Washington: The World Bank has approved a $ 120 million loan to support the development of India's Small and Medium Enterprises (SMEs) sector.

The loan to Small Industries Development Bank of India (SIDBI) is aimed at improving SMEs access to finance and business development services, thereby fostering their growth, competitiveness and employment creation.

The Small and Medium Enterprise Financing and Development Project, supported by this loan, is designed to achieve this objective through a multi-pronged approach.

"Small and medium enterprises are potentially a key engine of economic growth, job creation and greater prosperity in India," said Priya Basu, Senior Economist at the Bank.

"But SMEs in India have been unable to achieve the competitiveness that would allow them to drive the manufacturing sector and overall economic growth, employment and poverty reduction. In large part, this is because of the problems that SMEs face in accessing adequate financing and business development services," she said.

"Bankers are reluctant to lend to SMEs because of the high transactions costs and perceived risks of SME lending in the face of insufficient credit information, inadequate credit appraisal and risk management skills, poor repayment records and low market credibility of SMEs," she said.

"Through its various components that focus on both financing issues and business development support SMEs, we hope the project will demonstrate that it is possible for banks to scale-up lending to SMEs in a profitable manner without compromising on loan quality," she added.