cannot provide the required security of assets for rising of funds from Commercial Banks.

5. Government policy:

The commercial banks have been deemed with the execution of various government policies such as lead banks schemes, IRDP, Credit Guarantee Schemes etc which have made the banks too weak to invest in business sectors.

Thus, if the funds are not adequately available after meeting the various requirements and keeping the required amount of reserve, the banks cannot finance the SSI sectors. Moreover, the financial positions of the banks are not conducive to comply with the demands for funds from the Small Scale Industrial Sectors.