Credit Rating Framework for Financing of SMEs in India and role of central bank

Small and Medium Enterprises (SMEs) are playing more and more important role in world economic development. Indian SMEs have been on the forefront of the development path. However, Indian SMEs face a host of obstacles when they try to access credit market for their financing needs. Banks do not feel confident to extend loans to the business units whose track records are not apparently known to them, nor are they easily verifiable by the banks. On one side the government assigns a target of minimum threshold level of SME financing for banks and on the other side banks are reluctant to finance because of perception of higher probabilities of credit default. A specialized and effective enterprise credit rating mechanism is extremely important for these enterprises. In this paper we examine the major issues in the financing of SMEs in an Indian context and evaluate the flip side of the current rating mechanism. We also suggest a framework of financing these enterprises for respective sources of capital with comments on the role of the central bank in this regard.