The Small Industries Development Bank of India (SIDBI) is eyeing a 25 per cent share in the Banking system’s total lending to micro, small, and medium enterprises (MSMEs) in three years. Currently, its share is 14 per cent.

To support this, it expects to raise equity capital, including ₹5,000 crore in two tranches, said S Ramann, Chairman and Managing Director, SIDBI. This capital-raising programme will include a rights issue next year.

SIDBI was set up in 1990 through an Act of Parliament as a development financial institution (DFI) to promote, finance, and develop the MSME sector as well as coordinate the functions of institutions engaged in similar activities.

“We are a refinance bank as well as a direct lending bank. Our total loan portfolio stood at ₹4-lakh crore as of March-end 2023. We will probably end up at ₹5-lakh crore by the end of the current fiscal.

“Two years ago, SIDBI accounted for 7 per cent of total MSME lending. Today, that figure is already 14 per cent. This figure might cross 15 per cent in a year,” Ramann said.

SIDBI’s loan book has a 92 per cent indirect financing component and an 8 per cent direct financing component. The SIDBI Chief observed that this ratio will change to 85:15 in a couple of years.

Ramann underscored that digital banking helps bridge the chasm where the underserved MSEs (which require ₹1 lakh to ₹5 lakh loans and are probably without GST, PAN, and may not be filing returns) don’t get direct financing

“Though the interest rates are high in the up to Rs 1 lakh loan segment, MSEs do get credit from MFIs (microfinance institutions). These intermediaries borrow from others. So their cost of credit is high.

“Our aim is to lend at half the rate that MFIs lend. So, if MFIs are lending at 25-28 per cent, ballpark, we will probably lend at about half this rate. We are positioning ourselves as a lender to the micro, nano, and tiny segments,” Ramann said.

Green fund-of-funds

SIDBI wants to create a green fund-of-funds (FoF) to support the sustainability framework (involving solar rooftops, EVs, the circular economy, food and health, etc.), which is critical for India.

“We have run this programme with the Government, with ₹10,000 crore as start-up FoF... We have run an excellent process for how to select good AIFs (Alternative Investment Funds), where we put money as a limited partner (LP). So, we have put money into 105 AIFs. They, in turn, have put money into 1,000 start-ups.

“Now, given this process, which we have followed so diligently, we want to develop another 15-20 AIFs only in the green and climate sectors to address the largest problem the world is facing,” the SIDBI Chief said. From its own budget, SIDBI has set aside ₹500 crore for the green FoF.

The DFI hopes that it will be able to get like-minded institutions, sovereign funds, the World Bank, the ADB, etc. to join it in this endeavour.

Venture debt for start-ups

SIDBI has started a venture debt for start-ups since they do not get bank finance in the first few years.

“Even if they earn revenue, they are still posting losses for many years. As a DFI, we need to take risks to help businesses grow.

“We took the risk 20-years ago with MFIs. On hindsight, we can say that we have earned from our investments. These investments have come out very well as a portfolio,” Ramann said.

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