Small and Medium Enterprises (SMEs) with their high innovation capability are the key drivers of growth of Indian economy by contributing around 22% to India’s GDP, 45% of the total industrial output, 40% to exports and 70% to India’s employment. The globalization of Indian economy has not only brought tremendous opportunities for SMEs but has also brought many challenges for the sector mainly in terms for quality of goods and services, technology and various others. In order to cope up with these challenges, the SMEs have to develop cost competitiveness by providing quality products and services at competitive rates. However, to become competitive and grow, enterprises need sufficient finance at different stages of development.
Enterprises are formed from an entrepreneur’s dream to create something new. This dream is transformed in to an idea, the idea is formed in to product and service and eventually an enterprise is formed. However, most of the SMEs fail to succeed due to variety of reasons, availability of finance being the primary reason. The statistics of Reserve Bank of India indicates that only 5% of the MSME units, both registered and unregistered, had availed finance from institutional sources, 2% had availed finance from non-institutional sources and the majority of units i.e. 93% of the units had no access to finance and had to self finance.
One of the major reasons for banks/financial institutions (FIs) being unable to bridge this gap, is the perceived credit risk involved in financing small enterprises. This is primarily because of non-availability of valid bills, proper accounting systems and lack of known buyers. There has also been lack of efforts from SMEs in terms of preparation of their financial statements and other documents required for availing financial assistance.