– 35 percent of smes ( 8 – 10 million ) have access to credit. hence, the key challenge is to support banks in extending credit facilities to smes who have a deposit / checking account, but do not yet have access to credit. risk - sharing facilities, coupled with the introduction of best practice sme lending approaches are key interventions that can help banks provide credit to smes. these interventions need to accompany enhancements to the enabling environment for sme lending such as credit bureaus, collaterals and insolvency regimes. 25. in addition to loan financing, smes have the option of collaborating with venture capital investors. other significant forms of sme financing include leasing, trade credit and fiscal incentives in the form of tax breaks. access to finance is essential for improving sme competitiveness, as smes have to invest in new technologies, skills and innovation. issues pertaining to access to finance cannot be resolved by implementing financing schemes or programs in a vacuum. it is also noteworthy that efforts to resolve access to finance issues are not solely the responsibility of governments. smes also need to take initiative in this direction by implementing sound business practices and continuously investing in good internal management systems : in accounting, planning, financial, operations and human resource management. in the indian context, in spite of various measures taken by the rbi and the government, availability of credit to smes continues to remain a major issue in the development of the sme sector in the country. ( i ) impact of the global financial crisis on smes 26. the problem of access to finance faced by smes has been strongly exacerbated by the global financial crisis as smes and entrepreneurs have suffered a double shock : a drastic drop in demand for goods and services and a tightening in credit terms, which have severely affected their cash flows. governments have responded generally by three types of bis central bankers ’ speeches measures aimed at : i ) supporting sales and preventing depletion of smes ’ working capital ; ii ) enhancing sme ’ s access to liquidity ; iii ) helping smes maintain their investment level. the euro zone debt crisis has also impacted smes adversely. however, in the indian context, the sharp depreciation of the rupee against the us dollar in recent months has made sme exports more attractive, which should, to some extent, help in nullifying the adverse impact of the sharp fall in external demand. in these difficult times on the export front, it is imperative for

smes to tap the huge demand in the local markets. msmes are the best vehicle to create local demand and consumption and also to fight the global meltdown. at the international level, the g20 is spearheading the work on sme finance through sme finance subgroup under its global partnership for financial inclusion ( gpfi ) ( dec 2010 ). c. indian context 27. keeping in view the importance of sme sector in fostering growth and promoting employment, the government of india enacted the micro, small and medium enterprises development act, 2006. public policy in india has accorded high priority to this sector in order to achieve balanced, sustainable, more equitable and inclusive growth in the country. some of the major constraints faced by the msme sector and the important measures taken by government of india and reserve bank of india to address them have been set out below. 28. as with the smes operating elsewhere, access to timely and adequate credit is critical for msme growth and development in india as well. to ensure enhanced credit flow to the sector, and more so to the micro units, based on the recommendations of the prime minister ’ s task force on msmes ( chairman : shri t. k. a. nair, principal secretary, government of india ), banks have been advised to achieve a 20 per cent year - on - year growth in credit to micro and small enterprises. advances extended to the mse sector are treated as priority sector advances and as per the extant reserve bank guidelines, banks are required to extend at least 60 per cent of their advances to the mse sector to micro enterprises by 2012 – 13 and achieve a 10 per cent annual growth in number of micro enterprise accounts. the reserve bank is closely monitoring the achievement of targets by banks on a quarterly basis and banks have been advised to device strategies to step up their lending to micro units. however, the msme sector needs to be competitive and should not expect subsidized interest rates as this may not help them much as the cost of credit forms a relatively small proportion of their overall cost. table 1 provides outstanding credit to msme sector by scheduled commercial banks. 29. the problem of access to finance for the msme sector is intrinsically linked to the problem of financial exclusion in the country. the ability of banks to rapidly increase their coverage of msmes through credit facilities would depend on their ability to expand their reach to the hitherto unbanked segments of the country. the problem of financial