Small and Medium Enterprise (SME) sector is a vibrant and dynamic one, and an engine of growth for the present millennium. Financing of Micro and Small Enterprises (MSEs), which is part of the SME sector, has been given special attention by banks and financial institutions, and is included in priority sector lending. In spite of the special efforts, only 14.3% of registered small enterprises have availed institutional credit, as per the 3rd All India Census of Small Scale Industries of 2001-02. From 2000 to 2004, institutional credit for MSEs has shown disturbing trends, despite the high level of liquidity in the banking system and the initiatives taken by the Union Government and Reserve Bank of India (RBI). This paper examines the recent trends in credit flow to MSEs, in particular, and medium enterprises, in a limited way, from commercial banks and the Small Industries Development Bank of India (SIDBI), and outlines the recommendations of A S Ganguly Working Group and Internal Group chaired by C S Murthy. The Union Finance Ministry's directive to public sector banks is to double the credit flow to SMEs during the five-year period 2005-10. The year, 2005-06 has shown good progress in this direction. The task is to be pursued vigorously in the next four years, of which 2006-07 has been completed with encouraging performance. Innovative approaches and directions for the future are presented in the paper. SMEs need special treatment through devising special instruments of credit for strengthening their competitiveness.

The Small and Medium Enterprise (SME) sector has played an important role in the Indian economy. Micro and Small Enterprises (MSEs), forming a part of the SME sector, contribute nearly 40% of the total manufacturing output in the country, and 34% of national merchandise exports, and 47% of total manufactured exports. In terms of socioeconomic importance, the total number of MSEs at 12.34 million units (1.87 million registered and 10.47 million unregistered) during 2005-06, constitute nearly 95% of industrial units in the country, providing employment to 29.5 million persons, and output at 1993-94 prices at Rs. 2,777 bn. With growth rate of production at constant prices in MSEs during 2005-06 at 10.4%, the sector has consistently demonstrated better performance compared to the industrial sector as a whole, and manufacturing sector in particular for a long time. The merchandise exports of the sector during 2005-06 being Rs. 1,502.4 bn (US$ 33.9 bn) constituted nearly 32% of output of the sector.

The process of economic liberalization and market reforms, while exposing the Indian MSEs to increasing levels of domestic and global competition, has also opened up attractive possibilities of access to larger markets, and of stronger and deeper linkages with larger enterprises. Improved manufacturing techniques and management processes can be sourced and adopted with greater ease. In this environment of competition and rapid technological changes, the segment can achieve higher sustained growth by enhancing its technological capabilities, improving its product and service quality to global standards and seeking ways of innovation.

Small and Medium Enterprise, SME, Micro and Small Enterprises, MSEs, Reserve Bank of India, RBI, Small Industries Development Bank of India, SIDBI, Public sector banks, Indian economy, Industrial sector, Manufacturing enterprises, Prime Lending Rates, Venture Capital, Credit Deposit Ratio.