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Market analysis of financial institutions and entrepreneurship in India

Market analysis of financial institutions and entrepreneurship in India
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The purpose of this research is to investigate early-s.tage ease/difficulties faced by Start-Ups /MSME in India. The research is based in Bengaluru, Karnataka, India, five major banks located in the city were approached. The amount of support offered by banks to open a business bank account was investigated through interaction with representatives.

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Market analysis of financial institutions and entrepreneurship in India

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  1. International Journal of Management (IJM)
    Volume 10, Issue 6, November – December 2019, pp.1–7, Article ID: IJM_10_06_001
    Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=10&IType=6
    Journal Impact Factor (2019): 9.6780 (Calculated by GISI) www.jifactor.com
    ISSN Print: 0976-6502 and ISSN Online: 0976-6510
    © IAEME Publication

    MARKET ANALYSIS OF FINANCIAL
    INSTITUTIONS AND ENTREPRENEURSHIP IN
    INDIA
    Dr. Sheeza Ismail Patel
    The University of Wollongong, Australia

    ABSTRACT:
    The purpose of this research is to investigate early-s.tage ease/difficulties faced by
    Start-Ups /MSME in India. The research is based in Bengaluru, Karnataka, India, five
    major banks located in the city were approached. The amount of support offered by
    banks to open a business bank account was investigated through interaction with
    representatives. It was found that banks offered several services at low charges and
    minimum requirements to ease the burden on new businesses. However, financial
    institutions do not offer early-stage funding, this made the new businesses struggle to
    gain initial working capital.
    Keywords: Entrepreneurship, financial institutions, Innovation, MSME, Start-Ups.
    Cite this Article: Dr. Sheeza Ismail Patel, Market Analysis of Financial Institutions
    and Entrepreneurship in India, International Journal of Management, 10 (6), 2019, pp.
    1–7.
    http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=10&IType=6

    1. INTRODUCTION
    The standard practice of business studies towards entrepreneurship is opportunity identification
    and new venture creation. Global Entrepreneurship Monitor (GEM) defines an ‘entrepreneur’ as
    an adult who is engaged in setting up or operating a new venture that is less than 42 months old
    (Parker, S. C. 2018). Entrepreneur catalyzes the process of economic development. The concept
    of equating new venture creation with entrepreneurship fails in several ways as most of them
    are ‘replicative’ rather than ‘innovative’ in nature. Innovative entrepreneurs create new
    products and processes that boost economic growth, while replicative entrepreneurs answer to
    the demand of a growing population by replicating a successful idea. Nevertheless, both
    contribute to economic growth, while innovative ventures are the cause of economic boost,
    replicative ventures are symptoms of growth.
    Entrepreneurship in India was earlier limited to the family business that created an
    ecosystem that incubated new generation to learn hands-on traditional business models with
    little innovation- funded by cash cows of the business and angel investors (Forbes India, 2019).
    With the emergence of technological innovation, the new generation of start-ups challenges the
    traditional business models. The professional network forms the main ecosystem of these

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  2. Dr. Sheeza Ismail Patel

    ventures. The purpose of this paper is to investigate the amount of support received by financial
    institutions for the innovators to embrace entrepreneurship.

    2. LITERATURE REVIEW
    A popular definition of an entrepreneur in business studies is someone who perceives an
    opportunity and creates an organization to pursue it (Bygrave and Hofer, 1991) often without
    the resources to do so. The creation of a new venture is the essence of entrepreneurship (Parker,
    S. C. 2018). From economists, perspective entrepreneurs are defined as self-employed
    individuals or small business owners. That being said, not every business owner can be an
    entrepreneur there are certain qualities to be taken into consideration (Drucker, 1985). An
    entrepreneur needs to have a growth mindset, be an action-oriented, highly motivated
    individual, with the ability to create, dedicate and discipline themselves towards their goals not
    to forget readiness to take risks, flexibility to change and innovate.
    A historical overview of entrepreneurship did not consider entrepreneurs as contributing to
    the economy and society at large. Today, however, entrepreneurs are held responsible for
    economic development, by introducing and implementing innovative ideas.
    These ideas include product innovation, process innovation, market innovation, and
    organizational innovations. The successful implementation, initiated by entrepreneurs, of these
    new ideas, gives rise to the satisfaction of new consumer wants and the creation of firms. The
    created firms engender economic growth and supply jobs for the working population. Hence,
    by stimulating both a product market and a labor market, entrepreneurs can be given credit for
    a considerable contribution to the economy. These are the benefits of successful
    entrepreneurship (Van Praag, C. M. 1999), not all entrepreneurs are successful, and many fail
    due to financial, psychological and social costs.
    To summarize, an entrepreneur is a person who takes, innovative solutions to a problem and
    turns them into financially viable opportunities while accepting uncertainty and risks associated
    with it, to create demand, wealth and employment

