Information asymmetry, business viability, and limited formalization create a nexus that reduces lenders' confidence in SMBs, leading to significant difficulties in securing timely and adequate formal credit.

SMBs are the driving force of our nation’s economy. They drive entrepreneurship and create substantial employment opportunities. With approximately 6.3 crore units, SMBs contribute almost one-third of India’s nominal GDP, account for 40% of Indian exports, and generate over 22 crore jobs. The SMB sector harnesses the potential of the Indian demographic dividend and provides a chance for inclusive development across the nation.

Credit gap-

Despite the critical role of SMBs, they most often if not always suffer from liquidity issues. Many of them lack adequate credit scores or comprehensive financial records. Sometimes they lack adequate assets to serve as collateral, to receive the financing they require. This leads to a significant gap between the required liquidity to make any specific SMB unit functional and the available amount. This gap is termed the credit gap. According to one report by the Expert Committee on MSMEs chaired by U.K. Sinha, the credit gap in Indian SMBs is between Rs 20 to 25 lakh crore.

Government’s role in bridging the credit gap-

There was a pressing need to address the financial barriers affecting the functionality of this key sector. The Reserve Bank of India and the Government of India rolled out specific measures to target and reduce the credit gap. One such measure was Priority Sector Lending. This includes 7.5% of the bank’s lending adjusted for micro-enterprises and all the lending to SMBs was qualified under PSL. The apex bank had also sanctioned collateral-free loans for SMBs up to Rs.10 lakh for micro-enterprises. It also encouraged financial institutions to lend under the CGTMSE scheme which carries zero risk weight for a guaranteed portion of loans.

Moreover, to address the issue of delayed payment to SMBs, RBI has several innovations, the Trade Receivables Discounting System facilitates SMB financing through an electronic platform. The Account Aggregator and inclusion of GSTN in the AA ecosystem streamline financial data access for SMB lending. The Unified Lending Interface launched in 2023 allows SMBs to access tailored and frictionless credit using digital data. Additionally, RBI’s implementation of a revival and rehabilitation framework and inclusion of SMB loans of up to 25 crore, the NAMCABS program to help financers familiarize themselves with SMB financing needs, MUDRA, CGTMSE had improved the formal credit to SMB sector. In the ending of the FY 24 Scheduled Commercial Banks credit to SMBs stood at Rs 27.25 lakh crore and registered an annual growth of 12.39% and 20.58% in the last two financial years.

SMB’s role in bridging the credit gap-

“While regulatory policies and government schemes have played a crucial role in creating an enabling environment for MSMEs, it is equally important for MSMEs to take proactive steps to build trust and enhance their visibility with lenders,” said Shri Swaminathan J deputy governor of Reserve Bank of India.

• Embracing formalization should be the foremost step of SMB operation, to enhance creditworthiness. This includes steps like registering on the UDYAM portal and filling GST returns will increase transparency over their business activity and financials and improve their credibility to qualify for government schemes and priority sector lending. SMBs should adopt proper accounting practices such as maintaining a balance sheet, accurate cash flow statements, and income statements will help auditors and further boost their credibility. Adopting digital payment methods like Unified Payment Interfaces and digital banking will improve SMBs' digital footprint.
• SMBs should properly select the best-suited credit product from a buffet of products- working capital loans, term loans, overdrafts, invoice financing, and value chain financing specifically tailored to match their needs. Improving credit scores by payment of loans in due time will serve future needs. Moreover, use the facilitated credit for the purpose it was borrowed. There were instances where SMBs borrowed money but used it to serve individuals’ financing needs. These unethical practices increase stress, impacting credit history and subsequently decreasing their credibility with banks.
• SMBs should enhance their effort at capacity building, by strengthening their operational and financial management skills. Engaging in workshops for skill development on topics such as compliance, bookkeeping, and market trends will help them better manage their business and finances. SMBs can leverage the ecosystem for capacity building and financing, by engaging with industry bodies, incubators, accelerators and trade associations providing SMBs with mentorship, funding opportunities and market linkages.

In conclusion, for comprehensive development of the SMB sector requires the collective effort of all stakeholders- government, regulatory bodies, the financial sector, trade associations, and even larger corporates. Despite its pivotal role in driving economic growth, the sector faces numerous challenges, including delayed payments, infrastructure constraints, limited access to formal finance, low technology adoption, and a shortage of skilled labour. However, the stakeholders are engaged together in a task to provide innovative solutions with a firm commitment to boost confidence among lenders and borrowers.