SME Firm Performance and Access to Export Markets:The Role of Institutional Credit

Small and Medium Enterprises (SMEs) play an important role in the growth of Indian economy and contribute over 40% of the exports. However, access to adequate and timely finance has been a key constraint for the SMEs. In recent years, the Indian government has implemented several measures to improve bank credit to the sector. This paper analyzes the role of institutional financing sources such as bank credit on the profitability, efficiency, and export performance of SMEs. The paper also provides a comparison of the results for other funding sources such as internal finance, non-institutional debt, and trade credit. The results are based on the analysis of financial statements of 323 manufacturing firms for the years 2007-2012. Structural equation modeling was used to estimate the relationship between variables. The results showed that use of internal finance had a greater impact on SMEs’ profitability and efficiency as compared to other sources of funding. However, institutional finance played a more prominent role in export performance as compared to other sources. Our findings imply that increasing the flow of bank credit to SMEs can help in stimulating their export performance.