Access to finance for India’s SMEs vs other economies

Considered by many to be a potential future superpower, India is a vast, young, entrepreneurial and spirited economy. Home to a thriving tech sector, India is fast emerging as a hotbed of innovation. However, some critics have argued that a lack of access to financing is holding some SMEs back. In this post we will look at how India compares to other world economies in terms of providing access to small and medium enterprises.

There are an estimated 42.50 million SMEs (or MSMEs to reflect the inclusion of India’s micro-enterprises) currently operating in India today, accounting for a whopping 95% of the mega-nation’s total industrial units. Indian SMEs employ around 106 million workers amounting to an estimated 40% of India's workforce. The SME sector is second only to the agricultural sector which of course, has over 1billion mouths to feed!

Indian SME’s account for around 45% of the country's industrial output and 40% of its total exports. Conversely though, the sector only receives 16% of total Indian bank lending, an anomaly which we are going to examine.

Bank Lending to SMEs

Finding up to date figures on India’s SME lending can prove challenging but data from last summer demonstrates that despite the continuation of the COVID-19 pandemic year on year growth to SME’s continued to rise. By July 2021, the Indian banking sector combined had lent Rs 2.09 trillion ($17 billion) to SMEs - a rise of almost twofold which accounted for 70% of business lending.

By comparison though, SME in the UK lending equated to over £22.6 billion ($29.8 billion) in 2021 and over in the US lending to small business reportedly equates to a staggering $644 billion annually. Even figures from Australia show pre-pandemic SME lending as hovering around $59 in 2020 billion albeit declining year on year.

Gross GDP in 2021

USA - $22,939,580

UK - $3,108,416

India - $2,946,061

Aus - 1,610,556

SME Lending in 2021

USA - $644 billion

UK - $29.8 billion

Australia - *$59 billion (2020)

India - $17 billion (Projected)

Boasting the world's 5th largest economy, these figures make it clear that India should be doing significantly better at SME lending by almost an extra $10 billion. This is especially true considering its place as an emerging economy, with an enormous engine fueled by a young population.

In terms of loan size, the picture is slightly different. The average Indian SME loan size dropped during the pandemic to RS 10,000,000 ($13.9k USD). Comparatively, the average SME loan in the USA is much closer to $110k. Now, whilst the disparity between these 2 figures may give the impression that Indian businesses are borrowing too little, the lower living, labour and production costs do mean that Indian businesses can make that $13k go quite far.

Therefore, the encouraging take-away here is that if a business can access a loan, then the loan amount itself may well be sufficient - the only problem is that there are simply not enough loans being issued in the first place.

What Finance Can Indian SMEs Currently Access?

The Indian government has itself taken the initiative and introduced a number of schemes designed to help SMEs access finance all of which are overseen and facilitated by its various departments. The Indian Government backed loans are intended to help micro to medium businesses in all sectors of the economy. Let’s take a look at a few of them.

The MSME Business Loans in 59 Minutes was introduced in 2018 and allows both new and existing businesses to utilise the financial assistance offered by the scheme. The loans provided under these schemes extend up to Rs. 10,000,000.

The MUDRA Loan scheme was created to help “fund the unfunded” and offer finance to microbusiness. MUDRA loans are offered at all bank branches throughout India.

The Stand-Up India scheme was created to provide loans for businesses run by Scheduled Castes/ Scheduled Tribes and women. The scheme is overseen by the  Small Industries Development Bank of India (SIDBI) and loans  granted under this scheme can range from Rs. 1 million  to Rs. 10 million.

The Credit Guarantee Fund Scheme for Micro and Small Enterprises helps SMEs obtain loans without any collateral. The scheme is managed as a trust by the Ministry of MSMEs The scheme can offer working capital loans up to Rs. 20 million with a preference for women entrepreneurs.

Identifying central Asia as a region with a particular SME funding gap, the World Bank has also launched some initiatives in India. In particular, one scheme was intended to specifically help startups and extended a credit line of $500 million, which was to be provided to the Small Industry Development Bank of India (SIDBI).

How Can India Improve Capital Access for SMEs?

Despite the Indian Government's efforts, it is still “extremely difficult” for SMEs to access finance according to Shailesh Kumar Singh - the MSMS Development Commissioner. “We need to work more on this and any suggestions are most welcome,” Singh told a discussion panel at a recent event organised by Axis bank MSME association India.

If India is going to fulfil its potential then it is clear that leadership is going to have to come from the top. Relying on the bank sector has so far not yielded the results it could and the sector is going to need some encouragement from the state before it gets on with some serious SME lending.

A World Bank report published in 2018 identified the need for improved credit reporting in order to help improve SME lending globally. This is especially true in India, an economy which largely runs on cash and paper records (where there are any records).  Indeed, the Reserve Bank of India also specifically cited  a “lack of financial information and non formal business practices” as a barrier to lending - a lack of information means Indian banks are often simply unable to assess an application's creditworthiness. In order to implement this though, it is going to take a considerable effort both to introduce the necessary infrastructure for reporting, and in educating entrepreneurs in best practices.

We must also remember that SMEs are perceived as being high risk owing to vulnerability to fluctuations in global markets caused by the rupee. Whilst India is one of the world's largest economies, it does not have a powerful currency like the US, China and Germany do.

Australia has been looking to the US for inspiration in order to try and improve SME lending after deciding that Australian SME access to finance vs USA was not comparatively satisfactory. During the COVID-19 pandemic the American Government introduced some pretty robust support schemes such as the PayCheck Protection Scheme and Disaster Relief Grants. If the Indian Government was willing to fund a scheme that underwrote the wages of SME employees, then this could increase a bank's willingness to lend to them - as would a package of tax relief initiatives.

Final Thoughts

Ultimately, there is no easy answer here. The issues facing SMEs in India are deeply entrenched in both the country's culture and economy and as such, any solution cannot work in isolation. However, something does need to be done if India is going to fully realise its potential as a future economic superpower.

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