SME – MAIN GROWTH DRIVER

The SME sector is the main growth driver for

the economy.
• In a nation's economy, it's the small and micro
enterprises which play a vital role.
•For, they not only give employment to a large
number of unskilled and semi-skilled people but
also support bigger industries by supplying raw
material, basic goods, finished parts and
components, etc.
• The critical role and place of the MSME sector
in the Indian economy in employment eneration,
exports and economic empowerment of a vast
section of the population is well known.

The Micro, Small and Medium Enterprises

(MSME) segment has been a vital component of
Indian economy. This sector accounts for
around 40.0% of total industrial production,
34.0% of industrial exports, 95.0% of industrial
units and 35.0% of total employment in
manufacturing and service sectors of India. The
unorganized sector which forms a major
component of the MSE segment comprises
almost 95.0% of total
industrial units and employs over 65 million
people.
•The contribution of Services Sector within the
SME segment is quite
significant; especially IT enabled services,
hospitality services, tourism,
couriering, transportation, etc. The SMEs have
also been playing a vital
role in the job creation process. To give a
focused attention to emerging
SMEs in India, the Bank has been considering
other commercial units
with a turnover up to Rs 150 crore at par with
the SMEs.
.
The MSMEs of yesterday are
the large
corporates of today and could
be MNCs of
tomorrow. Thus the banks and
other
agencies should take pride
while servicing
the MSMEs as they are playing
an
instrumental role in the
formation of
MNCs of tomorrow.
Eg NIRMA – RELIENCE –
ADANI They
were SE originally became ME
then Mid
Corporate – Large corporate

It was, therefore, only appropriate that the

Government of
India enacted the Micro, Small and Medium
Enterprises
Development Act, 2006.
Subsequently, MSMED Act was
operationalized with effect
from 2nd October 2006, which defines an
“enterprise” instead of
an “industry” to give recognition to service
sector and also
defines a “medium enterprise” to facilitate
technology
upgradation and graduation
An increasingly globalised world, marked by
competition and innovation, is
posing newer and varied challenges to the MSEs.
Because of their small size,
individual MSEs are handicapped in achieving
economies of scale in procuring
equipment, raw materials, finance and consulting
services.
Often, they are unable to identify potential
markets to take advantage of
market opportunities, which require large volumes,
consistent quality,
homogenous standards and assured supply.
In today’s globalised economy, improvements in
products, processes,
technology and organizational functions such as
design, logistics and marketing
have become key drivers in delivering
competitiveness, for the MSEs.
MSEs primarily rely on bank finance for a variety
of purposes including
purchase of land, building, plant and machinery as
also for working capital, etc.
.
Availability of timely credit at reasonable rates is
the need of the sector. Here
the Banks & FIs plays vital role.

The non credit related factors which affect the

growth rate of small enterprises
sector are :
Non-availability of power and other infrastructural
facilities,
Delay in getting clearance from different agencies,
Lack of entrepreneurship development,
infrastructure and historical / social
bottlenecks etc.
The solution thus lies in the engagement of the
Central and State Government
in easing the licensing and documentation
requirements, exit policy and labour
laws, putting in place an efficient tax structure in
conformity with public
finance principles, appropriate infrastructure
development etc.
Delayed payments from large corporate. While
banks have been advised to
allocate a sub-limit in respect of large borrower
accounts, for making payments
to the MSE units against purchases from them but it
is not possible for banks to
force the large buyers to utilize the limit for making
payments
RBI has recently taken several measures to
enhance credit delivery to the
employment intensive micro and small enterprises
(MSE) sector.
One of the major concerns of the MSE sector is
the inability to arrange for
collateral security and or third party guarantee.
As a result, new entrepreneurs find it difficult to
access credit from the
banking system. Accordingly, RBI have issued
guidelines from time to time
thereby advising banks to grant collateral free loans
up to Rs. 10 lakh
sanctioned to the units of MSE sector (both
manufacturing and service
enterprises).
Introduction of Financing under CGTMSE
wherein Collateral free Loan up
To Rs. 100 lacs to MSME unit is envisaged

Policy Package for Stepping up Credit to Small and Medium Enterprises --Announcements
made by the Union Finance Minister

