Case Study: Swarnamukhi Public Bank Limited’s SME Loans
This case study was written by Sravanthi Vemulavada, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was written from generalised experiences.

Swarnamukhi Public Bank Ltd’s SME loans
Small and Medium Enterprises (SMEs) are enterprises wherein the number of employees and the turnover of the company are below certain defined limits. SME is very commonly used term in European Union, in the United Nations, by the World Bank and the World Trade Organization. However, the size of an SME varies from nation to nation. In the US, a company with less than 100 employees is termed as a Small Enterprise (SE) and a company with less than 500 employees is termed as a Medium Enterprise (ME). In the European Union, a company with less than 50 employees is termed as a SE, while a company with less than 250 employees is called an ME. In Germany, a company is called as an SME if it has 250 employees, while in Belgium, an SME consists of 100 employees. In South Africa, the term Small Medium Micro Enterprise (SMME) is used, whereas in Africa, the nomenclature is Micro, Small and Medium Enterprise (MSME). Most of the economies in the world are dominated by smaller enterprises. They comprise approximately 99% of all the firms and they even account for about 40%–50% of the industrial production. These smaller firms employ around 65 million people. SMEs have a major advantage of employing people at a low capital cost. As per statistics, the sector is one of the biggest

employment providers, employing around 31 million people through 12.8 million micro and small enterprises in India. The labour intensity in the SME sector is estimated to be around four times than that in large enterprises. Indian SMEs In India, the SMEs are known by the term Micro and Small Enterprise (MSE). This sector plays a key role in the overall industrial economy. MSEs account for about 39% of the manufacturing output and around 33% of the total exports of the country in terms of value. These MSEs also produce over 8,000 value added products.2 In addition to the above, MSEs have consistently registered higher growth rate when compared to the overall industrial sector. More recently, in India the MSE sector has been enlarged to include a medium category. Thus, the Micro, Small and Medium Enterprises (MSMEs) are classified into two classes3: 1. Manufacturing Enterprises based on investment in plant and machinery (Micro up to INR 25 lakh, Small between INR 25 lakh and INR 5 crore and Medium between INR 5 crore and INR 10 crore). 2. Service Enterprises based on investment in equipments (Micro up to INR 10 lakh, Small between INR 10 lakh and INR 2 crore and Medium between INR 2 crore and INR 5 crore). Globally, SMEs have been a source of innovation and SMEs that integrated innovation are known to have garnered significant benefits. However, in India, most of the MSEs still believe in importing technology rather than developing them inhouse or in association with some of the national Research and Development (R&D) centres – this despite the fact that India has the third largest pool of technologically trained manpower.

In short, Indian MSEs have mostly neglected their R&D, and even their new product development and technological up gradation. Even though MSEs constitute more than 80% of the total number of industrial enterprises and form the backbone for industrial development in India, they suffer from some serious problems such as sub-optimal level of operation, technological outdatedness and even lack of capital. In recent years, Indian MSEs have started facing tough competition, particularly from China. Their performance is also affected by the uncertain market conditions due to the ongoing recession. Owing to the same, the banks are sceptical about the repayment of loans by the MSEs. Swarnamukhi Public Bank Limited is one such bank, which is apprehensive about the repayment of the loans by the MSEs in India. Swarnamukhi Public Bank Limited Bangalore-based Swarnamukhi Public Bank Limited, a medium sized bank, has its presence across India. The top management of the Swarnamukhi Public Bank Limited is concerned that the default rate may go up among MSEs as a consequence of the recent economic recession. They wanted to understand the chances of default among MSE loan accounts. In particular, Vasanth Desai, the managing director of the Bank wanted to know the region wise chances for 10% default, 15% default and 20% default. He knew that during the recession in the ’90s, about 9% of the SMEs turned out defaulters on an all India basis. To avoid the repetition of such a situation once again and totake necessary initiatives, he wanted a branch-wise report from each region. To respond to the queries of the MD, Albert Pinto (Pinto), regional manager, Nagpur region, called for a meeting of branch managers of all those branches, which are specially focusing

on MSEs. There were six such branches, mostly located at industrial centers /estates. The collective number of loans advanced by these branches to MSEs prior to September 2008 (i.e., prior to the emergence of recession in India) was 752, including the 150 loans that they recently approved. In the meeting, most of the branch managers expressed their concern about MSEs’ ability to sustain the economic slowdown. After a long discussion on the performance of the old as well as the recently established MSEs, they could assess that most of the MSEs are hardly concentrating on developing new products and they are importing either the products or the concept from the West. Finally, the branch managers concluded that 8% of the MSEs, who received loans, would not be able to make payments on time. Given the scenario, what is the probability that more than 10% of the 150 loan takers would not make payments on time? While discussions were informative and rich in experience sharing, Pinto wondered on how to respond to the MD’s query at each branch level.
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