This article throws light upon the top six agencies providing funds to small scale industries in India. The agencies are: 1. Indigenous Bankers and Money Lenders 2. Public Deposits 3. Commercial Banks 4. State Financial Corporations 5. Industrial Co-operatives 6. Other Institutions.

Agency # 1. Indigenous Bankers and Money Lenders:

Indigenous bankers and money lenders are an important source of finance for small scale sector. Because of cumbersome procedures and security requirements of banks, small entrepreneurs have to borrow from money lenders etc.

These lenders provide funds generally for short periods i.e. working capital needs. Their procedures of lending are simple and flexible but interest rates are exorbitant. The loans are given as and when needed by the borrower and amount of security demanded differs from borrower to borrowers.

Money lending business is not an organised activity like other lending agencies. They devise their own methods and procedures for giving loans. The rates of interest to be charged also vary. The reputation of the borrower is considered while fixing various terms and conditions.


The expansion of banking sector and lending by various other agencies has reduced the dependence of small entrepreneurs on money lenders. The Reserve Bank of India should try to regulate the working of indigenous bankers and money lenders so that they are not able to exploit small businessmen.

Agency # 2. Public Deposits:

Another way of raising funds by industrial units is to get public deposits. These deposits can be raised without offering any security. The rate of interest to be offered on such deposits should be higher than that offered by commercial banks on time deposits. Under Companies Act, Central Government prescribes the limits and manner of accepting such deposits.

The small scale units generally get deposits from the employees. These workers sometimes leave some part of their earnings with the concern as deposit. These are like recurring time deposits. The units collect only small amount in this way.

Moreover, workers may get back these deposits after short-periods only. The public in general deposits funds with large scale concerns for reasons of security and regularity of getting interest. So public deposits do help in raising some funds but it is not a significant source in small scale-sector.

Agency # 3. Commercial Banks:


Commercial banks are the most important source of short-term financial needs. The major portion of working capital loans of industrial sector are provided by commercial banks. They provide a wide variety of loans tailored to meet specific requirements of a concern. The banks provide facilities such as loans, cash credits, overdrafts, and purchasing and discounting of bills.

But, the commercial banks have not been helping small scale industries to the extent it was required.

This was mainly due to two reasons:

(a) Weaknesses in small units, and


(b) Attitude of commercial banks.

(a) Weaknesses in Small Scale Units:

Small scale units do not have enough funds of their own. It implies that they acquire much less assets with their own funds. Thus, the units are not in a position to offer sufficient securities required by banks for grant of loans. As the demand of banks for securities is not met, it results into lesser grant of loans and under financing of units. Further, the demand for products of small scale units remains fluctuating.

The scarce inputs like raw material, etc. are not available sometimes in required quantity. These factors lead to unstable income and small scale units are not able to adhere to the strict schedules of payments. Thus, the inherent weaknesses of small scale industries do not allow them to make use of financial resources of commercial banks.


(b) Attitude of Banks:

The commercial banks have a rigid and unfavourable attitude towards small units. Their conservative lending policies do not allow them to accept less securities for giving loans to small scale units. Banks even demand additional securities in the form of collateral securities to protect their loans. Small units are unable to satisfy the bankers because of their limited equity base.

The resources available with banks for small-scale sector are limited in relation to demand for money in the market. The losses suffered by banks in lending to small units also discourage them to extend more credit to this sector. These banks usually prefer large-scale sector as compared to small scale sector.

Ever since the introduction of social control of banks in 1967 and nationalisation of banks in 1969, the commercial banks have liberalised their policy to some extent for lending to small scale units. The change in attitude of banks would be clear from the fact that whereas the amount of bank credit outstanding to small scale industries stood at only Rs. 258 crores in 1969 it rose to Rs. 26,034 at the end of 1993.


However, the fact is that the criterion of ‘creditworthiness’ and demand for sufficient securities still weighs heavily with the commercial banks. The banks should relax lending norms for small-scale sector.

Agency # 4. State Financial Corporations:

The State Financial Corporations were set up with a view to provide financial assistance to small and medium scale industries. At present there are 19 such corporations working in different states. These institutions provide them loans to medium and small-scale units at the regional level.

Besides sanctioning loans and advances to industrial concerns SFC’s also subscribe to the debentures of industrial concerns; guarantee loans raised by industrial concerns; underwrite the issue of stocks, shares, bonds & debentures by these concerns and also guarantee deferred payments due from industrial concerns in connection with purchase of capital goods in India.

The SFC’s also act as agents of the Central Government or State Government in respect of any business with an industrial concern in respect of loans sanctioned.

Agency # 5. Industrial Co-operatives:


Industrial Co-operatives are playing an important role in financing village and cottage industries in India. Through Co-operatives small scale units can utilise financial assistance from the government and the institutions and also guidance from technical service institutes and training centres.

In rural areas co-operatives have proved very useful to small business units. The co-operatives get funds from financial institutions at concessional interest rates and extend both long-term and short-term loans to small scale units.

Agency # 6. Other Institutions:

There are a number of exclusive institutions for helping the development of shall scale sector. National Small Industries Corporation (NSIC), State Small Industries Development Corporations (SSIDC’s) is set up to help small units.

NSIC was set up in 1955 for helping the small sector. It arranges supply of machinery under hire-purchase scheme and is also empowered to underwrite and guarantee loans from banks and similar institutions for small units.


SSIDC’s at the state level also help in supplying machinery on hire purchase basis and also help in procuring scarce raw materials. There are District Industries Centres (DIC’s) throughout the country which provide services and support to the decentralised industries sector under a single roof at pre-investment, investment and post-investment stages.

With the setting up of DIC’s, the need to evolve appropriate mechanism to ensure flow of institutional credit to small scale sector becomes crucial.