Factors determining financial constraint of SMEs: a study of unorganized manufacturing enterprises in India

Abstract

Small and medium enterprises (SMEs) play a critical role in generating employment and revenue for the Indian economy. However, they face severe financial constraints. The present study intends to identify the determinants of SMEs’ access to external finance. Analysis of data of the 62nd round of National Sample Survey Organization on unorganized enterprise using instrument variable probit technique found that larger firms, partnership firms, firms with highly educated owners, firms that maintain accounts, growing firms, and firms located in the urban areas were less financially constrained. Further, the study revealed that firms located in financially and economically better off states have better access to finance. The policy implication of the study is that the government should strengthen the financial sector and education needs to be emphasized for promoting SMEs entrepreneurship in India. Findings of the study will help facilitate India and other developing countries with similar structure and composition design suitable policies to improve access to finance of the SMEs. This will encourage small enterprises to realize their true growth potential, and thereby help the economy in achieving its long-term social and economic goals.