Understanding SME economics

BANGALORE, INDIA: Today SMEs have become an important source of growth for any country. They have the potential to contribute significantly to country's economy, provided they have sufficient funding and essential infrastructure. Unfortunately, the main challenge before Indian SMEs is not getting enough financial support for growth and innovations.

Financial institutions like banks, co-operative societies and SME associations play a vital role in this area. The goal is to increase financial help, venture capital opportunities and offer strategic help to SMEs like access to international markets and vendors.

Lending to SMEs involves risks: RBI official 

One of the reports from the Organization for Economic Co-operation and Development (OECD) says that banks avoid financing certain types of SMEs, particularly startups, very young firms that typically lack sufficient collateral and firms whose activities offer a possibility of high returns but at a substantial risk of loss.

Agreed, SMEs survival rate is lower than larger companies. Unlike larger companies, borrowing isn't an easy task for SMEs. At times, it is effectively impossible for many SMEs to borrow money at all because the price of credit is too high.

If SMEs cannot gain access to finance through the regular system, they may not start a business or simply go out of business, a potential loss to the economy. The other danger is that they will abandon the formal system altogether and operate in the informal economy, sidestepping taxes and regulations, and thus not making a full contribution to economic growth and job creation, says OECD report.

RBI guidelines for lending to SMEs 

In such scenario, government and government aided banks can play an important role by supporting the SME sector, measuring the SME financing gap, educating SMEs on the range of financing options available to them to bridge this gap.

On the other hand, large companies can help SMEs with the venture capital options and access to the international markets. In turn, it is the responsibility of SME associations to work towards this by taking large companies into confidence.

In order to assess the success of such actions, government should look at bringing necessary national policies and relevant checks.