SMEs face many challenges in their path to growth and expansion. Finding the right financing option is one of the top challenges faced by them. According to a recent report from the International Finance Corporation (IFC), around 40% of micro, small and medium enterprises cannot access funds worth $5.2 trillion annually. Their credit needs go unmet because of many reasons, the main one being that they don’t qualify for formal credit, in most cases. Hence, there is a huge gap in the lending infrastructure for SMEs, between the actual financial needs of these SMEs and the funds they actually have access to.
Banks and other traditional financial institutions assess the creditworthiness of businesses (even the small and medium ones) before providing them with adequate credit for their operations. However, in most cases, businesses don’t qualify for credit assistance from these banks due to the following reasons:
a) New SMEs may not have any credit history to submit to the banks for getting loans.
b) They may not have a systematic documentation system for their operations, which doesn’t allow banks to provide them with loans.
c) Their credit scores may not be good enough for banks to consider them for granting loans.
d) SMEs may not be able to wait for the long processing time that banks usually take for disbursing loans, as they need quick cash flow.
e) SMEs usually fall under the unorganized sector. They are not formally registered, which puts them at great credit risk.
All of these factors have impacted the infrastructure for SME financing in India and other emerging countries severely. However, understanding the potential of these SMEs for an economy’s growth, global organizations like the World Bank and the respective governments have introduced many initiatives to bridge the gap in the lending infrastructure for SMEs.
In order to help SMEs grow to their full potential and not be curbed by inadequate credit, the Government of India and the World Bank have implemented the following initiatives. These initiatives have definitely brought about a significant change in the infrastructure for SME financing in India and other developing economies:
a) Assessing and regulating the various sources of financing options to ensure that infrastructure lending for SMEs gets more responsible, organized and adequate than before
b) Implementing credit guarantee initiatives to improve the lending infrastructure for SMEs, thereby mitigating the credit risk associated with them
c) Improving infrastructure lending in India and other developing countries by setting up collateral registers, increasing channels of secured lending and changing the insolvency rules of SMEs – all of these moves reduce the credit risk of SMEs and increase their access to finance.
d) Focusing on topics of infrastructure for SME financing in emerging countries on global platforms to stress the importance of financial inclusion of SMEs in the broad scheme of lending infrastructure – this is to increase awareness about the current credit gap in SME financing and help access resources to bridge this gap as much as possible
Owing to the digital wave, the World Bank and other organizations have come up with a lot of new initiatives to ensure that SMEs get easy and affordable credit. Some of these include:
a) Introducing embedded lending platforms to SMEs, so that they can also look at non-banking sources for financing options
b) Supply chain financing, invoice factoring and other means of financing services help improve the liquidity of SMEs to run their normal operations; these asset-based financing schemes provide quick cash to SMEs for their assets like accounts receivables, stock, machinery and other types of collateral. Many fintech companies, like Finverv, offer a bevy of asset-based financing services at reasonable charges for SMEs today.
c) Plans are underway to open a digital-only bank in India to exclusively provide credit to SMEs, thereby bridging the credit gap in their lending infrastructure by a considerable level
d) Non-profit initiatives like Open Network for Digital Commerce (ONDC), which provide credit to SMEs that banks have rejected, thereby helping SMEs grow digitally as well
e) Though not a new concept, trade credit is making a comeback into SME financing slowly these days; in this type of lending infrastructure, businesses get into an agreement with their suppliers, where they buy raw materials and goods to meet their demands, but agree to pay at a later date (usually 30 or 60 days from the date of purchase).
The lending infrastructure of SME financing is all set to reach great heights in the future, with more international organizations and governments recognizing the potential of this sector, and its contribution towards the growth of an economy. With able support from organizations like the World Bank and the respective governments, SMEs today have more access to credit than they did about 10 years ago. A solid integration of financing options between traditional banks and new-age fintech options, digital banks, asset-based financing options and trade credit have significantly improved the financing options for SMEs in India and other developed countries today. All of these initiatives have introduced credit avenues that SMEs never knew existed before, thereby giving them ample opportunities for their growth and expansion.
