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Financial Inclusion : Options for Micro, Small andMedium Enterprises

Madhavi A Lokhande 1

Abstract

India is fast moving towards becoming a developed country. History proves that the Small andMedium Enterprises, now called the Micro, Small and Medium Enterprises in India have alwaysbeen given the required thrust; however, with regard to the capital needs of these small units, therehas been a gap between the needs and the available resources. Micro credit has emerged as the newpoverty reduction tool which can contribute towards the financial freedom of the SMEs in India.Of all the elements that go into a business, credit is perhaps the most crucial. The best of plans canfail if adequate finance is not available at the right time. MSMEs need credit support not only forrunning the enterprise but also for diversification and expansion. In general, MSMEs operate ontight budgets, often financed through owner's own contribution, loans from friends and relativesand some bank credit. Also, the information asymmetries associated with lending to small scaleborrowers have restricted the flow of finance to the micro enterprises. This study was conducted tohighlight the options available for financial inclusion in India and to understand the success factorsof the new financing tools along with its limitations.

Key Words

Micro enterprises, credit needs of MSMEs, small units funding, financial inclusion

1. Introduction

1.1 Financial Inclusion

Financial Inclusion is the delivery of financial services at affordable costs to sections of disad-vantaged and low income segments of society. Unrestrained access to public goods and ser-vices is the performance measure of an open and efficient society. The term "financial inclu-sion" has gained importance since the early 2000s, and is a result of findings about financialexclusion and its direct correlation to poverty. Financial inclusion is a common objective formany central banks amongst the developing nations. It denotes the delivery of credit andother financial services at an affordable cost to large sections of the disadvantaged and lowincome groups of people.

As banking services are in the nature of public good, it is essential that availability of bank-ing and payment services to the entire population without discrimination is the prime objec-tive of public policy. This means that those who want credit should not be denied the sameprovided they are bankable. Therefore, the objective of financial inclusion is to extend thescope of activities of the organized financial system to include within its ambit people withlow income. Outreach to the unbanked is an attempt to include the unbankable - both asproductive segment and as public policy.

1 Prof.Madhavi Lokhande, faculty of finance and academics, Welingkar Institute of Management Development andResearch, Bangalore, India, madhavial@yahoo.com, madhavi.lokhande@welingkar.org

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1.2 Objective

The objective of this paper is to study the financing options available to the MSME sector.

As a part of the study, the author has included some of the initiatives taken in the past andthe shortcomings of some of the schemes of funding.

2. Literature Review

To evaluate the financial options available to Micro, Small and Medium Enterprises in India,the author has studied the past and existing schemes, initiatives of the government and otherfinancial institutions.

Using the literature and documents available on the subject and other secondary data sources,the author has collated the findings under the sections as below:

Section 2 deals with definition of micro loans, and importance they hold as a source offunding for micro businesses.

Section 3 discusses some past financing initiatives for the MSME sector.

The conclusions and inferences from the study have been summarized in Section 4.

2.1 Definitions Forming Part of the Study

There is no universal definition of SMEs. Some countries made the classification based oncertain objective standards, while few other countries used turnover of the company todetermine the size of the enterprise. The size is also a relative phenomenon with reference tothe local economies, since a large company in a small country could possibly be consideredas a small company in a larger country.

2.2 Indian SME Definition

In the Indian context, the concept of Small Scale Industry had been in vogue and the Me-dium Enterprise definition is of recent origin. A Small Scale Industry was defined on thebasis of limit of historical value of investment in plant and machinery, which is up to INR10million. However, in respect of some specified items, this investment limit had been hiked toINR 50 million. For the Small and Medium Enterprises Fund, the Government of India hadapproved the limit of investment in plant and machinery above INR 10 million and up toINR 100 million for defining a unit as a medium enterprise. Amongst the developing coun-tries, India had been the first to display special consideration to Small Scale Industries andbasic focus has been to make economical use of capital and absorb the abundant laborsupply in the country. (Definition of small-scale industry and small business enterprises forpurposes of inclusion in priority sector has been changed in alignment with the definitionadopted in the Micro, Small and Medium Enterprises Development Act, 2006)

Definitions of size of the small firms sector vary a great deal, whether measured in terms offixed investment, or turnover or the number of employees. For purposes of access to fi-nance, micro enterprises may be restricted to the band of enterprises employing less than 10persons, though this need not be taken as a rigid boundary. It is in the nature of MicroEnterprises that the variation renders rigid thresholds in any one measure both unhelpfuland misleading. Many Micro Enterprises highlight certain common problems:undercapitalization and low ability to command loan finance due to insufficient collateral,track record or financial expertise, lack of broad-based management skills, inadequate under-standing of cash flow management and heavy dependence on local markets and a limitednumber of customers (Bradford, 1993).

