her business ; knows where to obtain the most suitable products and services ; and interacts with confidence with the suppliers of these products and services. he / she is familiar with the legal and regulatory framework and his / her rights and recourse options. ” 13. i don ’ t think that majority of the msme entrepreneurs in the country today meet the criterion. financial literacy in the context of a msme focuses on an individual ’ s ability to translate financial literacy concepts to business needs. financial literacy is essential for effective money management and low levels of financial literacy hinder the understanding of available financial products and services. mse entrepreneurs are also constrained by lack of operational skills, accounting and finance acumen, business planning etc. which underscores a need for facilitation by banks / other agencies. 14. however, it is not a one way street. large - scale retirements in banks in recent years have also adversely impacted the collective skill - sets available at the field level in understanding, appraising and monitoring the msme loan portfolio. the poor underwriting skills leads to avoidable under or over financing, which can have a telling effect on the health of the msme units, particularly in adverse life cycle situations. c ) “ c ” - collateral requirements 15. the formal financial institutions particularly banks consider lending to msmes as highly risky since the entrepreneurs often do not possess adequate collateral to support the credit. very often, the loans are rejected, despite the project prima facie, being feasible. while there are several dispensations to tide over the problem, the credit culture has not matured enough to a level existing in developed economies where lending is done against the assets of the firm including its movable assets. this also necessitates that we build up strong financial infrastructure, which would support the banks in lending to these sectors without worries and using all types of assets available to secure the loan. it is also pertinent for banks to realise that though the loan to the individual entities in the sector may be riskier on a solo basis, overall on a portfolio level, these are less vulnerable than loans to corporate. d ) “ d ” - documentation 16. many of the msmes, particularly the micro units, do not have adequate documentation to match the rigours of a formal financial system. absence of documentation drives the small entrepreneurs to informal sources that are willing to provide credit with minimum documentation. further, a vast majority of the msmes are informal

to formal financial channels ; however, it still remains a challenge. the public sector banks today have close to 3000 specialized branches which specialize in lending to msme units. private sector banks have built up products and processes, which enable quick disbursal of loans. most banks have switched over to centralized credit sanctioning, which enables better turnaround time. many others have increased the credit limits to the field level functionaries. while these steps have improved access, there is still a huge unmet demand for credit for msmes 2 ( there is a total finance requirement of inr 32. 5 trillion ( $ 650 billion ) in the msme sector, which comprises of inr 26 trillion ( $ 520 billion ) of debt demand and inr 6. 5 trillion ( $ 130 billion ) of equity demand ). as per provisional data for period ended march 2016, total outstanding loan of the banking system to msme sector stood at around 11. 1 trillion rupees in 20. 6 million loan accounts. contrast this to the estimated need of inr 26 trillion and number of msmes at 51 million. 11. an important piece of the problem is adequacy of banking outlets. small entrepreneurs are spread across remote locations in the country where physical bank branches are not available. also, the banking correspondent mechanism is yet to mature to a level where they can play a key role in credit disbursal. second and perhaps a more import dimension is availability of credit at a time when it is required by the entrepreneur. ability of small entrepreneurs to withstand life cycle shocks is extremely limited and hence availability of timely credit becomes critical for their survival. the formal financial system, due to a variety of reasons, which may include cumbersome procedures, lack of understanding of the business model, inability of the entrepreneur to meet the requirements of the banks etc., is unable to meet this immediate need of the entrepreneur. b ) “ b ” - banks and business 12. “ b ” in the “ abcd ” paradigm of credit fundamentally refers to the information asymmetry between the two bs – banks and business. the united states agency for international development ( 2009 ) defines a financially literate sme owner / manager as “ someone who knows what are the most suitable financing and “ micro, small and medium enterprise finance in india ”, ifc, world bank group, november 2012. bis central bankers ’ speeches financial management options for his / her business at the various growth stages of his /