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Why is strengthening SME financing in India important to reduce debt gap?

A growing economy such as India witnesses a chief role played by the Small and Medium Enterprises (SMEs) which are crucial in the overall development of the country. 

Why is strengthening SME financing in India important to reduce debt gap?

Wednesday November 08, 2017,

4 min Read


According to the official statistics collected by the Government of India, the SMEs in India account for not less than 106 million employees. In such a scenario, for the section of the business world that employs such a large population, nurtures potent talent and entrepreneurial skills of the energetic youth of the country, it is essential to ensure adequate flow of capital or financial resources of various forms in order to help these firms expand their wings in the most promising manner and meaningfully contribute their share in the growth of the country.


Present scenario

As India is a country with vast young population, it brings nearly 10 lakh individuals in action every month and with SMEs operating in many fundamental sectors of the economy, they account for the majority of the jobs for the youth that is not only energetic but dynamic and ready to take challenges and prove themselves. Despite holding such a determining position and growing at an astonishing rate, SMEs are often seen struggling for the proper attention by the Government and other organizations for sufficient financial infrastructure dedicated to its smooth operation.

Also, at present, the biggest hurdle in the trouble-free operation of SMEs is that these firms lack in qualified and professional assistance from the learned professionals holding degrees in relevant streams. Also, to successfully attract and retain the talent, it is of utmost importance that these SMEs have robust financial strength. This demands urgent attention by the concerned stakeholders. Once the financial assistance is made robust, the rest of the things are sure to fall in place in the due course of time.

Despite the fact that many steps are taken in making SMEs in India financially strong, yet the SMEs find it difficult to obtain credit from the banks and other big lenders who often take into account the basic assets of the firm such as primary infrastructure or inventory which SMEs may not be able to show. It is a sad fact to note that most of the SMEs have to depend on bank loans and other sources to run their business. 

Typically, funds from friends and family form the largest financial source for the SMEs in India followed by private money lenders and the unorganized financial sector where most of the times, the financing terms are unclear and interest rates are very high too. Further, in most cases, the lenders tend to look at the last three years of profitable track record of the company and it is obvious that SMEs are not able to do so due to various factors like asymmetry in maintaining the books, the family-owned nature of business and lack of information and expertise for tapping the right kind and source of finance, all of which result in increasing the gap.

This rightly highlights the need for strengthening the financial support for the SMEs so as to narrow down the debt gap on the nation. Although various banks in India are making all the possible efforts in bridging this gap, however, their approach is restrictive only.

In a nutshell

There is no doubt that in this digital age, the smart entrepreneurs are tapping the potential of digital technology to make this large eco-system of start-ups based on futuristic ideas to flourish with ease of 2-way transactions, yet financial assistance is something that they urgently need. A fact worth mentioning here is that India today boasts of nearly 50 million firms that can be classified under the SME category and are innovatively pacing themselves up to cater to the ever-increasing needs of the growing population. 

In such times, the flow of credit must turn towards SMEs so as to increase the flow of money that in turn will boost the financial strength of India in near future.