SME sector plays an important role in Indian economy in terms of employment generation and economic growth. SMEs need bank financing to acquire and absorb new technology to compete globally. In practice, many of the SMEs cannot provide sufficient collaterals to bank for loan. Hence, the sector is facing problems of bank financing.

The issues with banks on SME lending are information asymmetry on business risk, and inability of risk grading system at required level of granularity. On the other hand, SMEs find problems of excessive cost of lending, moral hazard of over-investment, and high switching cost.

To serve financial needs of SME,

banking regulators and the government can take initiative such as to promote venture capital, lease finance, soft loans, grants, micro-finance, guarantee for public tenders etc. For channeling finance to SMEs, the government set up SIDBI (Small Industries Development Bank of India). There is also SME Growth Fund (SGF) for equity related capital investment. The SME Fund provides assistance at affordable rate, and direct finance through SIDBI's various branches. The GOI has also launched Credit Linked Capital Subsidy Scheme (CLCSS) that is meant for help in technical up-gradation. SIDBI also has a line of credit with the World Bank for SME financing.

The Reserve Bank of India (RBI), from time to time, made