ROLE OF MICROFINANCE IN FINANCING SMES IN INDIA
Small medium enterprises (SME’s) plays a major role in economic development through creating employment, eradicating poverty and generating income. On the other hand, Microfinance is an important tool that promotes the business development and acts as a source of business growth through improving working capital. One of the primary reason for the expansion of small business into medium and further to large is due to microfinance.
Microfinance is a financial resource for low-income individuals and small medium enterprises for supplying loans, savings and other financial services to poor. In India microfinance operates through two channels: a) Self-help group bank linkage programme: where a small group of 10-20 women or men make small savings through contribution periodically and begin lending. They even get linked to banks, banks lend to self-help group after checking their creditworthiness. b) Microfinance institutions: which is an organization that provides microfinance services from small non-profit organization to larger banks.
Access to finance is the major problem faced by micro-enterprises, to whom commercial banks have traditionally concentrated their lending mainly to large formal enterprises which have the expertise of doing business and possess collateral. They miss out small enterprises as they lack expertise and riskier investment. Thus it is observed lack of proper access to finance as one of the factors hindering the SMEs growth. So to facilitate financing the policies of microfinance institutions have been framed.
Microfinance institution emerged as a noble substitute for informal credit and an effective instrument for providing funds, financial help for the growth of SME’s. Easy accessibility of services offered by microfinance institutions has a direct impact on the sales, profit and physical assets development of SME’s.