RBI/2005-06/131
RPCD.PLNFS. BC.No.31/ 06.02.31/ 2005-06

August 19, 2005

The Chairman/Managing Director

All Public Sector Banks

Dear Sir,

Policy Package for Stepping up Credit to Small and Medium Enterprises --Announcements made
by the Union Finance Minister

The Hon'ble Finance Minister, Government of India has announced certain measures in the Parliament
on August 10, 2005 for stepping up credit to small and medium enterprises (copy of the policy package
enclosed), which are required to be implemented by all public sector banks. Accordingly, banks may take
action as under:

Measures for improving credit flow to the sector:

2. At present, a small scale industrial unit is an industrial undertaking in which investment in plant and
machinery, does not exceed Rs.1 crore except in respect of certain specified items under hosiery, hand
tools, drugs and pharmaceuticals, stationery items and sports goods where this investment limit has been
enhanced to Rs.5 crore. A comprehensive legislation which would enable the paradigm shift from small
scale industry to small and medium enterprises is under consideration of Parliament. Pending enactment
of the above legislation, current SSI/tiny industries definition may continue. Units with investment in plant
and machinery in excess of SSI limit and up to Rs.10 crore may be treated as Medium Enterprises (ME).
Only SSI financing will be included in Priority Sector.

3. All banks may fix self-targets for financing to SME sector so as to reflect a higher disbursement over
the immediately preceding year, while the sub-targets for financing tiny units and smaller units to the
extent of 40% and 20% respectively may continue. Banks may arrange to compile data on outstanding
credit to SME sector as on March 31, 2005 as per new definition and also showing the break up
separately for tiny, small and medium enterprises.

4. Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a
transparent rating system with cost of credit being linked to the credit rating of enterprise.
SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment Model
(RAM) and a comprehensive rating model for risk assessment of proposals for SMEs. The banks may
consider to take advantage of these models as appropriate and reduce their transaction costs.

The National Small Industries Corporation has recently introduced a Credit Rating Scheme for
encouraging SSI units to get themselves credit rated by reputed credit rating agencies. Banks may
consider these ratings as per availability and wherever appropriate structure their rates of interest
depending on the ratings assigned to the borrowing SME units.

SIDBI in association with Credit Information Bureau (India) Ltd. is initiating necessary steps to set up a
credit rating agency expeditiously.

5. In order to increase the outreach of formal credit to the SME sector, all banks, including Regional Rural
Banks may make concerted efforts to provide credit cover on an average to at least 5 new small/medium
enterprises at each of their semi urban/urban branches per year.

6. Reserve Bank had issued a master circular on lending to SSI sector vide circular
RPCD.PLNFS.BC.No.03/06.02.31/2005-06 dated July 1, 2005 incorporating instructions on the time to be
taken for disposing of loan applications of SSI units, the limit up to which banks are obliged to grant
collateral-free loans, etc. Based on the above guidelines, the Boards of banks may formulate a
comprehensive and more liberal policies than the existing policies in respect of loans to SME sector. Till
the banks formulate such a policy, the current instructions of Reserve Bank will be applicable to advances
granted/to be granted by banks to SME units.

7. Cluster based approach for financing SME sector offers possibilities of reduction in transaction costs,
mitigation of risk and also provide an appropriate scale for improvement in infrastructure. About 388
clusters have already been identified. In view of the benefits accruing on account of cluster based
approach for financing SME sector, banks may treat it as a thrust area and increasingly adopt the same
for SME financing. SIDBI in association with Indian Banks’ Association will initiate necessary steps to
collect and pool common data on risks in each identified clusters and develop an IT-enabled application,
appraisal and monitoring system for small (including tiny) enterprises. It is expected that this measure will
help in reducing transaction costs as well as improve credit flow to the small and tiny enterprises in the
clusters. To broaden the financing options for infrastructure development in clusters through public private
partnership, SIDBI will formulate a scheme in consultation with the stakeholders.

In the meantime, SIDBI has already initiated the process of establishing Small Enterprises Financial
Centres (SEFCs) in select clusters. Risk profile of each cluster will be studied by professional credit rating
agency and such risk profile reports will be made available to commercial banks. Each lead bank of a
district may consider adoption of at least one cluster.

8. A debt restructuring mechanism for nursing of sick units in SME sector and a One Time Settlement
(OTS) Scheme for small scale NPA accounts in the books of the banks as on March 31, 2004 are being
introduced. Necessary circulars are being issued in this regard separately.

