19-07-2016, 02:37 PM
Small-Scale Industries in India: Definition, Characteristic and Objectives!
In Indian economy small-scale and cottage industries occupy an important place, because of their employment potential and their contribution to total industrial output and exports.
Government of India has taken a number of steps to promote them. However, with the recent measures, small-scale and cottage industries facing both internal competition as well as external competition.
There is no clear distinction between small-scale and cottage industries. However it is generally believed that cottage industry is one which is carried on wholly or primarily with the help of the members of the family. As against this, small-scale industry employs hired labour.
Moreover industries are generally associated with agriculture and provide subsidiary employment in rural areas. As against this, small scale units are mainly located in urban areas as separate establishments.
Definition:
The official definitions of a small scale unit are as follows:
(i) Small-Scale Industries:
These are the industrial undertakings having fixed investment in plant and machinery, whether held on ownership basis or lease basis or hire purchase basis not exceeding Rs. 1 crore.
(ii) Ancillary Industries:
These are industrial undertakings having fixed investment in plant and machinery not exceeding Rs. 1 crore engaged in or proposed to engage in,
(a) The manufacture of parts, components, sub-assemblies, tooling or intermediaries, or
(b) The rendering of services supplying 30 percent of their production or services as the case may be, to other units for production of other articles.
(iii) Tiny Units:
These refer to undertakings having fixed investment in plant and machinery not exceeding Rs. 23 lakhs. These also include undertakings providing services such as laundry, Xeroxing, repairs and maintenance of customer equipment and machinery, hatching and poultry etc. Located m towns with population less than 50,000.
(iv) Small-Scale Service Establishments:
These mean enterprises engaged in personal or household services in rural areas and town with population not exceeding 50000 and having fixed investment in plant and machinery not exceeding Rs. 25 lakhs.
(v) Household Industries:
These cover artisans skilled craftsman and technicians who can work in their own houses if their work requires less than 300 square feet space, less than 1 Kw power, less than 5 workers and no pollution is caused. Handicrafts, toys, dolls, small plastic and paper products electronic and electrical gadgets are some examples of these industries.
Characteristics of Small-Scale Industries:
(i) Ownership:
Ownership of small scale unit is with one individual in sole-proprietorship or it can be with a few individuals in partnership.
(ii) Management and control:
A small-scale unit is normally a one man show and even in case of partnership the activities are mainly carried out by the active partner and the rest are generally sleeping partners. These units are managed in a personalised fashion. The owner is activity involved in all the decisions concerning business.
(iii) Area of operation:
The area of operation of small units is generally localised catering to the local or regional demand. The overall resources at the disposal of small scale units are limited and as a result of this, it is forced to confine its activities to the local level.
(iv) Technology:
Small industries are fairly labour intensive with comparatively smaller capital investment than the larger units. Therefore, these units are more suited for economics where capital is scarce and there is abundant supply of labour.
(v) Gestation period:
Gestation period is that period after which teething problems are over and return on investment starts. Gestation period of small scale unit is less as compared to large scale unit.
(vi) Flexibility:
Small scale units as compared to large scale units are more change susceptible and highly reactive and responsive to socio-economic conditions.
They are more flexible to adopt changes like new method of production, introduction of new products etc.
(vii) Resources:
Small scale units use local or indigenous resources and as such can be located anywhere subject to the availability of these resources like labour and raw materials.
(viii) Dispersal of units:
Small scale units use local resources and can be dispersed over a wide territory. The development of small scale units in rural and backward areas promotes more balanced regional development and can prevent the influx of job seekers from rural areas to cities.
Objectives of Small Scale Industries:
The objectives of small scale industries are:
1. To create more employment opportunities with less investment.
2. To remove economic backwardness of rural and less developed regions of the economy.
3. To reduce regional imbalances.
4. To mobilise and ensure optimum utilisation of unexploited resources of the country.
5. To improve standard of living of people.
6. To ensure equitable distribution of income and wealth.
7. To solve unemployment problem.
8. To attain self-reliance.
9. To adopt latest technology aimed at producing better quality products at lower costs.
Related Articles:
Engineering Industries in India (Heavy Machine, Structures, Industrial Machinery and Machines tools)
Small Enterprises: Meaning and Definition of Small Enterprises
Third Census of the Small-scale Sector Covering both Registered and Unregistered Manufacturing Units
7 Specialised Institution for Growth of Small Scale Industries in India
Small Scale and Large Scale Production (Comparison)
Need for Total Quality Management (TQM) in Small-Scale Enterprises
The Advantages and Disadvantages of Small Scale Production
10 Tax Benefits available to Small-Scale Industries in India
A Study in the financial Problems of Small industries
SMAL L scale industries do not
refer to the size of the industries
but to the size of the firms
whic h constitute them. There has
been a great deal of controversy as
to wha t should constitute their distinguishing
criterion—whether it
should be the amount of capital assets,
or the number of workers employed
or the use of power. If an y
one of these criteri a were used as
the measuring rod, it migh t produce
misleading results. A highly mechanised
large-scale factory ma y
appear small when judged solely on
the basis of the number of workers
employed.
The application of the 'number of
workers' criterion has to be tempered
by the stage of economic development
attained by a country. In
an industrially advanced count
r y havin g an abundant supply
of capital resources and employi
ng capital intensive methods of
production, the average size of factories
on the basis of numbers of
wor k people alone would appear to
be smaller than that in backward
underdeveloped , countries, where
scarcity of capital and large supplies
of labour make for labour intensive
methods. The application of a composite
criterion number of persons
employed together wit h the amount
of capital assets possessed by the
individua l units may be a more reliable
guide in distinguishing between
the three broad groups of small, medium
and large-scale plants. If
figures of horse power per worke r
were available, the average horsepower
per worke r could clearly indicate
the technical size of an average
factory of a particula r country.
Criterion of Capital Assets
The Boar d of the Bombay State
Financia l Corporation has defined,
as a workin g formula , a small scale
industr y as a unit havin g capital
assets upto Rs 5 lakhs and a medium
scale enterprise as one havin g capit
a l assets of more than Rs 5 lakhs
but less than Rs 20 lakhs. In adopti
n g this definition the Bomba y Corporation
has been guided mainl y by
the desire to demarcate the frontiers
between the Directorate of Industries
an d itself on the one hand and
the Centra l Corporation and itself on
the othe r th e criterion o f capital
assets has, however, been coupled
wit h number employed in relation to
the gran t of some loans by the State
Governments. Thus small industries
have been taken to be those industries
whic h have a capital investment
of less than Rs 5 lakhs and employ
less than 50 persons when using
power and less than 100 persons
when not using power. A research
worke r has also combined the criterio
n of capital assets wit h tha t of
number of workers employed but
has argued in favour of units havin g
capital assets upto Rs 1 lak h and
employing upto 20 labourers as constitutin
g small scale industries.
Whichever of the above definitions
m a y be accepted, it is clear that in
the industria l structure of Indi a three
more or less related sections of a.
particula r industry may be broadly
distinguished an organised sector
represented by the large scale factories,
a sector of small factories and
a thir d sector of widely dispersed cottage
industries. It is the second
group of industries whose financial
problems are the subject-matter of
this study. Withi n this group some
industries are run on factory scale
and even fall withi n the purview of
the Indian Factories Act; some are
worke d as small entrepreneurial enterprises;
and yet others are smaller
still. These units mostly operate in
urban centres and some of them are
even ancillary to large industries,
supplying their products against occasional
orders. The existence of this
category has also been recognised by
the Karv e Committee which, inspite
of its mai n preoccupation wit h the
village industries, has recommended
an allocation of Rs (35 crorcs for
the development of such industries
out of a tota l of nearly Rs 260 crores.
This is undoubtedly a very small sum
and indicates a lack of awareness
of the significant role these industries
can play in the Second Plan
period.
Proprietary Concerns Predominate
The types and sources of credit
and capita l utilised by small industries
are largely determined by their
basic characteristics and have to be
sharply distinguished from those of
large industries. Small industries
are typically unincorporated concern
s under owner-management,
mostly proprietary or partnership
establishments. A recent survey of
small engineering industries of
Howra h where 75% of small industries
of West Benga l are located
has clearly revealed the predominance
of proprietary concerns. Out
of 153 firms surveyed 77.1% are proprietary
concerns, 19.0% are partnerships
and only 3.9'4 are found
to be either private or public limite d
concerns. .Problems of Small Engineering
Industries Bureau of Industria
l Statistic- p 10 (Statistica l
Survey Report'. It was found from
a survey of 49 firms in West Benga l
that, the majority of the plants wit h
invested capital upto Rs 1 lak h are
proprietary or partnership concerns.
