The Lending Scenario of Indian banks for SME Sector

Indian Banks

India has been the fastest developing economy globally. This has been high, possibly because, the lending scenario of Indian banks for SME sector, are flourishing enormously and contributing significantly to the Indian economy. They have been generating employment opportunities for the masses. In spite of their fantastic performance, they are sometimes deprived of sufficient funding sources.

The foundational requirement for any business is a proper finance. Not just for initiation of any organization, but for every phase of the business cycle, finance is the key factor to keep them running smoothly and achieve accolades.

The Indian Economy is expected to grow by more than 8% per annum until 2020. There is a scope for it to become the second largest in the world. Small Industries Development Bank of India offers loans to the SME’s. In India, there are many MSMEs, diverse in a type of business and located in remote geographies of a vast country.

As per several studies, SMEs are considered as high-risk borrowers by SME’s due to their insufficient assets, high mortality rates, and low capitalization. SME’s are largely dependent on Indian banks than on large enterprises.

Small and Medium enterprises are the growth engine of Indian economy. SME is next generation engine of economic development and the solution to accomplish 12th Five-Year Plan with reference to creating several employment and export opportunities for the nation.

Indian Banks become reluctant sometimes, towards providing credit to SMEs

High transaction cost, small ticket size, unavailability of sufficient entrepreneurial experience, insufficiency of promotional activities, the parameter of being at high risk because of low or no credit rating, high rate of diversions of funds and absence of collaterals, insufficient marketing and low competitiveness due to lack of product branding are some of the reasons why the banks are reluctant to provide credit to small and medium enterprises.

In India, Credit guarantee commenced in 2000 with a scheme- Central Government Guarantee against the default for loans to SMEs that are extended up to 75 percent without any collateral, up to 75 percent to the lending bank. Also, new enterprises without any performance record could avail this facility, if the credit requirements of the lending bank are met by this proposal.

Multiple MSMEs have been offered financial assistance by public sector bank. MSME sector has started receiving funds from Venture Capital. It is a means of equity financing for rapidly growing, MSMEs and provide funds after carefully evaluating these projects. They provide financial assistance through equity-linked capital investment. It also offers a mentoring support to enable funded organizations to accomplish fast growth and continue to maintain their competitive edge in national and international markets.

The venture capitalists consider the following parameters before offering financial assistance to any SMEs:

  • A robust and committed core team.
  • Sufficient growth potential
  • An advantage for the long-term competitive edge.
  • Sustainable business plan
  • A precise exit plan

Post Bank of India (PBI) could become a channel for financial inclusion and delivery of credit to the SMEs. Lending patterns to the SME sector by public sector banks, private sector banks, and foreign banks. Finance holds the key of initiating a business enterprise, maintaining its sustainability and growth.

SMEs will sustain if required enablers powered by the SMAC technologies are generated in integrated ecosystems to support their requirements.

Supported by the ‘Digital India Revolution’, the MSME sector will act as a catalyst in socio-economic metamorphosis. As per the research analysts, India’s GDP is estimated to touch 8.5 percent, with the nation most likely to be a USD5 trillion economy by 2025.

Google India has announced the launch of an India-wide initiative to aid SMEs to go digital without major expenses. SMEs will be offered the alternative to gain an online presence on Google search and Google Maps without investing in a website or domain.

Recently Indian banks have started using ad hoc and arbitrary methods to keep the lending rates inflated, as per the RBI Study group.

In the present scenario, every bank has been making efforts and also fulfilling their strategic goals, to give great importance to financing the SMEs because they are rapidly growing, flourishing enormously and contributing immensely to the Indian economy.

Approximately there are over 6000 products that range from traditional to high-tech items, which are being manufactured by MSMEs in India.

The MSME sector is said, as per the ongoing researches and studies to generate  59 million employment opportunities in over 26 million units throughout the nation. Nearly 9% of India’s GDP is contributed by SMEs.

The government of India has taken multiple initiatives both at domestic and international levels to bring betterment in the availability of finance. However, still, there are certain obstacles that the SMEs face that are essentially required to be addressed by the government of India. The bank officials must take care of certain factors in the process of lending finance to the SME sector.Not just bank officials but also the administrators and financial institutions and all individuals responsible for availing financial assistance to SMEs consider certain evaluating factors of the prospects. They are as follows:

  • In the process of making proposal each and, every detail is compiled with complete dedication and sincerity and care is taken that all necessary and important details regarding the specific organization’s financial soundness are filled appropriately.
  • Proper reports are generated and maintained at a rating, and validation is made along with sanctioning level.
  • During the rating and validation process, each detail is required. Thus, it is only accepted if properly filled.
  • The Proper market survey is conducted frequently to have the knowledge the entrants in the respective industry.

Several studies have come to a conclusion that providing credit to SME sector is not a problem for Indian banks in today’s era, like for the transformer and stamping & lamination industries. However several factors are taken into consideration prior to lending finances.If rating models are accounted, a system adopted by banks, the companies holding even a  satisfactory level of rating will be provided and availed with credit for their smooth functioning.

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