Small Industries Development Bank of India (Sidbi) is the principal financial institution for the promotion, financing and development of the MSME sector and for co-ordination of the functions of the institutions engaged in similar activities. Last year, Sidbi has embarked on a mission to identify the financial and developmental gaps in the MSME space and tailor its products and services to fill in those gaps.
NK Maini, deputy managing director, Sidbi, spoke to FE?s Verghis Chandy about the apex institution’s new initiatives. Excerpts:
What is new at Sidbi?
See, last year, we had tried to restructure and reposition the organisation. As a part of the repositioning exercise, we’ve decided that Sidbi will try to fill in the gaps in the MSME ecosystem, both in the financial space and the developmental space. By gaps we mean financial products which are badly needed by the MSME sector, but not provided by banks and other financial institutions. After wide-ranging consultations, we spotted four niche products where we felt that Sidbi must position itself.
The first is Risk Capital, which is provided to ventures which would not normally get funding from the commercial banking system, like high-risk ventures, start-ups or growing units which needs additional capital as promoters equity.
The second major product is Sustainable Financing. Under this we have two major plans, promoting energy efficiency?energy efficient equipment and green buildings– and adopting cleaner production technologies. Since we get funding support from multilateral institutions, we price these lines very competitively.
The third area is Receivable Financing. When an MSME delivers a supply or service to a mother unit, we discount its invoice on day one. The mother unit then settles with us in 60-90 days, depending on the arrangement. The second area in this niche is Factoring. In 2011, the factoring legislation was passed. And in the last budget, the government announced a credit guarantee fund of R500 crore for factoring. We?re working with the ministry of finance to develop the outlines of this fund. We will be a position to launch this fund shortly. This will give a great impetus to the factoring movement in India. Worldwide factoring is a major way through which capital pervades to MSMEs. But in India, it has not taken off to the desired extent. We would be able to plug this deficit with the launch of the factoring fund.
The fourth area pertains to Franchising or Services as a whole. Today the bulk of bank financing goes to manufacturing. This is reasonable, since the banking industry has understood the manufacturing industry. They are comfortable financing the manufacturing industry. Services is an emerging sector where a large number of verticals are based on intangibles, and companies in this sector may not have the right kind of collateral. It is basically cash flow-based financing. This concept is yet to emerge in the true sense in the banking industry and we have recently launched three products for the services sector: in addition we have come out with a product for the franchising industry to cater to its specific funding needs. Over time, we would be able to mainstream franchising as a viable option in the main financial stream also.
Do you think Sidbi intervention would reduce the risk for franchisees?
We don?t have a uniform franchising law that lays down the liabilities of the franchiser and the franchisee. Various countries have a specific law pertaining to franchising. We?ve discussed the risk factors with franchisers, as lenders need a comfort when the cash outgo?as in franchise fee paid upfront?is made without creating an asset. One way is to make the franchise fee transferable. Then we have the CGTMSE scheme by which loans up to R1 crore are guaranteed. Most franchisees would get covered within this R1 crore limit. It is also possible that this limit would get raised in the following years. Through CGTMSE, franchisees get financed without collateral and third party guarantee.
Coming back to new initiatives, what are the programmes on the developmental side?
On the developmental side, we have taken three initiatives;one is the launch of a comprehensive website, called smallb.in, to promote entrepreneurship. The second was the creation of facilitation centres in various industry associations. Through this initiative, we have covered 300 major industrial clusters. Facilitators, mostly retired bankers, are placed in these centres to guide and assist borrowers.
The third is the appointment of accredited consultants for preparing bankable project reports for MSMEs. Rating agencies are also involved in this. Projects would be taken to the banks through Sidbi. The intention is to improve the credibility of the project for financing. About 300 cases, on a pilot basis, have been launched across the country under this, and depending on the success, we can scale up. We have about 200 consultants currently.
What are the major changes that you?ve noticed in the MSME sphere in the last five years of economic crisis?
One thing I?ve noticed over the years is that the resilience of the MSME sector has improved, to a large extent. There is definitely some stress in the sector. But, I think, the MSMEs are now prepared for such crises and business cycles. They have built the necessary mechanisms to face such shocks. This is probably because of the scale, provided by the MSME definition (investment limit) that extends up to R10 crore.
How do you see the MSMEs shaping up in the next five years?
I think, this sector is only going to grow further. One would also hope that the definition would change, keeping in view the inflationary factors. In terms of technology, the sector is already adopting the latest technologies. This is one of our objectives also, to help the sector to modernise and go in for state-of-the-art technologies. There are government programmes and subsidies for technology adoption. Plus, there is a push from large buyers to improve the technology level at the units.
Who is changing the MSME sector, buyers or government?
See, there are two major game-changers from the government for the sector. One is the procurement policy. The second is the defence offset policy. Plus, the policies in terms of continuing to treat MSMEs as priority sector are there.
Tell me about the most critical issue facing the sector at the moment?
One issue is that because of the economic slowdown, MSMEs are also facing challenges, in terms of sales or output growth. We as bankers have to understand each case, and where possible, provide proactive packages, including credit restructuring, so that MSMEs are able to tide over this phase. Another point is helping them in terms of diversification, especially to exports, by identifying the export markets for them. The sector faces information gaps. It is for institutions like Sidbi to fill in the information gaps.