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April 8, 2016


*I have read with interest  the  Position paper submitted  by the WUSME General Secretary for this Conference  which calls for  innovative approaches  as to how a broader range of financial instruments can practically be used by SMEs. 1918084_1258882987472856_7462995732212480429_n

Generally speaking, my belief is that most of such policy prescriptions suffer from “One shoe size fits all ” approach . And many of them are not possible to be implemented either because either they are complex or untried or their implementation is just not possible due to regulatory framework .

In my brief presentation, I will speak about the Indian experience and the initiatives taken in recent times to support business enterprises with focus on small and micro enterprises which take into account economic situation of different communities and attempt  to cut down on delays in processing of  applications for loans and their disbursal .

Indian experience

Now numbering close to 55  million, Indian SMEs have grown at a stable pace of 4.5% in the last 5 years. However,  they continue to face  difficulties in raising money,  among other challenges, number and complexity of regulations being among others .

Definition of MSMEs in India
(As Per Micro, Small & Medium Enterprises Development (MSMED) Act, 2006)
Manufacturing Enterprises – Investment in Plant & Machinery
Description               @ INR EUR
Micro Enterprises Upto  2.5 million Upto  33,333
Small Enterprises Above  2.5 million and  up to 50 million Above 33,333  and up to    666,660
Medium Enterprises Above 50 million and  up to 100 million Above 666,660  and up to    1.33  million

Many of such enterprises resort to raising funds from relatives and friends and from a rather expensive informal credit system to meet their financial requirements . A recent study suggests that nearly 25% of all micro and small enterprises operating in the country do not have access to institutional credit .


So is the Indian financial system so short of cash that it is unable to cater to the needs of micro and small enterprises ?  This is certainly not so . I believe that the problem is with the mindsets of the bankers  who look for securities and collaterals when dealing with loans worth a few thousands euros and reject most applications on small technical or uncertain project viability related grounds , but throw caution to the winds while financing large corporates . Let us consider  some examples :

A case making headlines in the country presently  is that of  default in payment of  bank loans by the now sunk Kingfisher Airlines to the extent of  1.2 billion Euros .

Stocks and brand names were overvalued and pledged as collateral securities .They are worth nothing now, and sale of properties incl: non-leased aircraft/s owned by the Airline/its Directors and pledged to the Banks would hardly fetch them  120 million Euros, that too with a great deal of effort over a period of time . Which means that close to 90%  of the loans can easily be considered  as bad , and will have to  be written off over a period  of time . And in fact, while the loans given to the Airline by a consortium of  16 Banks  before had already turned sour , another Government owned Bank stepped in to support with a generous unsecured loan of  EUR 106 million . On the other hand , we read horror stories of small borrowers resorting to suicides because of  coercive actions initiated by Banks to recover small loans given to them , less than 10,000 Euros . Therein lies the dichotomy and the discrimination . Former Deputy Governor of the Reserve Bank of India , KC Chakraborty, put his finger on the sad truth when he said recently in an interview  “Small loans are rarely written off“.   Banks continue  to be the fiefdom of the rich.

As a result of reckless lending to huge corporates ,  commercial banks  – mostly State owned ones – are saddled with Non Performing Assets of Banks [  NPAs ] – or bad loans –  running into billions . As at the end of January this year , the figure was a staggering  53 billion Euros   , a situation that will require the concerned Banks to be recapitalized by the Government  to enable them to remain afloat . And these are just the amounts confirmed to be NPAs , the real losses would be much much  more .


This is not to say   that the Government of India is not aware of the difficulties that the small and micro enterprises face in accessing the blood line for running their business –  finance .  That is why , considering the importance of this sector in promoting entrepreneurship,  generating new jobs and distribution of  income across wider sections of the society, the present Government since it came into power in May 2014,  has taken several new initiatives .

I would like to mention some of them .

1.Funding the Unfunded – MUDRA BANK   

Set up on 8 April, 2015 , Mudra Bank aims to provide loans at low rates of interest  to micro- finance institutions and non-banking financial institutions which would  then provide  onward credit to micro and small businesses , including self employed professionals , craftsmen and services providers . Since small entrepreneurs and businessess , especially in rural and interior areas , are often cut off from banking system because of limited branch presence, Mudra Bank has  partnered with local coordinators , such as micro finance institutions and NGOs in order to re-finance  “Last Mile Financiers” of small/micro businesses.

