The Importance of Banking & Financial Services to SMEs
Importance of banking and financial services to Small and Medium Enterprises (SMEs) cannot be underestimated. They are vital for almost every function of an SME, from funding to sustenance, routine transactions and growth.
Other than the above four core functions, banking and financial services SMEs in myriad ways. They are indispensable for any economy that hopes to develop while reducing unemployment and poverty rates.
Here we look at the importance of banking and financial service to SMEs and additional roles they are playing in India.
SME Classification in India
Before proceeding further, let us understand what types of businesses meet the SME classification in India.
- Small Enterprises: Businesses with an investment ranging between Rs.1million and Rs.20million.
- Medium Enterprises: A company with a total investment between Rs.2million and Rs.5million.
Further, organizations employing less than 50 workers are broadly known as Small Enterprises. Those with less than 500 workers come under Medium Enterprises category. However, this is an international benchmark. Generally, the number of employees does not matter in classifying an enterprise.
Importance of Banking & Financial Services
As I already mention, banking and financial services provide capital to a fund, offer loans for expansion and, provide services for business transactions. However, here are some other areas where the importance of banking and financial services to SMEs is prominent.
Bridging Gender Income Inequality
This news might surprise you: women entrepreneurs account for about 14 percent of all businesses in India, including SMEs. In a nation where women are traditionally seen as homemakers, this figure is amazing. The number of women opening small and medium enterprises in India is on the rise for a variety of reasons.
Top reasons include special loans and finance schemes that aim at promoting entrepreneurship among Indian women. The Central government usually announces such special loans and finance schemes.
These schemes are also implemented by Microfinance Companies in India. They have excellent microfinance schemes for women entrepreneurs. Women’s self-help groups also can avail these microfinance packages to open SMEs in rural areas and provide employment. Banking and financial services providers implement them at the grassroots level.
While gender income inequality plagues India, the country’s banking and financial sector continues efforts to bridge the gap.
The slew of new Small Finance Banks, women’s cooperative credit societies as well as large public and private sector banks create own loan and finance products that aimed at promoting women entrepreneurship.
As a result, women are finding it increasingly easy to access credit and money to launch own SMEs in various sectors.
Helping SME Exports
Currently, the Indian government is considering several ways to enable SMEs to export products to lucrative foreign markets. Unfortunately, credit facilities are the single biggest hurdle for SMEs that have exportable products. In March 2018, credit demand for SMEs stood at US$370 billion against the available US$139 billion.
Despite, the banking and financial sector is helping SMEs to enter the export market with an available range of services. Consequently, several SMEs are making a mark abroad. These exports are helping SMEs to become active members of the Make in India initiative of the Indian government.
As the government rolls out more initiatives for promoting SME exports, banking and financial services providers will be at the forefront of creating and offering products specifically for SMEs.
Plant & Machinery Loans
Large Non-Banking Financial Companies (NBFCs) in India form the backbone of SME finance. They have several products such as equipment and machinery loans available to entrepreneurs on soft terms. Such loans enable SMEs to modernize operations and reduce operational costs rapidly. Without such loans, SMEs in India would be unable to keep pace with corporate giants and imported products.
To ensure that small and medium entrepreneurs do not risk losing credit rankings, these NBFCs accept machinery they finance as the collateral. helps SME owners since they do not have to live through the ignominy of facing bankruptcy and defaulter charges at Indian courts.
Interestingly, the percentage of SMEs defaulting on loans taken for business is relatively smaller. In January 2019, Reserve Bank of India said it would permit banks to restructure some SME loans to help overcome bad debt issues.
SMEs of Scheduled Castes/ Scheduled Tribes
Banking and financial services are increasingly helping members of Scheduled Caste and Scheduled Tribes by funding SME projects in remote and far-flung areas of the country. This initiative by banks and NBFCs aims at bridging the income gap between rural and urban Indians. Also, it is helping people from SC/ ST communities that earlier had no access to credit.
Some banks and financial services providers are offering special credit facilities to existing SC/ST entrepreneurs. Others have attractive credit services for first-time entrepreneurs, especially women from SC/ST communities to launch an SME.
As a result of these initiatives by banks and financial service providers, the increasing number of entrepreneurs are emerging from financially and socially challenged communities of India.
Micro Units Development and Refinance Agency (MUDRA) is an Indian government scheme that aims at promoting entrepreneurship among all Indians. Banks and NBFCs provide MUDRA finance. During the fiscal year 2018-2019, Indian banks and participating financial services companies had sanctioned a combined over 43.6million Mudra loans worth Rs.2.34 trillion.
These amazing figures became possible due to the active participation of the public sector, private, cooperative and other banks as well as leading NBFCs in providing finance under MUDRA scheme. Further, MUDRA scheme was launched on April 8, 2015. In less than four years, the number of loans sanctioned and amount disbursed is simply mind-boggling and merits accolades of sorts.
Insurance for SMEs
SMEs in India have unique requirements. They too are prone to vagaries of nature such as floods and droughts, acts of violence and terrorism, thefts, pilferages, fires and other undesirable occurrences.
NBFCs and banks offer customized insurance covers for SMEs to cover almost every aspect of their operations. These include insurance of premises and machinery in case of natural disasters to acts of terrorism. SME owners can also avail economical accident, health and life insurance covers for workers and themselves.
As we have seen, there is a great importance of banking and financial services to SMEs. They provide that vital lifeline to SMEs and provide them with the edge to succeed and flourish in the face of stiff competition.