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Strengthening SME Financing In India To Reduce Debt Gap

Financial resources are the basic requirements for the small and medium businesses to grow, but they generally lack a strong financial backup.

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SME lending in India: Opportunities for well-nurtured business growth
The small and medium enterprises are the spine of economic development in any country and more so in India as we have a huge population to be served. They employ more than 106 million workers, according to government statistics, in a country that brings a million new workers into the workforce every month. Financial resources are the basic requirements for these incubators for talent, innovation, and entrepreneurial spirit, to grow. With the Indian start-up eco-system blooming, entrepreneurs are now using technology to tap this space.

There are approximately 50 million SMEs in India, exercising frugal management skills and using local resources to create innovative products and services which cater to the country's growing needs. However, in order to continue scaling up, timely and adequate access to financial services and credit is essential, and this has traditionally been one of the biggest obstacles.

Financial resources are the basic requirements for the small and medium businesses to grow, but they generally lack a strong financial backup. Many of them depend on the bank loans and other sources of credit to run their businesses which call for high-interest rates. Moreover, big lenders often look for collaterals such as infrastructure or inventory which many of these small businesses may not have at the onset. Lack of available funding for SMEs has been brought into sharper focus post the credit crunch.

A report by the International Finance Corporation (IFC) analyzed that the total financing demand gap in the SME sector is of Rs 2.93 trillion. Most formal lenders prefer traditional-collateral based lending and look for at least three years of profitable track records. Such expectations out of newly opened innovative companies make loans for SMEs out of reach. Blame it all on the information asymmetry which exists in Indian SMEs, the family-owned nature of Indian businesses, and lack of information regarding tapping the right kind and source of finance, that results in the creation of this gap.

Traditionally, private funds from friends and family form the single largest source of finance to SMEs in India. Such enterprises also rely heavily on private money lenders and the unorganized financial sector for their requirements, where the terms of financing are unclear and interest rates are high. Although banks are making efforts in bridging this gap, their approach to funding is somewhat restrictive.

It is quite evident that working capital is the lifeline of SMEs and this sector needs investments in abundance to ramp up its infrastructure in the next few years. Unlike banks, digital lending platforms do a better job of lending and financing under a robust system. Investors lend money to the businesses without emphasizing the need to go through traditional financial institutions. Instead, they are mining new sources of data and using Big Data analytics to make lending decisions. These machine learning algorithms factor in a lot more than just CIBIL and other traditional credit variables to assess the real credit worthiness of the borrower. It's not surprising that SMEs are now relying on such digital lending platforms for timely finance so that they can make the most of business opportunities.

Apart from these platforms, the Indian government, which is also aware of the existing funding gap in the SME finance sector, is also taking efforts towards offering relief mechanisms to support them. Such initiatives would go a long way in bridging the financing gap and ensuring that India gets a steady flow of entrepreneurs in various fields.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Harsh Vardhan Lunia

The author is CEO and Co-founder of Lendingkart

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