Lending to micro small and medium enterprises: An analysis of bank approaches and risk perceptions

Abstract

The Banking Sector has played an important role in the modern economy by providing credit to the weaker segments. One such segment is Micro, Small and Medium Enterprises (MSMEs). It has been found in the literature that MSME sector is facing a major hurdle in access to finance. Credit flow to the sector is not found to be adequate although the sector contributes 45 per cent to total industrial production and 40 per cent to the exports of the country. The Perceived risk towards MSMEs pose greater challenge for banks in providing finance, resulting in different types of approaches adopted by banks towards MSME Lending like Income gearing, Capital gearing approach etc. This research is an attempt to identify 1. Approaches used by Banks to finance MSME sector thereby finding out whether these approaches differ across banks, Type of units and Loan Types. 2. To identify and evaluate important criteria in different Lending approaches.