The move by capital market regulator Sebi to ease stock listing and trading norms for small and medium enterprises (SME) can be but one step towards removing the panoply of constraints that they face on a daily basis. Finance, or the lack of it, at the right price and on time is, after all, a recurring problem. It makes sense to exempt SMEs from the eligibility criteria for initial public offerings and follow-on offers. 

But, in tandem, what is required is to remove routine informational rigidities between SMEs and lenders and potential investors. It’s the untoward presence of huge informational asymmetries that intrinsically heighten credit risks and transaction costs for the SME sector. Banks, of course, are required to meet the credit needs of SMEs as a part of their priority sector lending requirements. 

Also, the RBI has directed all banks to introduce standardised credit appraisal systems. Yet, SME lending by banks barely adds up to 2% of GDP. Worse, some studies suggest that banks seem to be stepping up lending for microfinance and self-help groups (as a part of their priority sector lending) at the expense of SMEs. Hence, the need for institutional reform to rev up informational systems on SMEs. 

What is required is a more responsive policy mechanism to finance SMEs. Sebi’s new guidelines for listed SMEs have rightly done away with the standard requirement of disclosing quarterly results; semi-annual figures would do, the intention being to reduce costs and overheads. But concurrently, what is necessary is an array of advisory and business development services focused on SMEs: the idea is to improve credit and business-performance information. 

We need a thriving SME sector to boost entrepreneurship and risk-taking pan-India, and spur innovation and growth. Hence, the need for proactive policy support for SME clusters to shore up demand and supply of finance. Actually, there seems scope for innovative financial products to reduce credit risks for SMEs and boost investor comfort. Additionally, there’s the need to address the problem of delayed payments and rationalise the tax regime for SMEs. Equity finance for SMEs deserves a leg up.