India has about 60 million+ Micro Small and Medium Enterprises, including registered and unregistered ones. SMEs have contributed about 40% of total manufacturing and 34% of total exports to the Indian Economy. They have become crucial; to the country’s economic growth, leading to employment generation and entrepreneurial development. SMEs are heavily reliant on debts to fulfil their start-up needs, cash flow and investment needs. Therefore, bank lending becomes the most common source of external finance for many SMEs.

The government has taken a variety of measures to support SME access to finance because of the sector’s importance. The government has also announced that to boost the collateral free lending and assistance to re-energize capital investment by the SMEs. Because of the financing scenario of the SMEs two broad approaches have been identified and that need to be adopted at the national level –

  1. Facilitating the access of SMEs to extant sources of financing and
  2. Venture capital and business angle networks are the new sources of financing for SMEs

The current trend for financing has been more flexible loan schemes as well as loan guarantees. Like in India, all other developing countries understand the role that small-scale industries play in an economy – in terms of balanced and sustainable growth, generating employment, developing entrepreneurial skills and contributing to export earnings.

The loans extended to SMEs are business loans which are custom-made to suit the requirements of each SME. All regulations for SME financing have been defined under The Micro, Small and Medium Enterprises Development Act, 2006 which states that the Central Government can facilitate the promotion and development of the competitiveness of SMEs. Through skill development in employees, entrepreneurs and management, technological upgradation, marketing assistance or/and infrastructure facilities of such SMEs. The government measures range from

  • reforming existing legal/regulatory barriers – the strengthening of SMEs will be

specified through notifications or guidelines.

  • taking actions to develop the SME finance market broadly, and
  • Jumpstarting or incentivizing lending to SMEs directly by intervening in the market.

A single framework for effective government support to the SME banking sector does not exist, despite some measures appearing to be more effective than others. The policies and practices concerning the financing of SMEs are progressive. These financing guidelines are issued by the Reserve Bank from time to time. This is to ensure a smooth and timely flow of credit to such enterprises and thereby enhance the competitiveness of such enterprises.

Government Schemes

The government has been a major part in influencing the guidelines for Small and Medium Enterprises. Through incentives, they help small businesses upgrade their technology and encourage research and development. Infrastructural and development investments flow heavily with the support of the National Bank for Financing Infrastructure and Development (NBFID). Additionally, they provide information on how much support the MSME sector will receive in terms of amenities and investments, which will indirectly also create new jobs.

The Government initiatives for the MSMEs have been proactive and ensure that all the benefits of these schemes reach each MSME at the right moment. For immediate relief to the sector, various initiatives have been launched by the government following the ideas of an Atmanirbhar Bharat.

  • Credit Guarantee Funds Trust for Micro and Small Enterprises – The government of India has launched a loan scheme for MSME businesses that allows for loans without collateral. Both new and existing enterprises can apply for loans under the scheme.
  • National Small Industries Corporation Subsidy – The NSIC is a Government enterprise under the MSMEs, and it is ISO certified. In addition to providing finance, technology, market, and other services across the country, its primary purpose is to assist MSMEs in growing.
  • Credit Link Capital Subsidy Scheme for Technology Upgradation – Small businesses can upgrade their processes through this scheme by financing technological upgrades. A technological upgrade can affect numerous processes within the organization, such as manufacturing, marketing, and supply chain.

Eligibility Criteria

Certain eligibility requirements are required for each SME to apply for the schemes, and such eligibility criteria vary from each other. However, some of the basic requirements are –

  • Age of the individual
  • Amount of credit sought
  • Type of business
  • Credit score of the individual
  • Capital invested
  • Annual turnover of the business

SMEs and MSMEs are the backbone of new India and contribute to each sector by bringing in innovation, and technology. To support SMEs and MSMEs between all the challenges of financing and funding requirements – there lies various opportunities and options for financing. 6.3 MSMEs in India contribute 33% of the GDP of the country and also employ a large segment of the population, particularly in the non-formal sector. Although when compared to other countries the MSMEs’ contribution to one-third of our GDP is still quite low. In Germany and China, MSMEs contribute 55 per cent and 50 per cent to their GDP respectively. In India, the economy has also swayed towards services than manufacturing. Though the manufacturing systems are also developing and are increasing competitiveness.

Business innovations have contributed to the spread of entrepreneurial culture among MSMEs. A unique characteristic of MSMEs is that they are widely dispersed across various sectors of the economy and offer a variety of products and services to meet the needs of local and global markets.

Final thoughts

Small enterprises make economical use of capital and create employment opportunities, which has now become the basic focus of the Government of India. The provisions of adequate financing to this sector have been an important element of the bank policies. There has been a paradigm shift in the context of government schemes and banking opportunities for SMEs.

The MSMEs provide solutions to critical issues in the country like poverty, unemployment, income inequality, regional imbalances, etc. – thereby creating unparallel growth in the Indian economy.


Leave a Comment