JumpStartIndia@ISB

Understanding SME Finances

(Shashwat Alok, Shiv Dixit, and Prasanna Tantri)

The Small and Medium Enterprises (SMEs, henceforth) play an extremely important role in the Indian
economy: it contributes 45% of the industrial output; 40% of the overall merchandise exports; and
employs more than 60 million people. 1 Despite their importance to the economy, it is well known that
SMEs suffer credit constraints. This situation can be loosely described as a lack of access to credit despite
there being profitable projects. The recently announced “Atmanirbhar Bharat” package of the
government of India has made solving access to credit issues faced by SMEs as its number one priority. To
resolve related credit-access problems of SMEs, we must first understand how SMEs are financed. To our
knowledge, there is no database that provides authoritative information about how SMEs are financed in
India. This project is an attempt to fill this knowledge gap.

We plan to conduct a large-scale survey to understand how SMEs are financed. The idea is to understand
the entire liability side of the SME balance sheet. In particular, the focus will be on understanding the debt
to equity mix, the sources of debt, the ratio between formal and informal debt, contingent liabilities on
and off the book, and others. We also plan to understand the reasons behind a particular capital structure.

Having collected the data, we intend to understand the broader implications of SME financing. For
instance, is it the case that the constraints on the liability side impact the kind of investments the SMEs
undertake, and, in some cases, force them to give up on profitable investments? Can SMEs be made better
off by changing the mix of their funding? Does the funding mix have any role to play in determining how
the SMEs are managed? Is there an information gap such as a lack of information about government
schemes that can be easily closed?

The exercise will have three phases. The first phase will have the team (consisting of faculty, researchers,
and students) working with a survey agency and conducting surveys of SMEs in Telangana and Punjab. We
will also work with an SME association. The work will involve designing initial and final survey documents,
deciding the working arrangement with the survey agency, monitoring the execution, tabulating the data,
and finally drawing inferences wherever possible.

1
Source: https://www.business-standard.com/content/specials/sme-landscape-in-india-growth-challenges-and-
opportunities-
119062100357_1.html#:~:text=Statistics%20show%20that%20SME%20accounts,1.3%20million%20jobs%20every%
20year.

MSME finances Boosting the Economy, JumpStartIndia@ISB

The second phase will involve a more in-depth analysis of the data from the survey. The findings may lead
to a case study or a research paper. Finally, the last phase will involve experiments. The questions for
experiments will be based on the findings of the first two phases.

Application Process
Students who are interested in the project must first download the proposal onto their system and subsequently
must fill out the application form by clicking here.

The deadline for submitting the project application form is 14 June 2020 at 11:45 PM.