Financing of SME firms in India

Abstract

A major bottleneck to the growth of the vital Indian small and medium enterprises (SME) sector is its lack of adequate access to finance. This paper examines the major issues in the financing of SMEs in the Indian context, such as the information asymmetry facing banks and the efficacy of measures such as credit scoring for SMEs; whether transaction lending would be adequate to address the information issues or would lending have to be based on a relationship with the SME, using both ‘hard’ and ‘soft’ information; and whether the size and origin of the bank affect the availability of credit to SMEs. Ranjana Kumar, a prominent Indian banker who also served, till recently, as the Vigilance Commissioner in the Central Vigilance Commission, speaks on some aspects that are raised in the paper, such as the importance of the credit appraisal and risk assessment processes in today’s banking landscape and the role that banks can play in developing the SME sector in India.

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