Monitoring and Review Mechanism

a. The existing institutional arrangements for review of credit to SSI sector like the Standing Advisory
Committee in Reserve Bank and cells at the bank head office level as also at important regional centres
will review periodically flow of credit to SME, including tiny sector as whole.

b. At the Regional offices, the Reserve Bank is constituting empowered committees with the Regional
Director of the Reserve Bank as the Chairman to review the progress in SME financing and rehabilitation
of sick SSI and ME units and to coordinate with other banks/financial institutions and the state
government in removing bottlenecks, if any, to ensure smooth flow of credit to the sector. These Regional
level committees may decide the need to have similar committees at cluster/district levels.

c. The banks may ensure specialized SME branches in identified clusters/centres with preponderance of
Medium Enterprises to enable the SME entrepreneurs to have easy access to the bank credit and to
equip bank personnel to develop requisite expertise. The existing specialised SSI branches may be also
be redesignated as SME branches. Though the core competence will be utilized for extending finance
and other services to SME sector, they will have operational flexibility to extend finance/render other
services to other sectors/borrowers.

d. For wider dissemination and easy accessibility, the policy guidelines formulated by Boards of banks as
well as instructions/guidelines issued by Reserve Bank may be displayed on the respective web sites of
banks as well as web site of SIDBI. The banks may also prominently display all the facilities/schemes
offered by them to small entrepreneurs at each of their branches.

10. The above instructions and the guidelines to be formulated by your Board of Directors may please be
advised to your controlling offices and branches for immediate implementation.

11. Boards of banks may review the progress in achieving the self-set targets as also financing of SME
accounts (including tiny sector) on a quarterly basis to ensure that the required emphasis at the highest
forum of the banks is given to this sector.

Policy Package for stepping up credit to Small and Medium Enterprises

The small-scale industries (SSI) produce about 8000 products, contribute 40% of the industrial output and
offer the largest employment after agriculture. The sector, therefore, presents an opportunity to the nation
to harness local competitive advantages for achieving global dominance. In recognition of these aspects,
the National Common Minimum Programme makes the following declarations for accelerating the
development of small-scale sector.

"Household and artisanal manufacturing will be given greater technological, investment and marketing
support. Small–scale industry will be freed from Inspector Raj and given full credit, technological and
marketing support. Infrastructure upgradation in major industrial clusters will receive urgent attention."

2. From SSI to SME: Defining the New Paradigm

2.1 Government policy as well as credit policy has so far concentrated on manufacturing units in the
small-scale sector. The lowering of trade barriers across the globe has increased the minimum viable
scale of enterprises. The size of the unit and technology employed for firms to be globally competitive is
now of a higher order. The definition of small-scale sector needs to be revisited and the policy should
consider inclusion of services and trade sectors within its ambit. In keeping with global practice,. there is
also a need to broaden the current concept of the sector and include the medium enterprises in a
composite sector of Small and Medium Enterprises (SMEs). A comprehensive legislation, which would
enable the paradigm shift from small-scale industry to small and medium enterprises under consideration
of Parliament. The Reserve Bank of India, had meanwhile set up an Internal Group which has
recommended:

"Current SSI/tiny industries definition may continue. Units with investment in plant and machinery in
excess of SSI limit and up to Rs.10 crore may be treated as Medium Enterprises (ME). The definition may
be reviewed after enactment of the Small and Medium Enterprises Development Bill. Only SSI financing
will be included in Priority Sector."
2.2 It is proposed to accept the recommendation with regard to the credit facilities being offered by the
banking sector and accordingly request the Reserve Bank of India to advise the banks to frame a policy
for enhancing the flow of credit to both small and medium enterprises, within the overall framework of
credit policy of banks to small and medium enterprises.

2.3. The challenges being faced by the small and medium scale sector may be briefly set out as follows-

a. Small and Medium Enterprises (SME), particularly the tiny segment of the small enterprises have
inadequate access to finance due to lack of financial information and non-formal business practices.
SMEs also lack access to private equity and venture capital and have a very limited access to secondary
market instruments.

b.SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to
market fluctuations.

c.SMEs lack easy access to inter-state and international markets.

d.The access of SMEs to technology and product innovations is also limited. There is lack of awareness
of global best practices.

e.SMEs face considerable delays in the settlement of dues/payment of bills by the large scale buyers.

