The World Bank said on Tuesday it has signed a $500 million loan agreement with India to improve financial access for the country’s small-scale business enterprises in the manufacturing and services domain.

“Lack of adequate finance is one of the biggest challenges facing the MSME (Micro, Small and Medium Enterprises) sector. Financial institutions have limited their exposure to the sector due to a higher risk perception, information asymmetry, high transaction costs and lack of collateral,” the World Bank said in a statement.

The project under the Indian government and World Bank will support MSMEs through direct finance options from Small Industries Development Bank of India (SIDBI), the apex financial institution for promotion, financing and development of MSMEs in India, as also through Participating Financial Institutions (PFIs) across three components.

“These include support to start-up debt financing and risk capital as well as support to service and manufacturing sector financing models,” it said.

According to the global financier, the MSME census of 2006-07 estimated that about 87 percent of MSMEs did not have any access to finance and credit towards this segment accounted for only 13-15 percent of institutionalised credit.

According to the World Bank, the MSMEs account for over 80 percent of total industrial enterprises producing over 8,000 value-added products and employ an estimated 60 million people in India.

“It contributes around 45 percent to manufacturing output and about 40 percent to exports, both directly and indirectly. In addition, over 50 percent of MSMEs are rural enterprises and widely distributed across low-income states making them an important sector for promoting economic growth and poverty reduction,” the statement said.

The World Bank said with eight million people entering the labour force every year, MSMEs have the potential to create many new and innovative jobs.

“However, for these ideas to take shape, MSMEs will need easier access to finance. This project will develop innovative products that address such constraints and help them achieve their true potential,” World Bank’s country director in India, Onno Ruhl said.

The project will support MSMEs in the manufacturing sector through innovative financial products including Loan Extension Services and cluster financing including women-led clusters.

“Particular focus will be to expand manufacturing activity in financially underserved areas, including low-income states especially through re-financing, as banks and other PFIs have a deeper network in these states,” the global financial institution noted.

The loan to India has a five-year grace period, and a maturity of 10 years.