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2.3 Micro, Small and Medium Enterprises Development Act, 2006

1. The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 sought tofacilitate the development of the enterprises and also enhanced their competitiveness. It pro-vided the first ever legal framework for recognition of the concept of 'enterprise' whichcomprised both manufacturing and service entities. It defined medium enterprises for thefirst time and sought to integrate the three tiers of these enterprises namely micro, small andmedium. The act also provided for a statutory consultative mechanism at the national levelwith balanced representation of all sections of stakeholders, particularly the three classes ofenterprises; and with a wide range of advisory functions. Establishment of specific funds forthe promotion, development and enhancing competitiveness of these enterprises, notifica-tion of schemes/programmes for this purpose, progressive credit policies and practices, pref-erence in Government procurements to products and services of the micro and small enter-prises, more effective mechanisms for mitigating the problems of delayed payments to mi-cro and small enterprises and assurance of a scheme for easing the closure of business bythese enterprises were some of the other features of the Act.

2. The Ministry of MSME has also took a view, in the light of the liberalized provisions ofthe MSMED Act 2006, to do away with the restrictive 24% ceiling prescribed for equityholding by industrial undertakings, whether domestic or foreign, in the erstwhile Small ScaleIndustries (now MSEs).This coupled with an expected legislation on Limited Liability Part-nerships (introduced in the Parliament by the Ministry of Corporate Affairs) paved the wayfor greater corporatization of the Small and Medium Enterprises thereby enhancing theaccess to equity and other funds from the market of these products in keeping with theglobal standards.

The Ministry of Micro, Small and Medium Enterprises drew up a road map and held detailedconsultations with stakeholders to generate consensus on further trimming this list.

2.4 Definition of MSMEs in India

Enterprises are broadly classified into 2 categories:

i. Manufacturing

ii. Those engaged in providing and rendering of services

Both categories of enterprises have been further classified into micro, small, medium andlarge enterprises based on their investment in plant and machinery (for manufacturing enter-prises) or on equipments (in case of enterprises providing or rendering services). The presentceiling on investments to be classified as micro, small or medium enterprises is as under:

Table 1: Classification of MSMEs based on the MSMED Act 2006

Classification Investment ceiling for Plant, Machinery or Equipments

Manufacturing enterprises Service enterprises

Micro Upto USD 62500 Upto USD 25000

Small Between USD 60000 to Between USD 25000 andUSD 1.25 million USD 0.5 million

Medium Between USD 1.25 million & Between USD 0.5 million andUSD 2.5 million USD 1.25 million

Source: Website of Development Commissioner, Ministry of MSME accessed on 15.12.2010

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Table 2: Definition of MSMEs before 2006

Classification Investment ceiling for Plant, Machinery or Fixed Assets*

Manufacturing enterprises Service enterprises

Micro Upto USD 62500

Small Between USD 60000 to Upto USD 25000USD 0.25 million

Medium Not defined Not defined

Excluding Land and Building $1=Rs 40 (Oct 2007)

Source: Website of Development Commissioner, Ministry of MSME accessed on 15.12.2010

Table 3: Micro, Small and Medium Enterprises (MSME) Sector Profile

Old Definition New Definition

No. of Micro and Small Enterprises 12.8 million 13.0 million*

Employment 31.0 million 41.0 million

Production (at current prices) USD 140 billion NA

Exports (USD) USD 33 billion NA

Share in GDP 6% 8-9%*

Share in manufacturing output 39% 45%*

Share in exports 33% 40%*

* The statistics relating to Micro and Small Enterprise are based on 3rd All India Censusconducted during 2001-02 when the old definition was invoked.

Source: Website of Development Commissioner, Ministry of MSME, accessed on 15.12.2010

3. Micro Loans for Micro Businesses

Micro loans are small business loans for up to $35,000. Micro loans are generally used forstart-up cash but are sometimes given to newly launch small businesses for working capital.Micro loans can be used for many purposes including the purchase of equipment, inven-tory, machinery, fixtures, furniture, supplies, and even to purchase another business.