50% of the firms are partnership
concerns and 35.7% are proprietary
ones. These small businesses are
generally limited to a single localit
y and as such are not known outside
the community in which they
operate. The success of such concerns
hinges on the efficiency of one
or a few persons; in the event of
personnel changes, continuity of efficient
management can hardly be
guaranteed. Detailed informatio n is
not readily available about their past
financial performance nor about
their present earnings potential. In
short, the conventional standards fo r
the proper appraisal of an investment
project arc not. readily available
to would-be investors. In such
circumstances small localized concerns
are unable to obtain their requirements
of long-term loan capita
l or equity capital through the organized
securities market. Hence
they usually rely for such funds
upon friends, relatives, local investors
or financial institutions,
The preponderance of owned capita
l and the insignificance of loan
capital are clearly revealed by the
surveys of small industries tha t have
been recently carried out in India .
In the case of the small engineering
industries in Howrah , amon g the
153 firms surveyed, owned capita l
comprised 50.5 %, share capital 45,8%
a n d loan capita l only 3.7%, equity
capita l thus accounting for 96.3%
of their tota l assets. (ibid). The
same predominance of equity capit
a l is to be witnessed in the case of
the small industries of Calcutta. In
the case of 28 firms surveyed,
having capital assets of not more
tha n Rs 1 lakh, equity capital comprised
86% of the total of. business
•assets. In the case of 22 medium
sized concerns wit h capital assets
between Rs 100,001 and Rs 15 lakhs
it was 72%. Fo r the small concerns
loan capital accounted for 8%
of the total raised capital; whil e for
t h e medium sired enterprises it was
25.6%. Some of the 22 medium
sized concerns surveyed were public
limite d companies but even then
none of them raised its capital
throug h sale of stocks and shares
to the general public.
Equity vs Debt Funds
The size of a business has generall
y been an importan t factor determining
the relative use of equity
and debt financing, Large sized
concerns have greater accessibility to
equity funds tha n small businesses.
They can make public offerings of
"equities" fa r more readily than
smaller concerns. They can also
build up equity through retention of
earnings for they have a higher and
steadier profitability. Hut the small
concerns have high proportions of
equity capital for entirely different
reasons. Their inabilit y and reluctance
to borrow on the terms currentl
y quoted generally account for
the insignificance of loan capital in
such businesses. Various factors
govern the nature of financing an enterprise
and therefore the equity-dept
relationship. The choice between
equity and debt funds is influenced
not only by the degree of accessibility
to the securities markets but also
by taxation policy and entrepreneuria
l expectations regarding the
future earnings of the enterprise.
The wide range of options available
to large concerns wit h respect, to the
adjustment of their financial structure
is inevitably denied to the small
industries. (Jacoby and Saulnier,
Business Finance and Bunkin g pp.
33-37.)
The type of credit obtained by the
small businesses is also determined
by their ability or otherwise to satisfy
the standards of creditworthiness
as conceived by the lenders. Unsecured
bank credit is easily available
to customers who are considered by
the banks to be the best credit risks.
Large companies wit h their detailed
balance sheets, frequent income
statements and country-wide basis
of operations are sometimes able to
obtain bank loans withou t any security
. Lenders may not insist upon
collatera l because they realize tha t
too much insistence wil l drive the
valued customer into the arms of a
riva l source of credit. Wit h inadequate
financial statements, limite d
Sources of credit and no extended,
record of successful working , small
industria l concerns are in a difficult
position in this respect. They find
it impossible to secure a loan of
the desired amount withou t sufficient
collateral. Hence otherwise sound
a n d profitable concerns are unable
to obtain their requirements from
banks on as favourable terms as
their conditions ma y warrant. They
have to depend on more expensive
types of secured bank loans, whil e
the large concerns are often able
to obtain low cost unsecured loans.