    3. TERMINOLOGIES
    Proprietorship: “It simply refers to a person who owns the business and is personally
    responsible for its debts.” (Entrepreneur, 2019)
    Partnership: “A legal form of business operation between two or more individuals who share
    management and profits. The two most common are general and limited partnerships.” (“Sole
    Proprietorship Definition – Entrepreneur Small Business Encyclopedia”, 2019)
    LLC: “LLC is a legal form of a company that provides limited liability to its owners in
    many jurisdictions. LLCs are well known for the flexibility that they provide to business
    owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being
    treated as a partnership, and, under certain circumstances, LLCs may be organized as a not-for-
    profit” (“Sole Proprietorship Definition – Entrepreneur Small Business Encyclopedia”, 2019).
    Corporation: “A corporation is a legal entity that is separate and distinct from its owners.
    Corporations enjoy most of the rights and responsibilities that individuals possess: they can
    enter contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay
    taxes” (“What Everyone Should Know about Corporations”, 2019).
    PAN card: PAN, or permanent account number, is a unique 10-digit alphanumeric identity
    allotted to each taxpayer by the Income Tax Department under the supervision of the Central
    Board of Direct Taxes (business today, 2019).

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  3. Market Analysis of Financial Institutions and Entrepreneurship in India

    GST/CST certificate: Goods and services tax registration certificate, from the concerned
    tax authorities to collect tax on behalf of the government and to avail Input Tax Credit. CST is
    Central sales tax certificate, for indirect tax on goods sold from one state to another.
    CIBIL (Credit Information Bureau (India) limited): is a Credit Bureau or Credit Information
    Company that maintains all the credit-related activities of a company. The registered financial
    institutions periodically submit information to CIBIL based on which it issues credit score.

    4. OBJECTIVES OF THE STUDY
    The objective of this study is to investigate the following:
    1. Requirements for start-ups/MSMEs to open a bank account.
    2. Minimum balance required for opening a business bank account.
    3. Minimum monthly balance required to maintain the business bank account.
    4. Monthly service charges.
    5. Length of time to open a business bank account.
    6. Minimum required turnover of the business.
    7. Level of financial support provided to new business.

    5. METHODOLOGY
    The study was conducted in Bengaluru, State of Karnataka, India. Bengaluru is the start-up hub
    of India which homes 5 out of 8 Unicorns of India and receives the fifth-largest amount of
    funding. The research, however, will focus on gathering information from financial institutions
    such as banks. A similar study was conducted to research the amount of support offered by
    banks located at the county of San Diego, California.
    This paper is modified to evaluate the start-up ecosystem of India. Five major banks were
    chosen as a model for this study: The State Bank of India, Bank of Baroda, Axis Bank, ICICI
    Bank, and HDFC Bank. Bank representatives were asked the following questions:
    Requirements for start-ups to open a bank account, Minimum balance required for opening a
    business bank account, Minimum monthly balance required to maintain the business bank
    account, monthly service fees, Length of time to open a business bank account, Minimum
    required turnover of the business to avail loan, Level of financial support provided to new
    business.

    6. ANALYSIS
    6.1. The requirement to open a bank account
    The basic requirements for opening a business bank account in all five banks were similar. The
    required documents included- Proof of identity – PAN card, voter ID card, passport, driving
    license, proof of address, Recent Colour Photograph, PAN/Form 49 A along with Form 60 if
    applied for PAN (for individuals without PAN), Account opening Cheque from existing
    Savings/Individual Current Account.
    In addition, requirements for proprietorship include, Certificate from a State Government
    or Statutory Body/Trade License/Sales Tax Certificate/Shop and Establishment Certificate,
    Letter of proprietorship duly signed by the proprietor, GST/CST certificate, IEC
    (Importer/Exporter Code by the Office of Director General of Foreign Trade (DGFT) in the
    name of Proprietary Concerned.
    For Partnership firms, the additional requirements include PAN of partnership firm,
    Partnership Deed and Registration Certificate, Establishment Certificate, a letter from partners
    authorizing opening and operating the account.

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  4. Dr. Sheeza Ismail Patel

    6.2. Minimum balance required for opening a business bank account.
    The minimum balance required by banks ranged from ‘Pay as you use’ to INR. 25000. Most
    banks required a minimum balance of INR 10,000, however, some banks offered NIL initial
    balance with maintaining a quarterly average of INR 2,500. The intention behind is to kick-
    start businesses and avail services hassle-free.

    30000
    25000
    25000

    20000

    15000
    10000 10000 10000
    10000

    5000
    900
    0
    SBI BOB Axis ICICI HDFC

    6.3. Minimum monthly balance required in the business bank account.
    The minimum monthly balance required ranges from zero to 25,000 INR. Banks offer several
    options to the businesses based on their stage, from inception to establishment. The monthly
    minimum balance account for New Start-up current account is Nil, while in some cases it can
    be Nil for the first six months thereafter it is INR 25,000. The average monthly minimum
    balance required by most banks is INR 10,000, while it is quarterly INR 10,000 in other banks.
    Start-Ups have the facility to choose the account type according to their business needs in the
    same bank.