With the deregulation of the financial sector, the ability of the banks to service the credit requirements of
the SME sector depends on the underlying transaction costs, efficient recovery processes and available
security. There is an immediate need for the banking sector to focus on credit and finance requirements
of SMEs.

3. Measures to increase the quantum of credit to SMEs at the right price

3.1 Public Sector Banks will be advised to fix their own targets for funding SMEs in order to achieve a
minimum 20% year on year growth in credit to SMEs. The objective is to double the flow of credit from
Rs.67,600 crore in 2004-05 to Rs.135,200 crore to the SME sector by 2009-10, i.e. within a period of 5
years.

3.2 Public Sector Banks will be advised to follow a transparent rating system with cost of credit being
linked to the credit rating of the enterprise.

3.3 SIDBI in association with Credit Information Bureau(India) Ltd. (CIBIL)will expedite setting up a credit
rating agency.

3.4 SIDBI in association with Indian Banks’ Association (IBA) would collect and poo common data on risk
in each identified cluster and develop an IT-enabled application, appraisal and monitoring system for
small (including tiny) enterprises. This would help reduce transaction cost as well as improve credit flow to
small (including tiny) enterprises in the clusters.

3.5 The National Small Industries Corporation has recently introduced a Credit Rating Scheme for
encouraging SSI units to get themselves credit rated by reputed credit rating agencies. Public Sector
Banks will be advised to consider these ratings appropriately and as per availability, and structure their
rates suitably.

3.6 SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment Model
(RAM) and a comprehensive rating model for risk assessment of credit proposals for SMEs. Public sector
banks will be advised to take advantage of these models as appropriate and reduce their transaction
costs.

4. Outreach of Formal Credit: Opening of New Accounts

The commercial banks (including regional rural banks) with over 67,000 branches, will make concerted
efforts to provide credit cover on an average to at least 5 new tiny,small and medium enterprises at each
of their semi urban/urban branches per year

5. Nursing the Sick Units Back to Health: Debt Restructuring

Reserve Bank will issue detailed guidelines relating to debt restructuring mechanism so as to ensure
restructuring of debt of all eligible small and medium enterprises at terms which are not less favourable
than the Corporate Debt Restructuring (CDR) mechanism in the banking sector. The restructuring would
follow upon a request to that effect from the borrowing unit. All accounts, except those classified as ‘loss
assets’ will be eligible for restructuring, provided the industrial units are viable or potentially viable.

Based on the Reserve Bank’s guidelines, banks may formulate, with the approval of their Boards of
Directors, more liberal policies relating to restructuring of accounts. Until the banks formulate their own
policies, Reserve Bank’s guidelines will be operative.

A one-time settlement scheme to apply to small-scale NPA accounts in the books of the banks as on
March 31, 2004 will be introduced.The scheme will be in force upto March 31, 2006.

6. Facilitative Measures

Reserve Bank had issued a detailed master circular on March 2005 on the time to be taken for disposing
of loan applications of SSI units, the limit up to which banks are obliged to grant collateral-free and
composite loans, norms for computation of working capital credit limits to SSI units, opening of atleast one
specialized SSI branch in each district, etc. Taking these guidelines as indicative minimum, banks will
formulate a comprehensive and more liberal policy relating to advances to SME sector. Untill the banks
formulate such a policy, the extant instructions of Reserve Bank will be applicable to advances granted or
to be granted by banks to SME units.

7. Credit Guarantee Fund Trust Scheme for Small Industries(CGTSI)

At present, Member Lending Institutions (MLIs), like banks, are provided guarantee cover of 75% of the
amount of default by CGTSI,I respect of term loan and/or working capital facilities up to Rs.25 lakh
extended by the MLIs to new and existing SSI units/IT/software units/small scale service business
enterprises (SSSBEs), without collateral security and/or third party guarantee. One-time guarantee fee of
2.5% and annual service fee of 0.75% of the credit facility sanctioned are currently charged by CGTSI
from the MLIs. In order to reduce the cost of guarantee to the weaker segments of the borrowers,
particularly tiny units, the CGTSI will be advised to reduce the one-time guarantee fee from 2.5% to 1.5%
for all (i) loans up to Rs.2 lakh, (ii) eligible women entrepreneurs, and (iii) eligible borrowers located in the
North Eastern regions (Sikkim) and Jammu & Kashmir. Further, public sector banks will be encouraged to
absorb the annual service fee in excess of 0.25% in respect of guarantee for all (i) loans up to Rs.2 lakh,
(ii)eligible women entrepreneurs, and (iii) eligible borrowers located in the North Eastern regions(Sikkim)
and Jammu & Kashmir.

