appraisal of sme credit proposals both in terms of value and profit. therefore, in order that the banks can quickly conduct appraisal of sme loan proposals without expending too much resources, it would be imperative to ensure the efficiency of the appraisal process. 13. credit scoring offers an alternative method of evaluating loans for small businesses. the credit scoring approach, which is based on use of computer technology and mass production methods, was originally designed to handle consumer loans, but are now being used effectively for lending to small businesses by predicting their potential loan delinquency. i am happy to note that canara bank has taken the initiative to launch the credit scoring model for loan evaluation of msme loan proposals. 14. credit scoring, is a model applied by banks in their assessment and approval or decline of the loan requests by smes. as there is a strong link between the payment behaviour of the business owner and that of the business, sme credit scores usually include financial characteristics from both the business and the business owner. credit scoring is based upon information like how the repayment of the previous loans has gone, what is the current income level of the enterprise, what are the outstanding debts, if any? it focuses on the credit history of the enterprise. as part of the process, the lenders see whether the enterprise / business owner has the reliability and honesty to repay the loan. it also examines how the enterprise has used credit before, its record for repayment of bills, including utility bills, how long the enterprise has been in existence, assets possessed by the enterprise and sustainability and viability of the activities that the unit is engaged in. credit scoring model draws inputs from historical information on the performance of loans with similar characteristics. e. benefits of credit scoring 15. when used appropriately, credit scoring can benefit multiple stakeholders, including lenders, borrowers, and the overall economy. for the lender, scoring leads to process automation which facilitates process improvements leading to many by - products such as improved management information, control and consistency. it also increases the profitability of sme lending by reducing the time and cost required to approve loans and increasing revenues by expanding lending opportunities as lenders can safely approve marginal applicants that an individual underwriter might reject. international evidence has shown that credit scoring can assist in overcoming the inherent benefit / cost trade - off that banks face when deciding whether or not to invest in obtaining information regarding a potential borrower. a study that was meant to

although the present fragile economic recovery in us and european countries and subdued business sentiments restrict the growth of the manufacturing sector, the country needs to be prepared for the times when an upswing in world demand would require an impetus to domestic manufacturing. meanwhile, the huge domestic market, encompassing the rising aspirations not only of the urban middle class, but also of the rural economy, need to be addressed through innovative domestic products and business models. d. financing of msmes 6. the msme sector in general and more specifically the small and micro enterprises rely heavily on the banks for finance and as such banks have to recognise the vast potential that exists in responsible lending to the mse segment. the scheduled commercial banks need to understand the problem of the sector and devise strategies to gear their credit mechanism structure so as to achieve the prescribed target of lending to the sector as recommended by the pm ’ s task force. sensitivity on the issue needs to be developed at various hierarchical levels. 7. over the years, there has been a significant increase in credit extended to this sector by the banks as may be seen from table - 1 below. as at the end of march 2013, the total outstanding credit provided by all scheduled commercial banks ( scbs ) to the mse sector stood at rs. 6, 84, 796 crore as against rs. 5, 27, 684 crore in march 2012, registering an increase of 29. 77 %. bis central bankers ’ speeches 8. nonetheless, despite the increase in financing to the sector there is still a considerable credit gap which needs to be bridged. the extent of financial exclusion and the vicious cycle of credit issues as graphically shown in the report of the inter - ministerial committee for accelerating manufacturing in the msme sector ( chairman : shri madhav lal, secretary ministry of msme ) shows that the cycle starts from lack of access to formal sources of finance which leads to tapping alternate sources of funds that are costly – higher cost of credit results into poor net cash inflow – which increases the risk profile of the small unit and reduces their credit worthiness – which in turn further aggravates lack of access to formal sources of finance. 9. thus access to timely and adequate credit from banks is critical for the sector. the ability of msmes ( especially those involving innovations and new technologies ) to access alternate sources of capital like equity finance, angel funds / risk capital is extremely limited. at present, there is almost negligible flow of equity capital into this