Most of the world's poorest people often cannot find steady work and many who do are notpaid a living wage (Bates & Servon, 1996). To feed their families, the poor often turn to self-employment in any way possible. They sell goods in the local market, stitch and sell clothes,run eateries and bakeries. For this vulnerable population of hard-working micro entrepre-neurs, micro loans can be instrumental in breaking the cycle of poverty. A small loan can beused to buy raw material in bulk or purchase important equipment. A loan can also help thepoor cope with business emergencies or afford larger expenses such as expansions, diversifi-cations and restructuring their business.

Small businesses and enterprises in India suffer from a great deal of indebtedness and aresubject to exploitation in the credit market through high interest rates and lack of conve-nient access to credit. They need credit to fund their working capital needs on a day-to-daybasis as well as long term needs like emergencies or other income related activities. They

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need credit to smoothen out seasonal fluctuations in cash flow arising from business activi-ties and consumer demand. They also need credit as an insurance against minor spikes andtroughs with respect to income and expenditure. Since cash flows for the majority of smallbusinesses like vegetable vendors are small and savings are small as well, they typically tendto rely on credit for other consumption needs like education, food, housing, householdfunctions etc. And this is backed by the fact that India has no social security net that willtake care of basic amenities like health, education and so on for the poor. To meet thesecredit needs they need access to financial institutions that can provide them with credit atlower rates and at reasonable terms than the traditional money lender. The traditional sourceof lending in the formal sector i.e., public sector banks have been extending support to thesebusinesses (Sabharwal, 2000).

Table 4 and 5 below enumerates the number of small industries that were provided loans bypublic sector banks from March 2005 to March 2010 and the total credit provided by publicsector banks to Industrial/Small and Micro Enterprises in India.

Table 4: Number of Small Industries Provided Loans by Public Sector Banks in IndiaMarch'05 to March'10

Year No. of Industries

2005 17.10 lakh

2006 17.28 lakh

2007 20.02 lakh

2008 22.10 lakh

2009 25.60 lakh

2010 28.20 lakh

Source: Rajya Sabha Unstarred Question No. 776, dated 27.11.2007, updated 20.09.2010.

Table 5: Total Credit Provided by Public Sector Banks to SMEs and Industrial Sector 2005to 2010

Year SME Sector Industrial Sector (Rs. in Crore)

2005 68000 438503

2006 82434 556357

2007 127322 731157

2008 176890 997682

2009 232789 1342456

2010 298768 1278960

Source: Lok Sabha Unstarred Question No. 1180, dated 24.10.2008, updated 30.10.2010.

The total credit provided to SME sector as compared to the total credit to the Industrialsector was around 15% in 2005 and 2006 and there was a marginal increase to 17% in 2007(as per Table 5 above).There has been further increase till 2010. If access to finance is broadlyinterpreted as the ability of economic participants to obtain a broad range of financial ser-vices to manage price and other risks, with ease and at reasonable prices, then improvingsuch access can have a strong welfare impact on the poor. These financial services allowparticipants to smooth consumption across time and help them tide over the impact of

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adverse shocks during their life cycle. Access to financial services allows the participants toinvest in and benefit from their skill sets. Presence of well functioning financial marketspermits participants to generate surpluses for future investments by eliminating the need toself-insure and over-diversify. However, the scenario of supply of formal financial serviceswithin India is that, only less than 20% of population have a bank account, against a total ofover 600,000 villages, there are barely 30,000 bank branches and while products such ashealth insurance are completely inaccessible to the poor, even the most basic life insuranceproducts remain out of reach (as per India Vision 2020 report).

4. Some Past Financing Initiatives to SME Sector

While several structural reforms have been initiated since 1991 and the economic and finan-cial policies had undergone significant transformation, provision of adequate credit to theMSME sector continued to be an element of banking policy.