The degree of risk is not the only,
or necessarily the major factor in
determining the interest cost of bank
loans to small industry. Highe r
lending cost rathe r than greater
lending risk is often the crucial factor
in this interest differential. The
cost of keeping track of small loans
or small investments in small business
is very high. The cost of in -
vestigating and servicing many small
loans is greater than tha t of a single
large loan.
Bank Loans in USA
In our country the available data
relatin g to business loans of commercia
l banks throw no light on
the amount or number of such loans
to various sizes of business. In the
USA interesting studies have been
made wit h reference to the business
loans of member banks where breakdown
figures in respect of various
sizes of industry have been obtained.
According to a survey carried out
in 1946 it is found tha t advances to
small business accounted for ¾ the
of the number and 1/ath of the
amount of all business loans of member
banks. In the case of the
smaller banks 92%; of the number
and 82% of all outstanding business
loans represented advances to small
business. (C H Schmidt. Member
Hank Loans to Small Business
Federal Reserve Bulletin, August
1947.)
An important aspect of bank
lending to business as revealed by
these studies in the USA is that the
character of business lending of
banks of different sizes is related
to the size of the business of the borrower.
Large banks are inclined to
whil e small banks nave the small
concerns as their principa l customers.
The different economic and
geographical characteristics of small
and large lenders and borrowers
account to a considerable extent for
this direct variation of size of bank
wit h size of business.
The credit needs of small local enterprises
are best met by the smaller
banks in the particula r localities;
while the larger banks located in
the metropolitan areas have the necessary
equipment to handle the credit
needs of large companies operatin
g throughout, the country. More
than 70% of the dollar volume of
loans of banks wit h tota l depostis
of less than $2 millio n each was
made to business enterprises wit h
assets of less than $50,000, while
75% of the dollar volume of loans
of banks wit h tota l deposits of $500
millio n went to business concerns
wit h tota l assets of $5 millio n or
more. The size factor is also found
to affect the industria l distribution
of the loans of different size banks.
Smaller banks generally lend to
small manufacturers of food, tobacco
etc.. small service establishments
and small retailers, while large
manufacturers in ,the food, liquor,
automobile, tobacco, petroleum industries
and public utilities are serviced!
by the larger banks. (A R Koch,
Business Loans by Member Banks,
Federal Reserve Bulletin, March,
1947.).
In Indian economy small-scale and cottage industries occupy an important place, because of their employment potential and their contribution to total industrial output and exports.
Government of India has taken a number of steps to promote them. However, with the recent measures, small-scale and cottage industries facing both internal competition as well as external competition.
There is no clear distinction between small-scale and cottage industries. However it is generally believed that cottage industry is one which is carried on wholly or primarily with the help of the members of the family. As against this, small-scale industry employs hired labour.
Moreover industries are generally associated with agriculture and provide subsidiary employment in rural areas. As against this, small scale units are mainly located in urban areas as separate establishments.
Definition:
The official definitions of a small scale unit are as follows:
(i) Small-Scale Industries:
These are the industrial undertakings having fixed investment in plant and machinery, whether held on ownership basis or lease basis or hire purchase basis not exceeding Rs. 1 crore.
(ii) Ancillary Industries:
These are industrial undertakings having fixed investment in plant and machinery not exceeding Rs. 1 crore engaged in or proposed to engage in,
(a) The manufacture of parts, components, sub-assemblies, tooling or intermediaries, or
(b) The rendering of services supplying 30 percent of their production or services as the case may be, to other units for production of other articles.
(iii) Tiny Units:
These refer to undertakings having fixed investment in plant and machinery not exceeding Rs. 23 lakhs. These also include undertakings providing services such as laundry, Xeroxing, repairs and maintenance of customer equipment and machinery, hatching and poultry etc. Located m towns with population less than 50,000.
(iv) Small-Scale Service Establishments:
These mean enterprises engaged in personal or household services in rural areas and town with population not exceeding 50000 and having fixed investment in plant and machinery not exceeding Rs. 25 lakhs.
(v) Household Industries:
These cover artisans skilled craftsman and technicians who can work in their own houses if their work requires less than 300 square feet space, less than 1 Kw power, less than 5 workers and no pollution is caused. Handicrafts, toys, dolls, small plastic and paper products electronic and electrical gadgets are some examples of these industries.
Characteristics of Small-Scale Industries:
(i) Ownership:
Ownership of small scale unit is with one individual in sole-proprietorship or it can be with a few individuals in partnership.
