A CRISIL study on the funding patterns of 2000 small and medium enterprises (SMEs) in India reveals that there is scope for banks to increase their lending to SMEs by Rs.500 billion. The study indicates that while banks have been lending to the SME sector, they still have significant scope for increasing lending to the sector. The funding opportunity is greater for smaller SMEs where turnover is less than Rs.500 lakh. Furthermore, the study reveals that bank branches in urban areas have greater scope than their counterparts in the semi-urban and rural areas to increase funding support to SMEs.

Ramraj Pai, Director, CRISIL Ratings, states, “We believe that the SME sector will continue to drive India’s economic growth, and present a significant business opportunity for banks. The banks will derive commercial benefits from lending to SMEs. In addition, access to bank funds will help the SME sector grow and prosper, and, in the process, favourably impact industrial output, and employment and wealth creation.”

The CRISIL study estimates that Indian banks funded on an average only around 60 per cent of the incremental working capital requirement between 2006-07 (refers to financial year, April 1 to March 31) and 2008-09. This is as against the common banking practice to finance up to 75 per cent of an entity’s working capital requirement. This shortfall was funded by the SMEs from their own funds.

Hence, there is a significant business opportunity for India’s banks in the form of incremental SME funding, which is currently not being exploited. Increased funding by the banking sector can assist the SMEs to grow their businesses faster.