Bank credit to Small units had increased from Rs.168 billion in March 1991 to Rs.583 billionin 1999 in respect of public sector banks. An amount of INR. 2, 56128 crore that consti-tuted for 11.4 percent of the Adjusted Net Bank Credit was provided by all Scheduled Com-mercial Banks (SCBs) to the MSME sector. A double rate of credit flow was observed fromINR 1, 27,000 crore in 2006-07 to INR 2, 57,000 crore in 2008-09. The credit flow to thesector was INR 2, 13,000 crore in 2007-08. There was an increase in the credit flow to INR369866 crore in February 2010 (Indian MSME Report). In the policy context, the Govern-ment of India introduced a comprehensive policy package for SMEs, which included fiscal,credit, infrastructural and technological measures. An exclusive Ministry dedicated to SmallScale Industries (SSIs) was created by the Government in 1999 to provide more focusedattention to the sector.

A well structured institution was set up both in the public and private sectors to cater to thecredit needs of Small and Medium Enterprises (SMEs). The Small Industries DevelopmentBank of India (SIDBI) was set up in April 1990, as the principal financial institution forfinancing and development of SSIs and coordination of institutions engaged in similar activi-ties. A fair code of practices was also adopted by the bank in its day-to- day operations whilefunctioning as an apex financial institution for the sector.

Various steps that had been taken by the Government of India and Reserve Bank of India toenhance the flow of credit to SMEs in the past included:

(i) Increase in the loan limit of composite loan scheme for SMEs up to Rs.5 million

(ii) Providing loans to SSIs within the interest rate band of 2 percent above and belowthe respective bank's Prime Lending Rate (PLR)

(iii) Setting up of Technology Bureau for Small Enterprises (TBSE) to address thetechnology related needs of SSIs and proposal to convert TBSE into a full fledgedTechnology Bank

(iv) Opening of specialized SSI branches throughout the country

(v) Introduction of Laghu Udyami Credit Card for SME borrowers with satisfactorytrack record

(vi) Identification of 60 clusters for focused development by including their creditrequirements in the respective State Credit Plans

(vii) Setting up of a Credit Guarantee Fund Trust for Small Industries

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Government undertook a lot of measures to boost investment in SSIs. The Table 6 belowshows the budget allocations to SSIs in the last 10 years. The budget estimates, the revisedestimates and the actual expenditures under the various schemes of the government havebeen compiled in the table.

In order to boost investment in SSI sector, the benefits of exemptions of capital gains arisingfrom the transfer of long term capital assets were allowed, if such capital gains were investedin the bonds issued by SIDBI. However, it is important for the policy of directed lending tosmall firm (the targets for priority sector lending) to shift from targets or quotas to incentivesto banks for lending to small firms. Only then the responsible risk taking in lending wouldre-emerge. State Finance Corporations which could play a crucial role in financing of SMEswould have to go through quick restructuring and refocus on promotion of new enterprisestypically where vast positive external effects are anticipated, such as in technology basedsmall firms, promising industries, nodal industries, industrial estate corporations, in exchang-ing specific infrastructural support to existing clusters of small firms, etc. Investments ininfrastructure especially general roads, power, railways, and water supply would help toimprove the performance of small firms significantly. Financial institutions could usefullydevelop strong venture capital arms to finance innovative small firms that have a good po-tential to emerge in the near future in many industries. Merging of the umpteen laws andregulations into one wherever feasible could reduce the currently large costs of SMEs indealing with government.

Table 6: Budget Utilization of Ministry of Small Scale Industries (SSIs) in India from 2002-03to 2006-07

Item 2002-03 2003-04 2004-05 2005-06 2006-7 Total (Rsin Crore)

Small Industries Development Organisation (SIDO)

Budget Estimates 313 298.31 315.55 360.69 381.71 1669.26

Revised Estimates 256.85 301.45 312.4 356.34 396.31 1623.34

Expenditure 249.3 294.27 307.05 349.32 396.31 1596.25

Ministry of Small Scale Industries (SSI) (Proper)

Budget Estimates 32 40 40 42 44.95 198.95

Revised Estimates 28 40 40 41 44.95 193.95

Expenditure 25.65 38.13 33.87 41.8 44.95 184.4

National Small Industries Corporation (NSIC)

Budget Estimates 11.15 11.69 10.45 9.57 43.27 86.13

Revised Estimates 11.74 8.94 9.85 11.57 24.97 67.07

Expenditure 8.61 7.21 9.98 9.83 24.97 60.6

Total Mo Small Scale Industries (SSI)