8. Cluster based approach

Cluster based approach for financing SME sector offers possibilities of reduction of transaction costs and
mitigation of risk. About 388 clusters have already been identified. Cluster based approach now be
treated as a thrust area. Banks will increasingly adopt the cluster-based approach for SME financing. To
broaden the financing options for infrastructure development in clusters through public private
partnership, SIDBI will formulate a scheme in consultation with the stakeholders.

SIDBI has already initiated the process of establishing Small Enterprises Financial Centres in select
clusters. Risk profile of each cluster would be studied by a professional credit rating agency and such risk
profile reports would be made available to commercial banks. Each lead bank of a district will consider
adoption of atleast one cluster

9. Setting up of Watchdogs: Monitoring and Review

The following supervisory arrangements will be ensured:

a. The existing institutional arrangements for review of credit to SSI sector like the Standing Advisory
Committee in Reserve Bank of India and cells at the banks’ head office level as well as at important
regional centres will be made more rigorous and regular. They will also review the flow of credit to small
(SSI) and medium enterprises.

b. At the Regional offices, the Reserve Bank will constitute empowered committees with the Regional
Director of the Reserve Bank as the Chairman to review the progress in SME financing and rehabilitation
of sick small (SSI) and medium units and to coordinate with other banks/financial institutions and the state
governments in removing bottlenecks, if any, to ensure smooth flow of credit to the sector. The said
Regional level committees may decide on the need to have similar committees at cluster/district levels.

c. The banks will ensure specialized SME branches in identified clusters/centres with preponderance of
small enterprises to enable the entrepreneurs to have easy access to the bank credit and to equip bank
personnel to develop requisite expertise. The existing specialised SSI branches may be also be
redesignated as SME branches.

d. Boards of banks will be advised to review the progress in achieving the self-set targets as also
rehabilitation and restructuring of SME accounts on a quarterly basis to ensure that the required
emphasis is given to this sector.

e.For wider dissemination and easy accessibility, the policy guidelines formulated by Boards of banks as
well as instructions/guidelines issued by Reserve Bank will be displayed on the respective websites of
Public Sector Banks as well as website of SIDBI. The banks would also be advised to prominently display
all the facilities/schemes offered by them to the small entrepreneurs at each of their branches.

There are a number of issues in lending to the SME sector, which banks generally face. The key issues
among them are outlined below:

(a) Information Asymmetry:

Accurate information about the borrower is a critical input for decision-making by banks in the lending
process. Where information asymmetry (a situation where business owners or managers know more

about the prospects for, and risks facing their business than their lenders) exists, lenders may respond
by increasing lending margins to levels in excess of that which the inherent risks would require.
However, the sheer ticket size of SME lending makes it inviable for banks to invest in development of
information systems about SME borrowers. In such situations, banks may also curtail the extent of
lending even when SMEs are willing to pay a fair riskadjusted cost of capital. The implication of raising
interest rates and/or curtailing lending is that banks will not be able to fi nance as many projects as

otherwise would have been the case.

(b) Granularity: This refers to a situation where the risk grading system at banks does not have the
requisite capability to discriminate between good and bad risks. The consequence is tightening of credit
terms, or an increase in prices, or both. From the borrower’s perspective, this leads to an outcome here
the bank is over-pricing good risks and under-pricing bad risks. The fact that most banks in India have
not developed adequate expertise in SME lending risk assessment exercises leads to the problem of
granularity when it comes to SME lending.

(c) Pecking Order Theory:

Pecking order theory fl ows from the above two issues, which makes SME lending highly diffi cult for
banks. Under this hypothesis, SMEs, which face a cost of lending that is above the true risk-adjusted

cost, will have incentives to seek out alternative sources of funding. Evidence suggests that in such
situations SMEs prefer to utilise retained earnings instead of raising loans from banks.

