The importance of Small and Medium Enterprises (SMEs) in economic and social well being of a country is well documented and recognized and so is the fact that one of the biggest stumbling blocks in the growth of SMEs is their access to credit.

It is heartening that Government of India has constituted the 'Task Force on Investment Promotion and Coordination' and included in its mandate some SME specific issues with regard to off take of credit by SMEs.

If the meeting was held a decade or so ago, the demands of the SSIs would have been on expected lines- availability of finance at concessional rate of interest. With increasingly globalized economy, free flow of information, finance, technology and soon the free flow of people to begin within RTAs, the contours of competitiveness have undergone a complete metamorphosis. Today, all the demands of the SMEs, not just with regards to finance but about all the factors of production are not for concession but for the 'level playing field'. If as a country we are serious about sustainable economic growth, SMEs will have to be given their due or not just the SMEs but the whole of economy will bear its consequences and the banking and financial sector in particular.

In changed economic realities, the relationship between the Banks and the SMEs have to move from a 'donor-recipient' relationship of past to the relationship characterized by partnerships- where each knows the strength and weakness of the other and tries to minimize the weaknesses and thrives on strengths. It is with this vision that we wish to share with you a few insights we gathered with the goal that a realistic, sustainable and mutually rewarding business proposition would emerge between the banks and the SMEs after the deliberations.

In order to discuss the investment and credit issues in SMEs, we have to address the demand as well as supply side constraints.

Demand Side Constraints :
· The relationship between risk and return has become unattractive in the SME manufacturing sector relative to trade both in goods and services, and the executive jobs in the corporate world. Though indications are a plenty, a study of the birth and death ratio of the SMEs in manufacturing during the last decade would bear out the fact.
· The time, effort and cost of conformance to the regulatory set up are very high and have become a disincentive after devolution of secured markets. Half baked liberalization, control on factors of production by lobbies, hostile regulatory environment, manufacturing is small scale is being increasingly considered 'not worth the trouble'.
· Among SMEs there are constraints in developing bankable projects and also in communicating their ideas well so that their projects are perceived bankable.
· There is near absence of seed / risk capital availability for start-ups. The maximum resistance encountered is at the time of birth of new enterprises.
· As the supply chains between Small-Medium-Large enterprises are yet to mature due to pending second generation reforms and imposition of national and state VAT, the large enterprises both public and private, invariably squeeze the Small companies after taking supplies. In spite of Delayed Payment Act, delay and out right defaults by large companies are common place increasing the financial vulnerability of the small companies by reducing liquidity.
· Unavailability of acceptable collaterals chiefly due to socio-economic reasons as property is owned jointly by the family and because of pendency of land reforms for decades. The problem is even greater when entrepreneur is young or is a woman. Further, squeeze on births.
· Exposure of unlimited risk even in corporate type of entity due to personal guarantees and not only is there not an option of honourable exit after failure but the hanging sword of jail terms under host of antiquated regulations. Almost complete absence of the modern bankruptcy and insolvency codes reflecting the needs of ruthless competitive markets and uncertainties in globalization.

Supply Side Constraints :
These constraints could be classified in two: The policy related constraints and Operational constraints.

a. Policy Related Constraints :
· Though, the macro-economic policy environment has improved considerably following first generation reforms undertaken during early 90s, the delay in second generation reforms have constrained the flow of benefits of reforms to the masses. The competition in banking and financial sector is yet to reach at maturity. Whatever competition is seen so far is in retail banking only and the SMEs have yet to see any benefit of reforms or competition.
· Though recently, RBI did take up the matter with IBA on higher rate of interest charged from SSIs, yet their suggestion of tieing the interest with PLR is hardly to give any succor. The prevalent Banks' PLR in India are arbitrary and already significantly high. (No bank can survive by giving loans at 6-7% in large quantities which are being offered for financing housing and automobiles, if their PLRs are indeed between 11-12%.).
· We are not also very sure about the role of Credit Guarantee Corporation in easing access to finance. Our experience in India as well as from the feed back of our counterpart associations in other countries is that impact of Credit Guarantee corporations is very limited.
· The role and impact of NBFCs can be significant in facilitating SMEs' access to finance for technology upgradation and meeting short term finance through leasing, hire-purchase and equipment finance. We would like to know more of recent announcement of RBI Governor that credit given to NBFCs by Banks for on lending to SSIs would be considered under the Priority Sector Lending.
· We feel that the Central bank has not been able to develop and guide so that Bankers move away from the traditional collateral requirements as the main method of reducing risk. Globally, increasingly, the suppliers of finance prefer 'real time information' to the collaterals based on fixed assets as the latter are considered illiquid and uncertain in value. There is hardly any work on 'collateral substitutes' in India.

b. Operational Constraints :
· One of the biggest operative constraint at the banks is that officers are personally considered responsible for default of smaller loans ( the large loans are approved in committees and hence nobody is responsible). There are very low rewards for officers to take risk. The Banks lack the "profit center approach"- a crucial prerequisite in competitive world.
· The information management systems are primitive and highly inadequate, leave apart the policies of RBI, majority of them do not even know the policies of their own banks.
· There is inadequate knowledge of credit/ risk assessment with bank staff which they try to complement with over securitization.
· As Bankers are still on 'Donor mode', they have never taken the partnership approach seriously with SME associations. Remember Bankers' having met the associations at a platform? In spite of Banks having huge exposure, there are no serious research and studies on the SMEs as clients to understand their contribution, needs and demands. The myths continue that SMEs are not bankable without any rational research.