Budget Estimates 356.15 350 366 412.26 469.93 1954.34

Revised Estimates 296.59 350.39 362.25 408.91 466.23 1884.36

Expenditure 283.56 339.61 350.9 400.95 466.23 1841.25

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Khadi and Village Industries Commerce (KVIC)

Budget Estimates 394.67 392 437 587 592.93 2403.6

Revised Estimates 394.67 444.75 462 560.82 592.93 2455.17

Expenditure 340.55 423.6 460.99 558.56 592.93 2376.63

Coir Board

Budget Estimates 15.6 18 18 23 23 97.6

Revised Estimates 15.6 15.85 18 35.51 23 107.96

Expenditure 13.77 14.52 16.8 35.43 23 103.52

Primary Ministry Rozgar Yojana (PMRY*)

Budget Estimate 169.73 170 219 219 325.1 1102.83

Revised Estimate 169.73 169.4 219 273.69 250 1081.82

Expenditure 168.1 168.01 218.19 272.54 250 1076.84

Scheme of Funds for Regeneration of Traditional Industries (SFURTI**)

Budget Estimate - - 100 30 25.97 155.97

Revised Estimate - - 1 1.5 25.97 28.47

Expenditure - - - 1.5 25.97 27.47

Total Ministry of Agriculture (Agriculture and Rural Industries)

Budget Estimate 580 580 774 859 967 3760

Revised Estimate 580 630 700 871.52 891.9 3673.42

Expenditure 522.42 606.13 695.98 868.03 891.9 3584.46

Source: Compiled from the statistics released by: Lok Sabha Unstarred Question No. 4143, datedon 22.04.2008.

In the Table SFURTI was introduced on 3 October, 2005.

4.1 Instruments of SME Financing

In spite of various initiatives taken by the Government, banks and Financial Institutions,SMEs faced certain challenges, which were universal in nature. These problems relate to theissue of collaterals, cost of loans, delay in receivables, obsolete technology, marketing, etc.In order to address the above problems in the Indian context, some innovative instrumentsof financing have been introduced and institutional set up created. Some of the major initia-tives include -

a) Credit Guarantee Fund Trust for Small Industries

Government of India, in association with SIDBI, has set up a Credit Guarantee Fund Trustfor Small Industries (CGTSI) to implement the guarantee scheme. The corpus of the Trustwas proposed to be enhanced from the level of Rs.7 billion to Rs.25 billion. The main objec-tive of the Trust was to facilitate hassle free credit to the SSI sector and encourage banks toshift from security based lending to merit based lending. SSI loans up to Rs.2.5 million wereeligible to be covered under the scheme and CGTSI has so far extended guarantees to mem-ber lending institutions for around 18,000 units in the last three years of its operations,covering a loan amount of Rs.3 billion. The CGTSI contemplates to triple its business in thecurrent year, as compared to the previous year. Some new guaranteeing techniques like

'

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mutual credit guarantee scheme on the lines of similar schemes in Italy and other Europeancountries are also being developed (Poddar 2010).

b) Risk Sharing Facility

While the CGTSI extended guarantee cover for the loans up to Rs.2.5 million, there was aneed to offer guarantees for loans extended by banks beyond the above limit. Under a WorldBank led project on 'Financing and Development of SMEs', a possibility of introducing aRisk Sharing Facility for the SME sector was being examined, wherein the risk in lending bybanks to SMEs could be shared on pari passu basis between the originating banks and thesuggested entity. This facility would be available at a cost. This mechanism, as and when inplace, would mitigate the credit risks of the banks and upscale SME financing.

c) Venture Capital Funding

With regard to new sources of financing, many countries were considering liberalizing therules regarding venture capital investments. In India also, various measures had been takenin this direction. SIDBI, along with some other institutions, had taken a lead in promotingventure capital funding in the country. The bank had contributed in setting up of 16 Statelevel / Regional level funds. SIDBI had also set up a National Fund for Software and ITIndustry with a corpus of Rs.1 billion and launched a new SME Growth Fund of Rs.1billion corpus. The fund would focus on units in pharma, biotech, light engineering, soft-ware and other knowledge based industries (KBIs). The SME Growth Fund corpus wascontemplated to be enhanced to Rs.5 billion.

