Small and Medium Enterprises (SMEs) are essential for the economic growth of a nation. In India, this sector contributes over 40% of the industrial output and 35% of direct and 15% of indirect exports. It is the second largest employment sector and has consistently grown at a higher rate when compared to the industrial segment. The economic recession has resulted in severe distress for the SMEs. This segment is driven by entrepreneurs’ energies, innovation, and creativity. A major deterrent to the lack of growth for these businesses is the availability of funds. This article looks at the Opportunities and Challenges of SME Finance

Here are three major challenges that are faced by entrepreneurs:

1. Access to timely and adequate credit facilities

Most of the entrepreneurs lack financial knowledge and have limited capital. Although several institutions offer SME loans, these are often not available when needed due to the tedious documentation and long disbursement period. In addition, banks require collateral securities to fund the SMEs, which further limit the availability of credit to this sector. Furthermore, these loans are offered at high-interest rates, which make it impossible for entrepreneurs to avail of structured funding.

2. Low productivity due to lack of skilled labor

The SMEs have limited resources that reduce their production capabilities. In addition, skilled labor at affordable rates is not largely available to these businesses. This limits the growth potential for the companies, which increases their riskiness for institutions while offering SME finance facilities.

3. Technology and modernization

The SMEs are unable to acquire modern technology which helps improve their operational efficiencies. Additionally, these businesses face several constraints on modernization, which limits their expansion. Many companies are unable to reach new markets because of lack of modern technology. All these factors make it difficult for SMEs to access credit facilities from the banks.

There is an immediate need of finding ways to make modern technology available to the SMEs. Furthermore, they need to overcome the labor market constraints to improve productivity. Most importantly, these businesses must have quick and easy access to credit through SME banking.

Here are some opportunities available for lenders to fund SMEs in India.

1. Priority sector lending

Commercial banks are mandatorily required to lend certain percent of the net bank credit (NBC) to the priority sector. Public and private banks must lend at least 40% of the NBC while foreign banks are required to maintain this at 32% of the NBC. Any shortfall in these requirements must be deposited in the Small Enterprise Development Fund (SEDF) created by Small Industries Development Bank of India (SIDBI). This compulsory priority sector lending offers banks an excellent opportunity to fund SMEs to take their businesses to the next level.

2. Policy packages by the Government

Policy makers comprehend the importance of supporting the SME sector. Therefore, they offer various financial and fiscal incentives for overcoming the challenges and growing their businesses. One such package is the credit guarantee scheme to encourage banks in order to offer loans. Another policy is the performance and credit rating scheme with the objective of improving the SME ratings to enable them to access credit at affordable rates.

Combined efforts needed to overcome challenges

Transforming India into a major manufacturing hub requires the SMEs to adopt modifications to survive the economic situation. Entrepreneurs must strive to benefit from the large number of opportunities offered through globalization. All the stakeholders including the Reserve Bank of India, Government, financial institutions, non-government organizations, and industry associations should provide a beneficial environment for the growth of these companies. Acquiring financial knowledge is crucial for the entrepreneurs while the institutions need to understand the unique needs of this sector to make funding available SME loans India. Combined efforts of all the stakeholders would assist SMEs benefit from the opportunities while overcoming the challenges that prevent them from growing into large companies.

The SMEs are important for the economic growth of the country. However, this sector faces severe problems like inaccessibility of credit, lack of modern technology, and limited availability of skilled labor. However, the policymakers are offering several packages to assist banks to overcome their limitations while funding this sector, which provides tremendous opportunities for the institutions.