Three products available under Mudra Bank’s Scheme are Shishu [ Tiny] , Kishore [ Youngster ] and Tarun [ Adult ] , signifying different stages of growth and funding needs of the beneficiary micro unit or entrepreneur . Shishu covers loans of upto  EUR 665 , while Kishore covers those above  EUR 665 and upto EUR 6650 . Under Tarun category,  loans between  EUR 6650 to EUR 13,300  are provided .

As on 15 March this year , loans equivalent to  145 billion  Euros  have  been provided by Mudra  Bank  to over  29.6 million beneficiaries,  almost 35% of them being  women , since it was set up  less than 12 months before .


This was launched on 16 January, 2016 and  is applicable to those businesses which were  launched in India in the last 5 years, but have either not received adequate funding or none at all. Some of its innovative features are as follows :

a.Compliance regime based on Self Certification

The objective of compliance regime based on  self certification is to reduce the regulatory burden on Startups . This self-certification will apply to various laws like payment of gratuity, contract labour, employees provident fund ,water and air pollution acts, among others .

b.Startup India hub and simplifying the Startup process

A Startup India hub will be created as a single point of contact for the entire Startup  ecosystem to enable efficient exchange of knowledge and faster access to funding . It  will be possible to   set up such a StartUp by just filling a short form through a mobile app and on line portal launched recently by the Department of Industrial and Investment Promotion [ DIPP ] in the Ministry of  Commerce and Industry .  Through the Mobile App/On-Line Portal, Start Ups can access latest updates on various  notifications, circulars issued by various Departments, and different funding agencies from time to time as well as information on financing procedures and options .

c. Patents protection and exploitation of  IPRs

The Government is also working on legal support for fast tracking patent exanination at lower costs . It will promote awareness and adoption of Intellectual Property Rights [ IPRs ] by Startups and help them protect and commercialise  IPRs

d) Easier access to public procurement by Government agencies/departments .

Procedures will be established for facilitating access to public procurement programme for goods and services supplied by such StartUps .

e) Tax exemptions for StartUps

Startups will be exempted from payment of taxes on their earnings for a period of 3 years from the day of starting their commercial operations . Mechanisms will be set up  to facilitate faster exit in case of  genuine business failures .


 Under the Scheme launched  by the Indian Prime Minister just 2 weeks ago , 125,000 branches of  commercial banks will loan money to 125,000  young people from marginalised communities , the intention  being to turn job seekers into job creators.

The “Stand up India Scheme” will help members of Scheduled Castes and Tribes class  and Women to get loans –  from Euros 13,350  to  Euros 133,350 –  for their non-farm businesses. The Scheme proposes to leverage the institutional credit structure to reach out to these under-served sectors of the population by facilitating bank loans to them on easy terms .


A recent phenomenon  has been setting up of  a smaller, exclusive stock exchange for SMEs enabling them  to raise finances from retail as well as institutional investors , thus  becoming  publicly trading enterprises through such IPOs .

Until now, that is during last 3 years ,  129 SMEs have been listed on the SME Exchange set up by the Bombay Stock Exchange .  34 SMEs raised  EUR 38.26 million  by way of  IPO   during April, 2015  –  January  2016 .  23 SMEs have filed IPO papers in January –March 2016 quarter to mop up  EUR 26.66 million .


During the last 2 decades or so , several micro finance institutions and agencies have come up in the country which are also engaged in financing crafts and small businesses , including Self-Help Groups of Women and those below the poverty level . They also provide  counselling ,  insurance and deposit services . SKS Microfinance Limited [ Mumbai ] , Bandhan [ Kolkata ]  and SEWA [ Ahmedabad ] are some of the leading MFIs in the country who have done a commendable job in this direction .

This is not to say that  life for small and micro businesses  in India  will be a garden of roses from now onwards , so far as access to institutional credit is concerned . Far from it .  But a new , innovative and simpler architecture for their financing has definitely been set up, one that will yield fruitful results in coming years .




*Paper prepared for an International Conference on ” Promoting a new architecture for financing of SMEs and Entrepreneurship ” to be held in San Marino on 16 April, 2016 .

The author  has been associated closely with WUSME right since its inception, 5 years ago . He is a known authority on small businesses and has delivered lectures  worldwide in Conferences organized by various UN agencies  and intergovernmental organizations , including OECD and APEC.  He lives in New Delhi [ India  ] .

@ 1 EUR = INR 75


For the interest of those who wish to learn more about  the Indian financial system and set up  for facilitating easier access of micro and small enterprises to institutional credit , I  would recommend that they may look at the content posted on the  following websites/ web links  :

References and suggested readings:

Click to access Analysing-Indian-SME-perceptions-around-Union-Budget-2014-15_Final-new.pdf










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