d) Micro Credit

Realizing the potential of micro finance in stimulating economic growth, SIDBI had laidemphasis on increasing the capacity of the sector to handle credit and growth in the dis-bursements of micro finance. SIDBI Foundation for micro credit, functioning as a depart-ment of SIDBI, had sanctioned an aggregate financial assistance of Rs.710 million in FY2004. The cumulative number of beneficiaries assisted under the program in the last 4 yearsaggregated over 1 million, mostly women. The outstanding portfolio under the program asat end-March 2004 increased from a level of Rs.910 million to about Rs.2 billion by the endof this year (based on NABARD report).

e) Small and Medium Enterprises Fund

The most important amongst the sectoral initiatives taken by the GOI and SIDBI was launch-ing of an SME Fund of Rs.100 billion, with a view to give impetus to the fund flow to theSME sector. SIDBI had been advised to structure the fund and its operations had commencedwith effect from April 2004. Under the Fund, assistance is being provided to SMEs at aninterest rate of 200 basis points below the Bank's PLR. Direct assistance is being extended toSMEs through SIDBI's own offices at 9.5 percent rate of interest as also by way of providingrefinance to the primary lending institutions. Refinance to SFCs was available in the interestrate band of 7.5 percent to 8 percent. The SME Fund provided for routing of assistance,besides SFCs, through commercial banks as well. The Fund, besides up scaling the flow ofassistance to SMEs, addressed the issue of cross sector parity in the cost of loans.

f) Setting up of a Dedicated Credit Rating Agency for SMEs

In order to address the demand side issues of credit and provide comfort to the bank officials,initiatives had been taken to support the mechanisms of information sharing and creditrating. With a view to providing credit enhancement and comfort to the bank officials at the

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field level in their taking bona fide credit decisions, SIDBI decided to launch a dedicatedcredit rating agency for SMEs in association with leading public sector banks. SIDBI indialogue with select public sector banks and credit rating agencies commenced its operationsunder the Small and Medium Enterprises Rating Agency (SMERA).

g) Portfolio Purchase Scheme / Asset Securitization

With a view to widen the scope of assistance to SMEs, the process of asset securitizationoffered opportunities to purchase the SME portfolio from originators and channelize fundsto the sector. The portfolio so purchased was either retained by the purchaser or sold to theinvestors in the capital markets through structuring of suitable instruments. SIDBI, permit-ted by the Government of India undertook business through asset securitization.

h) Priority Sector Lending

Provision of finance to the sector is a part of the 'Priority Sector Lending Policy' of thebanks (both domestic and foreign banks operating in India). For the public and privatesector banks, 40% of the net bank credit (NBC) is earmarked for the priority sector. For theforeign banks, 32% of the NBC is earmarked for the priority sector, of which 10% is ear-marked for the small scale sector. In the case of foreign banks operating in India which fail toachieve the priority sector lending target or sub-targets, an amount equivalent to the short-fall is required to be deposited with SIDBI for one year at the interest rate of 8 percent perannum. (as per RBI policy)

The Table 7 below as compiled from annual report of SIDBI for the years 2001 to 2006shows that neither the public sector, private nor the foreign banks were just around thetargets that had been specified for them in the Priority Sector Lending Policy.

Table 7: Flow of Credit to SSI Sector by Public, Private Sector and Foreign Banks in India

2001 to 2006

Balance Outstanding as at End-March

Banks 2001 2002 2003 2004 2005 2006Amt % Amt % Amt % Amt % Amt % Amt %

Share Share Share Share Share Shareof NBC of NBC of NBC of NBC of NBC of NBC

Public SectorBanks 48400 14.2 49743 12.5 52988 11.1 58799 13.6 65789 15.2 68976 16.5

Indian PrivateBanks 8096 14.4 8613 13.7 6857 8.3 8790 9.2 9876 10.4 10567 11.9

Foreign Banks 3646 11 4561 12 3809 8.7 4570 9.3 5980 9.9 6759 11.8

Total 60142 14 62917 11.8 63654 10.3 72159 11.4 81645 13.6 86302 14.2

Source: 16 Annual Report, 2005-2006, Small Industries Development Bank of India.

i) Small Industries Development Bank of India (SIDBI)

SIDBI had been set up with the mission to empower the Micro, Small and Medium Enter-prises (MSME) sector with a view to contribute to the process of economic growth, em-ployment generation and balanced regional development. It is the principal financial institu-tion responsible for promotion, financing and development of the sector. Apart from ex-tending financial assistance to the sector, it coordinates the functions of institutions engagedin similar activities. The four basic objectives of SIDBI for orderly growth of industry in the

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small scale sector are:

1. Financing2. Promotion3. Development4. Co-ordination

SIDBI's major operations are in the areas of (i) refinance assistance (ii) direct lending and (iii)development and support services.

