Can SME Financing in India Address the Credit Constraints?

There's little doubt that that the SME's (small & medium enterprises) have played a key role in propelling the country's economic growth. The sector has made a substantial contribution to the GDP, industrial production, exports, and employment opportunities. Despite the sectors' huge potential, it often faces tight liquidity due to inadequate external funding. The inaccessibility to finance can jeopardise a business' expansion and growth prospects.Let’s dwell on the financial challenges that SMEs encounter when securing funding and what can be done.

SMEs are run by individuals who are proficient in their specific field but ignorant on matters of finance. While the government is trying hard to introduce digitalisation in every facet of business, many entrepreneurs are wary of using online lending avenues to acquire resources. There is a need to educate them about new technologies and other funding tools for credit assistance.

SMEs are still using outmoded techniques to source funds. In the tech-powered world, cashless transactions and digital payments can be used to avail credit. SME's must, therefore, consider investing in innovative financial technologies to borrow money.

A business’ financial standing and credit history is an important criterion for procuring an unsecured loan . Unfortunately, many entrepreneurs ignore this creditworthiness aspect. It’s imperative that SME owners work hard towards achieving a strong credit rating to access monetary aid from financial establishments.

SMEs prefer obtaining loans via the traditional banking route that involves collaterals, long assessments and elaborate paperwork. SMEs should get away from conventional banking payouts and try digital lending platforms that have a shorter turnaround, transparency and functional efficiency.

There should be a proper appraisal process to evaluate the feasibility of a project and the creditworthiness of business for sanctioning funds. But most financial institutes have their own methodology based on various factors to determine the level of credit risk. The absence of pre-defined rules makes it difficult for SMEs to formulate proper plans.

Many SMEs turn to lenders offering loans against collateral to unlock liquidity for expansion or operational needs. However, some entrepreneurs may find it difficult to qualify for the same because they don’t have assets that can be leveraged for the loan. They can look at the influx of new-age financing products that provide funding without security and documentation.

The Peer-to-Peer (P2P)lending platforms are the ideal solution for SMEs struggling to generate capital as it offers faster and cheaper credit. Most SMEs are unaware of its potential as a reliable source of funding as the P2P industry in India is still in the budding stage. However, with RBI asking P2P companies to register themselves as NBFC, business owners may start considering it as a viable financial tool.The constraints faced by SME financing in India is a cause for major concern.  It is therefore crucial for small business owners to become financially literate and explore the range of modern and technology backed financing instruments available to address the issue.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.