(ii) Management and control:
A small-scale unit is normally a one man show and even in case of partnership the activities are mainly carried out by the active partner and the rest are generally sleeping partners. These units are managed in a personalised fashion. The owner is activity involved in all the decisions concerning business.
(iii) Area of operation:
The area of operation of small units is generally localised catering to the local or regional demand. The overall resources at the disposal of small scale units are limited and as a result of this, it is forced to confine its activities to the local level.
(iv) Technology:
Small industries are fairly labour intensive with comparatively smaller capital investment than the larger units. Therefore, these units are more suited for economics where capital is scarce and there is abundant supply of labour.
(v) Gestation period:
Gestation period is that period after which teething problems are over and return on investment starts. Gestation period of small scale unit is less as compared to large scale unit.
(vi) Flexibility:
Small scale units as compared to large scale units are more change susceptible and highly reactive and responsive to socio-economic conditions.
They are more flexible to adopt changes like new method of production, introduction of new products etc.
(vii) Resources:
Small scale units use local or indigenous resources and as such can be located anywhere subject to the availability of these resources like labour and raw materials.
(viii) Dispersal of units:
Small scale units use local resources and can be dispersed over a wide territory. The development of small scale units in rural and backward areas promotes more balanced regional development and can prevent the influx of job seekers from rural areas to cities.
Objectives of Small Scale Industries:
The objectives of small scale industries are:
1. To create more employment opportunities with less investment.
2. To remove economic backwardness of rural and less developed regions of the economy.
3. To reduce regional imbalances.
4. To mobilise and ensure optimum utilisation of unexploited resources of the country.
5. To improve standard of living of people.
6. To ensure equitable distribution of income and wealth.
7. To solve unemployment problem.
8. To attain self-reliance.
9. To adopt latest technology aimed at producing better quality products at lower costs.
Related Articles:
Engineering Industries in India (Heavy Machine, Structures, Industrial Machinery and Machines tools)
Small Enterprises: Meaning and Definition of Small Enterprises
Third Census of the Small-scale Sector Covering both Registered and Unregistered Manufacturing Units
7 Specialised Institution for Growth of Small Scale Industries in India
Small Scale and Large Scale Production (Comparison)
Need for Total Quality Management (TQM) in Small-Scale Enterprises
The Advantages and Disadvantages of Small Scale Production
10 Tax Benefits available to Small-Scale Industries in India
A Study in the financial Problems of Small industries
SMAL L scale industries do not
refer to the size of the industries
but to the size of the firms
whic h constitute them. There has
been a great deal of controversy as
to wha t should constitute their distinguishing
criterion—whether it
should be the amount of capital assets,
or the number of workers employed
or the use of power. If an y
one of these criteri a were used as
the measuring rod, it migh t produce
misleading results. A highly mechanised
large-scale factory ma y
appear small when judged solely on
the basis of the number of workers
employed.
The application of the 'number of
workers' criterion has to be tempered
by the stage of economic development
attained by a country. In
an industrially advanced count
r y havin g an abundant supply
of capital resources and employi
ng capital intensive methods of
production, the average size of factories
on the basis of numbers of
wor k people alone would appear to
be smaller than that in backward
underdeveloped , countries, where
scarcity of capital and large supplies
of labour make for labour intensive
methods. The application of a composite
criterion number of persons
employed together wit h the amount
of capital assets possessed by the
individua l units may be a more reliable
guide in distinguishing between
the three broad groups of small, medium
and large-scale plants. If
figures of horse power per worke r
were available, the average horsepower
per worke r could clearly indicate
the technical size of an average
factory of a particula r country.
Criterion of Capital Assets
The Boar d of the Bombay State
Financia l Corporation has defined,
as a workin g formula , a small scale
industr y as a unit havin g capital
assets upto Rs 5 lakhs and a medium
scale enterprise as one havin g capit
a l assets of more than Rs 5 lakhs
but less than Rs 20 lakhs. In adopti
n g this definition the Bomba y Corporation
has been guided mainl y by
the desire to demarcate the frontiers
between the Directorate of Industries
an d itself on the one hand and
the Centra l Corporation and itself on
the othe r th e criterion o f capital
assets has, however, been coupled
wit h number employed in relation to
the gran t of some loans by the State
Governments. Thus small industries
have been taken to be those industries
whic h have a capital investment
of less than Rs 5 lakhs and employ
less than 50 persons when using
power and less than 100 persons
when not using power. A research
worke r has also combined the criterio
n of capital assets wit h tha t of
number of workers employed but
has argued in favour of units havin g
capital assets upto Rs 1 lak h and
employing upto 20 labourers as constitutin
g small scale industries.
