Abstract

This paper examines three issues on the financial inclusion of SME firms in India and Indonesia while drawing meaningful comparatives. The first issue addressed in this paper is the extent of the SME financing gap wherein appropriate econometric exercises are conducted to model the potential demand for formal credit by the SME sector at the aggregate level. Thereafter, the wedge between the potential demand for credit and the actual consumption of credit is worked to arrive at alternative measures of the SME financing gap. The second issue is the assessment of how far the SME firms have been experiencing access to formal credit markets in India and Indonesia while digging into the comparative performance of both economies on this dimension. The third matter examined in this study pertains to the financial access constraint faced by SME firms both in terms of the unserved and underserved sectors. The Financial Access Survey of the International Monetary Fund, Global Enterprise Surveys for formal SMEs by the World Bank, and data from official agencies of India and Indonesia are taken into consideration. Both economies have displayed quite different dynamics in terms of the time path of the SME financing gap. With regards to the extent and constraint dimensions, there is a large scope to reach not only the unbanked SME firms but also those that are currently consuming sub-optimal quantum of credit.