    2500/
    quarterly

    10000/
    quarterly 10000 25000

    Nil for six
    months

    New Start-Up Current Monthly average Balance Business Advantage
    Account for most bank accounts Current Account

    6.4. Monthly Service fees
    Indian Banks charges vary for different services, including initial waive-offs like, free digital
    transactions, debit cards are generally waived off service fee for the first year thereafter they
    are charged, Depositing cash beyond 50,000 INR is charged while for some banks it is 25,000
    INR, with unlimited withdrawal, cheques are charged after 50 issued, statement of the account
    is issued twice free of charge.
    Most banks charge accounts for non-maintenance of minimum balance. It can from INR 350
    per quarter to INR 5000. While some banks charge straight up 50 INR per month.

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  5. Market Analysis of Financial Institutions and Entrepreneurship in India

    50 350 1000 1500 5000

    6.5. Length of time to open a business bank account.
    The time required to open the bank account depends on the availability of all the required
    documents. The services are pretty quick if all documents are precise. It may take 15 minutes
    to 45 minutes to register for the account. The activation may take place on the same day or a
    week.

    15 45 4 to 5 days

    30 24 hours

    6.6. Minimum required turnover of the business
    There is no minimum turnover required by a business to open a business bank account with any
    of the analyzed banks. Entrepreneurs can approach the bank to sanction them business loans.
    The banks take into account the turnover rate for companies existing for 36 months, the range
    of turnover required is from 20,00,000 INR to 1,00,00,000 INR.

    1CR
    60L
    30L
    20L

    6.7. Level of financial support provided to new business
    Indian banks provide financial support to entrepreneurs through various government schemes
    and working capital loans. Government schemes such as Pradhan mantra mudra yojana,
    StandUp India offers loans to the homegrown enterprise from 50,000 rupees to 10 lakh based
    on the stage of growth/development and funding needs. Banks offer technology-based start-ups
    working capital financing through cash credits, overdraft or working capital loans according to
    their risk profile.
    Based on CIBIL score (300 – 900), age of business (36 months), turnover rate and age of
    the entrepreneur (21 – 65 years) loans are offered from 1,00,000 to 50,00,000 INR on an average
    interest rate of 15%.

    7. CONCLUSION
    Indian start-up ecosystem hosts nearly 40,000 start-ups, producing unicorns and high profile
    exits with international players. The micro, small and medium enterprise sector values 577CR.
    Despite the development, many ideas fail to take a flight due to a lack of working capital. An
    established start-up attracts investors, however, getting funding for an early-stage idea is a
    tremendous challenge.
    The initial stages of starting a business include setting up a business bank account. The goal
    of this research paper is to investigate the amount of administrative and financial support given
    to the start-ups by financial institutions of India. The study revolves around the following
    questions- Requirements for start-ups to open a bank account, Minimum balance required for

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  6. Dr. Sheeza Ismail Patel

    opening a business bank account, Minimum monthly balance required to maintain the business
    bank account, monthly service fees, Length of time to open a business bank account, Minimum
    required turnover of the business to avail loan, Level of financial support provided to new
    business.
    The documentation procedure for opening a business bank account is simple yet a lot of
    documents are required to register an account for proprietorship. The banks offer ‘pay as you
    use’ services to ease the burden on businesses, while others offer very low minimum balance
    required to open an account. The banks offer entrepreneurs various business account types such
    as- New start-up current account, Shubh Arambh (new beginning), business advantage current
    account, which include zero minimum balance to very low monthly average balance. Waive-
    offs and very low monthly service fees are offered to help the new businesses initiate and scale-
    up.
    The length of time required to open a bank account again depends on the availability of all
    documentation, the process can be very quick between 15 to 45 minutes. The banks do not
    require a minimum turnover to start a bank account, however, businesses can apply for bank
    loans only after 36 months of existence and turnover above 20 Lakh. This makes gaining early-
    stage funding impossible, some banks offer government schemes such as PMMY and start-up
    India for MSME. Although Indian Banks do not offer loans directly at an early stage of
    businesses, products like BizCircle, iStartup and Axis Start-up, support them by offering zero
    balance current account, telebanking support, forex services, advisory, and network building.
    Research in the field of entrepreneurship has tremendous scope, this study can be extended
    to other cities of India at large. Different variables for ease of doing business such as permits,
    trading across borders, intellectual property protection and foreign funding, etc. should be taken
    into account to gain a clearer picture.

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    http://www.iaeme.com/IJM/index.asp 6 editor@iaeme.com

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