Whichever of the above definitions
m a y be accepted, it is clear that in
the industria l structure of Indi a three
more or less related sections of a.
particula r industry may be broadly
distinguished an organised sector
represented by the large scale factories,
a sector of small factories and
a thir d sector of widely dispersed cottage
industries. It is the second
group of industries whose financial
problems are the subject-matter of
this study. Withi n this group some
industries are run on factory scale
and even fall withi n the purview of
the Indian Factories Act; some are
worke d as small entrepreneurial enterprises;
and yet others are smaller
still. These units mostly operate in
urban centres and some of them are
even ancillary to large industries,
supplying their products against occasional
orders. The existence of this
category has also been recognised by
the Karv e Committee which, inspite
of its mai n preoccupation wit h the
village industries, has recommended
an allocation of Rs (35 crorcs for
the development of such industries
out of a tota l of nearly Rs 260 crores.
This is undoubtedly a very small sum
and indicates a lack of awareness
of the significant role these industries
can play in the Second Plan
period.
Proprietary Concerns Predominate
The types and sources of credit
and capita l utilised by small industries
are largely determined by their
basic characteristics and have to be
sharply distinguished from those of
large industries. Small industries
are typically unincorporated concern
s under owner-management,
mostly proprietary or partnership
establishments. A recent survey of
small engineering industries of
Howra h where 75% of small industries
of West Benga l are located
has clearly revealed the predominance
of proprietary concerns. Out
of 153 firms surveyed 77.1% are proprietary
concerns, 19.0% are partnerships
and only 3.9'4 are found
to be either private or public limite d
concerns. .Problems of Small Engineering
Industries Bureau of Industria
l Statistic- p 10 (Statistica l
Survey Report'. It was found from
a survey of 49 firms in West Benga l
that, the majority of the plants wit h
invested capital upto Rs 1 lak h are
proprietary or partnership concerns.
50% of the firms are partnership
concerns and 35.7% are proprietary
ones. These small businesses are
generally limited to a single localit
y and as such are not known outside
the community in which they
operate. The success of such concerns
hinges on the efficiency of one
or a few persons; in the event of
personnel changes, continuity of efficient
management can hardly be
guaranteed. Detailed informatio n is
not readily available about their past
financial performance nor about
their present earnings potential. In
short, the conventional standards fo r
the proper appraisal of an investment
project arc not. readily available
to would-be investors. In such
circumstances small localized concerns
are unable to obtain their requirements
of long-term loan capita
l or equity capital through the organized
securities market. Hence
they usually rely for such funds
upon friends, relatives, local investors
or financial institutions,
The preponderance of owned capita
l and the insignificance of loan
capital are clearly revealed by the
surveys of small industries tha t have
been recently carried out in India .
In the case of the small engineering
industries in Howrah , amon g the
153 firms surveyed, owned capita l
comprised 50.5 %, share capital 45,8%
a n d loan capita l only 3.7%, equity
capita l thus accounting for 96.3%
of their tota l assets. (ibid). The
same predominance of equity capit
a l is to be witnessed in the case of
the small industries of Calcutta. In
the case of 28 firms surveyed,
having capital assets of not more
tha n Rs 1 lakh, equity capital comprised
86% of the total of. business
•assets. In the case of 22 medium
sized concerns wit h capital assets
between Rs 100,001 and Rs 15 lakhs
it was 72%. Fo r the small concerns
loan capital accounted for 8%
of the total raised capital; whil e for
t h e medium sired enterprises it was
25.6%. Some of the 22 medium
sized concerns surveyed were public
limite d companies but even then
none of them raised its capital
throug h sale of stocks and shares
to the general public.
Equity vs Debt Funds
The size of a business has generall
y been an importan t factor determining
the relative use of equity
and debt financing, Large sized
concerns have greater accessibility to
equity funds tha n small businesses.
