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 sector, which poses serious challenge to development of knowledge - based industries, particularly those that are promoted by first - generation entrepreneurs with the requisite expertise and knowledge. venture / risk capital is, therefore, often a more appropriate financing instrument for high - growth - potential and start - up smes. however, access to this type of financing is often not available to them. in the absence of alternate sources of finance, the smes ’ reliance on debt finance is very high. the availability of debt finance, however, is not adequate as viability of these small units is a major issue. besides, the high reliance on debt, combined with high cost of credit adversely impacts the financial viability of start - ups, particularly in the initial years, thereby threatening their long - term survival and sustainability. c. constraints of banks in lending to the sector 6. one of the major challenges faced by the msmes and more particularly, the micro and small enterprises ( mses ), is access to timely and adequate credit from the banking sector. the lenders are reluctant to service the mses for a number of reasons, the foremost of which emanates from a general perception amongst banks that the credit risk in lending to small and medium borrowers is very high. this, in itself, is a wrong notion that i have been trying to dispel through my presentations supported by hard data. while the headline numbers of non - performing assets ( gross and net npas ) are higher in this segment, if one reckons the extent of restructuring and write - offs that are resorted to in the medium and large borrower segments, the credit risk would appear to be much lower in the mse sector. a comparative table indicating the extent of npas, restructuring and cumulative write - offs in micro and small vis - a - vis medium and large segments during the last five years is given below : the data clearly highlights the fact that in the recent scenario of rising impairment of assets in the banking sector, it is the mses that have demonstrated better credit discipline resulting in lower impairment. 7. the other reasons why mses are regarded as high - risk is on account of insufficient assets and low capitalization, vulnerability to market fluctuations and high mortality rates. information opacity arising from mses ’ lack of accounting records, inadequate financial

statements or business plans also makes it difficult for potential creditors to assess the creditworthiness of mse applicants. besides, high administrative / transaction cost of lending small amounts also queers the pitch for banks insofar as mse financing is concerned. notwithstanding the merits of the reasons mentioned above, i would say that a major constraint in the banks ’ lending stems from the fact that the existing system of banks ’ credit appraisal and related processes are not geared to appraise the financial requirements of mse sector. 8. nonetheless, over the years, there has been a significant increase in credit extended to this sector by the banks. as at the end of march 2013, the total outstanding bis central bankers ’ speeches credit provided by all scheduled commercial banks ( scbs ) to the mse sector stood at rs. 6847 billion as against rs. 5276 billion in march 2012, registering an increase of 29. 77 %. despite the increase in financing to the sector there is still a considerable credit gap which needs to be bridged. in terms of the report of the private sector investment for msme sub group under working group for the 12th five year plan ( 2012 – 2017 ) the credit gap as a percentage to total demand is estimated at 56 % in 2013 – 14 for the msme sector as may be seen from the table. 9. in the absence of alternate source of funding for the sector, the role of banks is very crucial in bridging this funding gap. in this context, it is important for the banks to look beyond their existing customer base and the large corporates and to reach out to the vast number of micro and small enterprises which are presently deprived of bank credit. alongside extending the reach of their banking services, there would be a need to improve and customize the products offered, fine tune the pricing aspects and enhance the quality and efficiency of services. for this, banks need to have a proper business plan and delivery model that would harness the benefits of technology. this would help in planning product delivery and building lasting customer relationships which will translate into higher revenues. the costs of banking transactions need to be dramatically reduced just as in so many other fields such as telecom, after the advent of technology. d. need for alternate appraisal techniques 10. having appreciated the criticality of the sector in terms of its contribution to employment generation, manufacturing and exports, it is important for us to ensure that lending to the sector is appropriately stepped up. here, we need