(d) Moral Hazard: Even when loans are made to SMEs, it may so happen that the owners of these SMEs
take higher risks than they otherwise would without lending support from the banks. One reason for this

situation is that the owner of the fi rm benefi ts fully from any additional returns but does not suffer
disproportionately if the fi rm is liquidated. This is referred to as the moralhazard problem, which can be

viewed as creating a situation of over-investment. The moral hazard problem may, thus, result in SME
lending turning bad in a short period of time, a situation that all banks would like to avoid.

(e) Switching Costs: SMEs may fi nd it harder to switch banks, when countered with any issue. It is a
known fact that the smaller the business, the more signifi cant the switching costs are likely to be and,

therefore, it is less likely that the benefi ts of switching outweigh the costs involved. This situation
results in SME lending becoming a sellers market, which may not be attractive to SME borrowers.

Steps for Smooth SME Lending In order to ensure that the Small and Medium Enterprises (SMEs) play a
very significant role in the economy in terms of balanced and sustainable growth, employment
generation, development of entrepreneurial skills and contribution to export earnings. However, despite
their importance to the economy, most SMEs are not able to stand up to the challenges of globalisation,
mainly because of difficulties in the area of financing. With the opening up of the Indian economy, it has
become necessary to consider measures for smoothening the flow of credit to this sector. The article
provides a crosscountry perspective in this regard and highlights the Indian scenario with reference to
SME lending.
Finance, the following steps could be taken as remedial measures:

Collateral: Existence of collateral that can be offered to banks by SMEs could be one effective way of
mitigating risk. Banks could, therefore, look at collateral when pursuing the question of SME lending. It
can also be stated that a borrower’s willingness to accept a collateralised loan contract offering lower
interest (relative to unsecured loans) will be inversely related to its default risk. However, not all SMEs
would be able to offer collateral to banks. Hence, Reserve Bank of India (RBI) allows banks, with a good
track record and fi nancial position on SSI units, to dispense with collateral requirements for loans up to
Rs. 25 lakhs.

(a) Relationships: The length of the relationship between a bank and its SME customers is also an
important factor in reducing information asymmetry, as an established relationship helps to create
economies of scale in information production. A relationship between a SME and a bank of considerable
duration allows the bank to build up a good picture of the SME, the industry within which it operates

and the calibre of the peoplerunning the business. The closer the relationship, the better are the signals
received by the bank regarding managerial attributes and business prospects.

(b) Quality of Information:SMEs are required to provide accurate and qualitative information to the
banks for them to undertake a reliable risk assessment. Accurate risk assessments obviously rely upon

good information regarding the SME and its prospects. Hence, it is suggested that banks should make
efforts to encourage SMEs to improve the quality of information provided.

(c) Customer Consideration:The SME market is somewhat different to the corporate market in that
corporate customers generally have a wide range of fi nancing options to choose from and are not as
dependent on bank fi nancing as is the case with SMEs. The extent to which SMEs can take necessary
steps, with the aid of public initiatives, to easily switch to another bank is another factor that can infl
uence the level of competitive pressure on banks in the case of SME lending. Role of Government and

Banking Regulator in SME Lending As is apparent, the above factors are only idealistic solutions and may
not be practical for SMEs to follow because they are faced with several problems such as weak fi
-nancial strength, inability toprovide adequate collateral and other factors. Hence, the Government and
banking su- It is a known fact that the smaller the business, the more signifi cant the switching costs are

likely to be and, therefore, it is less likely that the benefi ts of switching outweigh the costs involved
pervisors should take a holistic view of the SME Sector while considering SME fi nancing, taking into
account the risksfaced by banks and the problems faced by SMEs. In this regard, the initiatives taken

up by the Government and Banking Regulators across various countries and in India are as follows:

(a) Cross-country perspectives:

Increased competition in fi - nancial markets in developed countries has led several Governments
and Banking Regulators to encourage banks and other fi nancial institutions to launch a number of
initiatives to serve the fi nancing needs of SMEs effectively. Some of these initiatives (along with
necessary government and regulatory support) include the promotion of venture capital; receivables fi
nancing; leasing fi nance; soft loans, grants, and guarantees for entry into public tenders; setting up of
special fi nancing companies with state participation; micro-fi - nance programmes, etc. For instance,
New Zealand has introduced a scheme called ‘BIZ Investment Ready’, which targets innovative
businesses and entrepreneurs seeking funds to expand, diversify or commercialise a new concept. The
European Union has devised a scheme to facilitate contacts between SMEs and banks and other fi
nancial institutions, by developing a ‘code of good practice’ for SME lending. The Philippines has
instituted a fi nancing programme called SME Force (SME Financing for Organisationally Competent

and Excellent Franchise Businesses), which is a franchise development fi nancing facility that will be
implemented with the participation of franchiser organisations.

