SME Finance Issues and Recemmendations

Abstract

SME promotion is an important issue for many government departments and central offices. However, there is an existing lack of coordination and regular information exchange mechanism among institutions which constrains their collective ability to deliver in the SME development process. While SME are being mentioned in some of our socio-economic strategies and policy documents, measures are not sufficiently specified and prioritized for us to be able to speak of any coherent SME policy or approach. Among all the challenges being faced by the SMEs, access to equity and formal debt financing has repeatedly been identified as a recurring constraint to its growth and development. Uncertainty and informational asymmetries that characterize SMEs are amplified for Certain SMEs, making it more difficult for them to access financing. The responsibility for facilitating SME policy development lies with SMEDA, attached to the Ministry of Industry and Production. One of the major reasons for the lack of coordination is that SMEDA has not been provided with a mechanism to initiate, coordinate, monitor, and evaluate initiatives of SME development outside of its own scope of activities. Anyways, the responsibility of such an important sector should not be put to organizations like SME Banks and Microfinance Banks alone, in terms of providing them with finance, Commercial Banks should be taken care of it as well. Though Banks are working in this regard and most of the banks have separate SME departments but still there are certain issues due to which banks are somehow reluctant in financing SMEs. while obtaining financing facilities from banks, Concerns like: Inadequate planning process, Unorganized business and organization structure, outdated technology, insufficient skill development, lack of legal and tax understanding, and unreliable accounting information contributes a lot in creating hurdles for SMEs. Indeed it’s an important issue, because if SMEs cannot gain access to finance through the regular system, they may not start up a business or simply go out of business, a potential loss to the economy. At the same time, the other danger can be, that they will abandon the formal system altogether and operate in the informal economy, sidestepping taxes and regulations, and thus not making a full contribution to economic growth. This paper highlights the issues at the heart of difficulties in accessing finance by SMEs, and the suggested practical policy recommendations