Taking into account the fact that a majority of such enterprises which are at the lower-endof the sector are outside the ambit of institutional finance, concerted efforts have been madeby SIDBI to promote micro finance across the country to enable the unemployed people toset up their own ventures. There are more than 100 Micro Finance Institutions (MFIs) de-veloped by SIDBI that are engaged in implementation of its micro finance programme. SIDBIhas disbursed about Rs.1700 crore (cumulative) under its programme, benefiting around 50lakh beneficiaries (Rangarajan 2008).

j) At the State level, State Financial Corporations (SFCs) along with the State IndustrialDevelopment Corporations (SIDCs) are the main sources of long-term finance for the sec-tor. State Financial Corporations, the state-level institutions have always played an impor-tant role in the development of small and medium enterprises in their respective states withthe main objectives of financing and promoting these enterprises for achieving balancedregional growth, catalyze investment, generate employment and widen the ownership baseof industry.

k) Credit Guarantee Cover Fund Scheme for Small Industries was launched jointly bythe Government of India and SIDBI (on a 4:1 contribution basis) in August 2000, with aview to ensure greater flow of credit to the sector without collateral security. It picked upduring the last two years of the Tenth Plan and till the end of March 2007, 68062 proposalswere approved and guarantee covers for Rs 1705 crore were issued. During the last twoyears of the Tenth Plan and till the end of March 2007, 68062 proposals were approved andguarantee covers for Rs 1705 crore were issued.

l) Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs) waslaunched with the objective of doubling the flow of credit to this sector within a period offive years. The measures in the policy package, inter alia, include banks to achieve a mini-mum 20% year-on-year growth in credit to the MSME sector and cover on an average atleast 5 new MSMEs at each of their semi-urban/urban branches per year.

5. Result and Conclusion

All kinds of business enterprises require sufficient funds in order to meet their fixed as wellas working capital requirements. The same applies for the MSMEs - Finance is one of thecritical inputs for growth and development of the MSMEs. They need credit support notonly for running the enterprise and operational requirements but also for diversification,modernization/upgradation of facilities, capacity expansion, etc.

Inadequate access to credit is a major problem facing micro, small and medium enterprises.Generally, such enterprises operate on tight budgets, often financed through owner's owncontribution, loans from friends and relatives and some bank credit. They are often unableto procure adequate financial resources for the purchase of machinery, equipment and rawmaterials as well as for meeting day-to-day expenses. This is because, on account of their lowgoodwill and little fixed investment, they find it difficult to borrow at reasonable interest

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rates. As a result, they have to depend largely on internal resources.

In respect of MSMEs, the problem of credit becomes all the more serious whenever anydifficult situation occurs such as a large order, rejection of consignment, inordinate delay inpayment, etc. Sometimes, they have to close down their operations due to shortage of funds.Also, there is little or no scope for expansion and growth due to dearth of capital. Hence,economies of scale are not available.

Recognizing the importance of easy and adequate availability of credit for ensuring sustain-able growth of the MSME sector, the government has undertaken several measures. Theneed of the hour is to ensure that these measures benefit the segment they have been de-signed for.

References

Banking for the poor, Micro credit gathers force, retrieved November 20, 2010, fromwww.indiatogether.org/2005/nov/eco-microfin.htm.

Bates, T. and Lisa J. Servon (April, 1996). Why loans won't save the poor, in CommercialWharf, Boston, Massachusetts.27-28.

Bradford Jane, (1993). Banks and Small Firms: An Insight National Westminster BankQuarterly Review, retrieved December 30, 2010 from ww.fao.org

Development Commissioner, Ministry of MSME (MSMED Act 2006), accessed December10, 2010, from http://dcmsme.gov.in/publications/msmed.

Government of India (2002). India Vision 2020, Planning Commission India, retrievedJanuary 15, 2011, from www.india.gov.in

Government of India (2007). Industrial Policy and Promotion, Karve Report 10(3),Ministry of Commerce and Industry, retrieved January 15, 2011 fromwww.india.gov.in

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