(b) Indian scenario – Government initiatives: Even in India, the fi nancing of the SME sector has received
some attention since independence. Some of the initiatives taken by the Government in this regard

are as follows: Setting up of the Small Industries Development Bank of India (SIDBI), as the apex refi
nance institution in India for the purpose of channelling of fi nance to Small Scale Industries (SSIs)

and SMEs in an organised manner. In line with the announcement made in the Interim Budget for 2004-
2005, SIDBI has proposed two fun dbased initiatives for improving credit fl ow to the SME sector

as follows: A contribution of Rs.100 crore to the Rs. 500 crore corpus of the SME Growth Fund (SGF),
which shall make primarily equity/equity related capital investments in accordance with SEBI guidelines,

in SMEs operating in various growth sectors such as the life sciences, biotechnology, etc. The SME Fund
of Rs. 10,000 crore to give an impetus to the fl ow of funds to the SME sector. This fund has begun
operations with effect from April 2004. Under the Fund, assistance is provided to SMEs at affordable
rates of interest, and direct fi nance is extended to SMEs through SIDBI’s network of branches.

Further, refi nance to State Financial Corporations (SFCs) has also been made attractive in terms of low
rates of interest. The Government of India has launched the Credit Linked Capital Subsidy Scheme
(CLCSS), which aims at facilitating technology upgradation of SMEs in specifi ed products/sub-sectors.

Existence of collateral that can be offered to banks by SMEs could be one effective way of mitigating
risk. Banks could, therefore, look at collateral when pursuing the question of SME lending

SIDBI has recently negotiated a line of credit with the World Bank for fi nancing nd development of
SMEs in India, with a view to upscale the credit fl ow to the sector and raising resources for the

SME Fund.

(c) Indian scenario – RBI initiatives: The RBI, from time to time, has formed several committees and
working groups to study the fl ow of credit to the SME sector in a comprehensive manner, and
has issued detailed guidelines in this regard. Recently it has constituted an Internal Group under the
Chairmanship of Shri C. S. Murthy to, interalia, consider the relaxation and liberalisation of credit

lending norms that are applicable to the SME sector. The Group has submitted its report on June 6,
2005.

The Internal Group, with reference to fi nancing of SMEs, has recommended: Constitution of
empowered committees at the regional offi ces of the Reserve Bank to periodically review the progress
in SME fi nancing and also to coordinate with other banks/fi nancial institutions and the state
governments in removing bottlenecks, if any, to ensure smooth fl ow of credit to the sector. Opening of
specialized SME branches in identifi ed clusters/centres with preponderance of SME units to enable
entrepreneurs to have easy access to bank credit and to equip bank personnel to develop the requisite

expertise. Empowerment of the boards of banks to formulate policies relating to restructuring

of accounts of SME units subject to certain guidelines. Restructuring of accounts of corporate SME

borrowers having credit limits aggregating Rs. 10 crore or more under multiple banking arrangements to
be covered under the revised CDR mechanism. Appropriate authorities are currently examining the
above recommendations of the Internal Group.

Conclusion

Without adequate bank fi - nance, SMEs cannot acquire or absorb new technologies nor can they xpand
to compete in global markets or even strike business linkages with larger fi rms. Similarly, banks cannot
consider the fi nancing of SMEs as a viable option unless their priorities are addressed by SMEs. In this

regard, SMEs should be assisted largely by public initiatives involving participation of the banking
industry. In India, however, the various public initiatives for promoting fi nance to SMEs have not

been as successful as envisaged because there has been some overlapping of regional and

national initiatives. Efforts to harmonise the standards and practices, therefore, need to be properly
coordinated to facilitate SME fi nance further. The extent to which SMEs can take necessary steps, with
the aid of public initiatives, to easily switch to another bank is another factor that can infl uence

the level of competitive pressure on banks in the case of SME lending