They can make public offerings of
"equities" fa r more readily than
smaller concerns. They can also
build up equity through retention of
earnings for they have a higher and
steadier profitability. Hut the small
concerns have high proportions of
equity capital for entirely different
reasons. Their inabilit y and reluctance
to borrow on the terms currentl
y quoted generally account for
the insignificance of loan capital in
such businesses. Various factors
govern the nature of financing an enterprise
and therefore the equity-dept
relationship. The choice between
equity and debt funds is influenced
not only by the degree of accessibility
to the securities markets but also
by taxation policy and entrepreneuria
l expectations regarding the
future earnings of the enterprise.
The wide range of options available
to large concerns wit h respect, to the
adjustment of their financial structure
is inevitably denied to the small
industries. (Jacoby and Saulnier,
Business Finance and Bunkin g pp.
33-37.)
The type of credit obtained by the
small businesses is also determined
by their ability or otherwise to satisfy
the standards of creditworthiness
as conceived by the lenders. Unsecured
bank credit is easily available
to customers who are considered by
the banks to be the best credit risks.
Large companies wit h their detailed
balance sheets, frequent income
statements and country-wide basis
of operations are sometimes able to
obtain bank loans withou t any security
. Lenders may not insist upon
collatera l because they realize tha t
too much insistence wil l drive the
valued customer into the arms of a
riva l source of credit. Wit h inadequate
financial statements, limite d
Sources of credit and no extended,
record of successful working , small
industria l concerns are in a difficult
position in this respect. They find
it impossible to secure a loan of
the desired amount withou t sufficient
collateral. Hence otherwise sound
a n d profitable concerns are unable
to obtain their requirements from
banks on as favourable terms as
their conditions ma y warrant. They
have to depend on more expensive
types of secured bank loans, whil e
the large concerns are often able
to obtain low cost unsecured loans.
The degree of risk is not the only,
or necessarily the major factor in
determining the interest cost of bank
loans to small industry. Highe r
lending cost rathe r than greater
lending risk is often the crucial factor
in this interest differential. The
cost of keeping track of small loans
or small investments in small business
is very high. The cost of in -
vestigating and servicing many small
loans is greater than tha t of a single
large loan.
Bank Loans in USA
In our country the available data
relatin g to business loans of commercia
l banks throw no light on
the amount or number of such loans
to various sizes of business. In the
USA interesting studies have been
made wit h reference to the business
loans of member banks where breakdown
figures in respect of various
sizes of industry have been obtained.
According to a survey carried out
in 1946 it is found tha t advances to
small business accounted for ¾ the
of the number and 1/ath of the
amount of all business loans of member
banks. In the case of the
smaller banks 92%; of the number
and 82% of all outstanding business
loans represented advances to small
business. (C H Schmidt. Member
Hank Loans to Small Business
Federal Reserve Bulletin, August
1947.)
An important aspect of bank
lending to business as revealed by
these studies in the USA is that the
character of business lending of
banks of different sizes is related
to the size of the business of the borrower.
Large banks are inclined to
whil e small banks nave the small
concerns as their principa l customers.
The different economic and
geographical characteristics of small
and large lenders and borrowers
account to a considerable extent for
this direct variation of size of bank
wit h size of business.
The credit needs of small local enterprises
are best met by the smaller
banks in the particula r localities;
while the larger banks located in
the metropolitan areas have the necessary
equipment to handle the credit
needs of large companies operatin
g throughout, the country. More
than 70% of the dollar volume of
loans of banks wit h tota l depostis
of less than $2 millio n each was
made to business enterprises wit h
assets of less than $50,000, while
75% of the dollar volume of loans
of banks wit h tota l deposits of $500
millio n went to business concerns
wit h tota l assets of $5 millio n or
more. The size factor is also found
to affect the industria l distribution
of the loans of different size banks.
Smaller banks generally lend to
small manufacturers of food, tobacco
etc.. small service establishments
and small retailers, while large
manufacturers in ,the food, liquor,
automobile, tobacco, petroleum industries
and public utilities are serviced!
by the larger banks. (A R Koch,
Business Loans by Member Banks,
Federal Reserve Bulletin, March,
1947.).