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Small businesses serve as engines of innovation, growth, and employment, due to their flexibility and their potential for rapid growth. However, if successful small enterprises are not able to grow over time, these benefits are lost to the economy. A crucial difference between developing countries and more advanced economies lies in the potential growth paths of small and medium enterprises (SME's). In developing countries, very few small enterprises grow to become medium enterprises and very few medium enterprises grow to become large companies. This has a negative impact on innovation, employment and growth in developing countries. In addition to its impact on the overall economy, the business environment which SME’s face has important implications for equity, social mobility and poverty elimination.
The Small and Medium Enterprise (SME) sector in India plays a significant role in terms of balanced and sustainable growth, employment generation, development of entrepreneurial skills and contribution to export earnings. The SME sector in India produces over 8,000 products, constitutes 95% of all the industrial units and contributes 40% to industrial output. In an emerging economy like India, SMEs have become the prime drivers of new employment. The SME sector is the largest employment sector after agriculture, constituting about 45% of industrial employment. SMEs have also proved their worth in the crucial exports sector owning up to 35% of India’s exports. India has over 3.6 million SME units, which contributed 7% to the GDP in 2002-03 . SMEs in India can thus be identified as powerful tools for economic growth and development.
Despite playing an important role in the Indian economy, SMEs face serious constraints to growth. Limited access to finance has seriously affected the success of SMEs, impacting the performance of these enterprises. High cost of funds and lack of working capital finance reduces the expansion opportunities of these units. In addition, lack of training among bankers has impacted the services provided to SMEs.
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