A study on the Bank financing of SMEs in India

The financing of small and medium-size enterprises (SMEs) has been a subject of great interest both to policy-makers and researchers because of the significance of SMEs in private sectors. In developed and developing countries, on average, SMEs account for close to 60% of manufacturing employment. More importantly, a number of studies using firm-level survey data have shown that SMEs not only perceive access to finance and the cost of credit to be greater obstacles than large firms, but these factors constrain SMEs more than large firms. Banks are the main source of external finance for SMEs. Furthermore small banks are more engaged in relationship lending where as the large banks have a comparative advantage at financing SMEs through arms-length lending technologies (eg., asset-based lending, factoring, leasing, fixed-asset lending, credit scoring, etc.) instead of relationship lending. Early studies on SMEs financing shows that bank credit is the major source of external finance for the SMEs. Both small and large banks play a vital role in financing SMEs. The study finds that the following are the main factors which act as the driver for the financing decisions. They are: profit earning of SME, legal formation of the firm, stages of development of the firm. no of default firm made in previous loans, availability of collateral, payment history of firm, preparation of financial statements, feasibility of the proposed project and experience of management in business. The influence of these factors decides the risk associated with the SME lending.