Small and Medium Enterprises
THEME
Bank Finance to the SME Sector– Issues And Perspectives here are a number of issues in lending to the SME sector, which banks generally face. The key issues among them are outlined below: (a) Information Asymmetry: Accurate information about the borrower is a critical input for decision-making by banks in the lending process. Where information asymmetry (a situation where business own-
T
implication of raising interest rates and/or curtailing lending is that banks will not be able to finance as many projects as otherwise would have been the case. (b) Granularity: This refers to a situation where the risk grading system at banks does not have the requisite capability to discriminate between good and bad risks. The consequence is tightening of
Y. Srinivas
(The author is Manager, Compliance Group at ICICI Bank. He can be reached at srinivas. yanamandra@icicibank. com)
Small and Medium Enterprises (SMEs) play a very significant role in the economy in terms of balanced and sustainable growth, employment generation, development of entrepreneurial skills and contribution to export earnings. However, despite their importance to the economy, most SMEs are not able to stand up to the challenges of globalisation, mainly because of difficulties in the area of financing. With the opening up of the Indian economy, it has become necessary to consider measures for smoothening the flow of credit to this sector. The article provides a crosscountry perspective in this regard and highlights the Indian scenario with reference to SME lending. ers or managers know more about the prospects for, and risks facing their business than their lenders) exists, lenders may respond by increasing lending margins to levels in excess of that which the inherent risks would require. However, the sheer ticket size of SME lending makes it inviable for banks to invest in development of information systems about SME borrowers. In such situations, banks may also curtail the extent of
Bank Finance to the SME Sector– Issues And Perspectives here are a number of issues in lending to the SME sector, which banks generally face. The key issues among them are outlined below: (a) Information Asymmetry: Accurate information about the borrower is a critical input for decision-making by banks in the lending process. Where information asymmetry (a situation where business own-
T
implication of raising interest rates and/or curtailing lending is that banks will not be able to finance as many projects as otherwise would have been the case. (b) Granularity: This refers to a situation where the risk grading system at banks does not have the requisite capability to discriminate between good and bad risks. The consequence is tightening of
Y. Srinivas
(The author is Manager, Compliance Group at ICICI Bank. He can be reached at srinivas. yanamandra@icicibank. com)
Small and Medium Enterprises (SMEs) play a very significant role in the economy in terms of balanced and sustainable growth, employment generation, development of entrepreneurial skills and contribution to export earnings. However, despite their importance to the economy, most SMEs are not able to stand up to the challenges of globalisation, mainly because of difficulties in the area of financing. With the opening up of the Indian economy, it has become necessary to consider measures for smoothening the flow of credit to this sector. The article provides a crosscountry perspective in this regard and highlights the Indian scenario with reference to SME lending. ers or managers know more about the prospects for, and risks facing their business than their lenders) exists, lenders may respond by increasing lending margins to levels in excess of that which the inherent risks would require. However, the sheer ticket size of SME lending makes it inviable for banks to invest in development of information systems about SME borrowers. In such situations, banks may also curtail the extent of