Small and Medium Enterprise

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  • Topic: Credit rating, Credit, Debt
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  • Published : August 21, 2011
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Small and medium enterprise(SME’s) in India have a very important place in the Indian economy. Their contribution in terms of production, export, export, employment generation and all round growth of the country is well known. The role of SME sector in the nation building is well recognized not only in India, but also across the globe. The industrial engines of Japan, china, US, Germany and Taiwan are also driven by the SME sector.

Finance/credit is the most critical component in any business process. Any industrial sector cannot work to its full capacity without adequate flow of funds. The SME sector is working with low capacity utilization, which, however, has now improved from 33.34% to around 52% percent. Still these remain a vast scope for enhancing growth and employment generation.

SME’s occupy a place of strategic importance in the Indian economy. however since the early 1990s, Indian SMEs have been exposed to intense competition due to the accelerated process of globalization. Therefore, the survival as well as growth of SMEs is under strain. However, globalization has also brought, in its wake, newer opportunities for SME’s.


There is no universal definition of SME (small and medium enterprise) different countries follow different definition for the SME sector. Some use the criteria of turnover; some use the number of employees whereas in certain countries, investment in the enterprise is used to define an SME.

In India, the definition of SME’s has always been based on the productive plant and machinery. Currently, a unit having gross investment in productive plant and machinery of up to Rs. 1 crore is classified as an SME enterprise. In certain sector such as drugs and pharmaceuticals, hosiery, stationary, hand tools, etc, this limit has been raised to Rs. 5 crore in the past few years. This move has given a fillip to the potential for growth in this sector.

SME startups tend to evolve along a single entrepreneur or a small group of entrepreneurs; in many cases; leveraging on a skill set. There are other SMEs being set up purely as a means of earning livelihood. These include many trading and retail establishments while most countries continue SMEs to manufacturing services, others adopt a broader definition and include retailing as well. (b) Greater operational flexibility

The direct involvement of owner(s), coupled with flat hierarchical structures and less number of people ensure that there is greater operational flexibility. Decision making such as changes in price mix or product mix in response to market conditions is faster. (c) Low cost of production

SMEs have lower overheads. This translates to lower cost of production, at least up to limited volumes. (d) High propensity to adopt technology
Traditionally SMEs have shown a propensity of being able to adopt and internalize the technology being used by them. (e) High capacity to innovate export:
SMEs skill in innovation, improvisation and reverse engineering are legendary. By being able to meet niche requirements, they are also able to capture export markets where volumes are not huge. (f) High employment orientation:

SMEs are usually the prime drives of jobs, in some cases creating up to 80%. Jobs SMEs tend to be labour intensive per se and are able to generate more jobs for every unit of investment, compared to their bigger counterparts. (g) Utilization of locally available human & material resources SMEs provide jobs locally and hence utilize manpower available locally. Since it is available for them to transport materials over long distances, they often improvise with materials which are available locally. (h) Reduction of regional imbalances

Unlike large industries where divisibility of operations is...
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