All kinds of business enterprises require sufficient funds in order to meet their fixed as well as working capital requirements. Finance is one of the critical inputs for growth and development of the micro,small and medium enterprises. They need credit support not only for running the enterprise and operational requirements but also for diversification, modernization/upgradation of facilities, capacity expansion, etc.

Inadequate access to credit is a major problem facing micro, small and medium enterprises. Generally, such enterprises operate on tight budgets, often financed through owner's own contribution, loans from friends and relatives and some bank credit. They are often unable to procure adequate financial resources for the purchase of machinery, equipment and raw materials as well as for meeting day-to-day expenses. This is because, on account of their low goodwill and little fixed investment, they find it difficult to borrow at reasonable interest rates. As a result, they have to depend largely on internal resources.

In respect of MSMEs, the problem of credit becomes all the more serious whenever any difficult situation occurs such as a large order, rejection of consignment, inordinate delay in payment, etc. Sometimes, they have to close down their operations due to shortage of funds. Also, there is little or no scope for expansion and growth due to dearth of capital. Hence, economies of scale are not available.

Recognising the importance of easy and adequate availability of credit for ensuring sustainable growth of the MSME sector, the government has undertaken several measures:

Priority Sector Lending

Provision of finance to the sector is a part of the 'Priority Sector Lending Policy' of the banks (both domestic and foreign banks operating in India. For the public and private sector banks, 40% of the net bank credit (NBC) is earmarked for the priority sector. For the foreign banks, 32% of the NBC is earmarked for the priority sector, of which 10% is earmarked for the small scale sector. In the case of foreign banks operating in India which fail to achieve the priority sector lending target or sub-targets, an amount equivalent to the shortfall is required to be deposited with SIDBI for one year at the interest rate of 8 percent per annum.

Small Industries Development Bank of India (SIDBI)

SIDBI has been set up with the mission to empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development. It is the principal financial institution responsible for promotion, financing and development of the sector. Apart from extending financial assistance to the sector, it coordinates the functions of institutions engaged in similar activities. The four basic objectives of SIDBI for orderly growth of industry in the small scale sector are:

• Financing
• Promotion
• Development
• Co-ordination

SIDBI's major operations are in the areas of (i) refinance assistance (ii) direct lending and (iii) development and support services.

Taking into account the fact that a majority of such enterprises which are at the lower-end of the sector are outside the ambit of institutional finance. Hence, concerted efforts have been made by SIDBI to promote micro finance across the country to enable the unemployed persons to set up their own ventures. There are more than 100 Micro Finance Institutions (MFIs) developed by SIDBI that are engaged in implementation of its micro finance programme. SIDBI has disbursed about Rs. 1700 crore (cumulative) under its programme, benefiting around 50 lakh beneficiaries.

At the State level, State Financial Corporations (SFCs) along with the State Industrial Development Corporations (SIDCs) are the main sources of long-term finance for the sector. State Financial Corporations, the state-level institutions have played an important role in the development of small and medium enterprises in their respective states with the main objectives of financing and promoting these enterprises for achieving balanced regional growth, catalyse investment, generate employment and widen the ownership base of industry.

Credit Guarantee Cover Fund Scheme for Small Industries was launched jointly by the Government of India and SIDBI (on a 4:1 contribution basis) in August 2000, with a view to ensure greater flow of credit to the sector without collateral security. It picked up during the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and guarantee covers for Rs 1705 crore were issued. up during the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and guarantee covers for Rs 1705 crore were issued.

Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs), was launched with the objective of doubling the flow of credit to this sector within a period of five years. The measures in the policy package, inter alia, include banks to achieve a minimum 20% year-on-year growth in credit to the MSME sector and cover on an average at least 5 new MSMEs at each of their semi-urban/urban branches per year.

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