Credit Starvation of Small Indian Firms by Banks: Need for a Strong Relationship Lending Theory

Abstract

Millions of Indian SMEs who depend for their growth on banks – the only source of credit at normal market price – are perennially remaining outside the ambit of any bank finance. The literature has long identified relationship lending (RL) as a suitable technology for lending to small firms. But the dominant positivistic mindset of the finance discipline is preoccupied with quantification of relationship loans using quite often conceptually shallow relationship constructs. In a staggeringly diverse Indian society relationships between loan officers and entrepreneurs are probably impacted by a variety of overlapping group identities like caste, religion and language. Therefore, for improving SME credit delivery the banks need to be guided by a strong RL theory. Only by operationalizing such a theory, the banks will be able to offer the much needed capital to our capital-starved SME sector, which is also our biggest employer.

Keywords: Relationship lending, Entrepreneurship, Small business financing, Qualitative research, Entrepreneurial finance

JEL Classification: M13, N25, P47