Small Industries Development Bank of India

Overview

The Small Industries Development Bank of India (SIDBI) was established in April 1990 by an Act of Parliament (the SIDBI Act) as a wholly owned subsidiary of the Industrial Development Bank of India (IDBI).

SIDBI was created to act as the principal financial institution for promoting, financing, and developing the micro, small, and medium enterprise (MSME) sector in India.

SIDBI's business activities are into Direct and Indirect lending Operations

SIDBI manages an MSME portfolio of over $5 billion, and has sustained continued good financial performance

Overall disbursements grew by 87.56% in FY2009, totaling Rs282.97 billion ($5.9 billion)

Shareholder Structure

As a Government of India (the Government) public sector financial institution, SIDBI was wholly owned by IDBI until 2004. Following an amendment to the SIDBI Act, the majority of the equity held by IDBI was transferred to various other public sector and financial institutions, and is currently held by 36 institutions comprising public sector banks and insurance companies owned or controlled by the central government.

The largest shareholders are: IDBI Bank Ltd, State Bank of India and Life Insurance Corporation of India.

OBJECTIVES

Four basic objectives are set out in the SIDBI Charter.

Financing Promotion Development Co-ordination 

for orderly growth of industry in the small scale sector.

MSME (Micro, small, and medium enterprises) MSME is the second largest employer after agriculture. The MSME sector in India has immense potential to generate such broad based

employment and income growth and expected to contribute 22 % to India's Gross Domestic Product (GDP) by 2012.

MSMEs typically have comparatively high labor-capital ratios, shorter gestation periods, lower investment requirements, and can effectively mobilize local resources of capital and skills that would otherwise remain unutilized.

It is estimated that the MSME sector in India accounts for around 95% of industrial enterprises, 45% of gross industrial production, and 40% of exports, and provides direct employment to 42 million persons in around 12.8 million registered MSMEs.

Classification of Enterprises into Different Categories (New Definitions)

Investment Ceiling (excluding land and building) Classification Manufacturing Service Micro < Rs2.5 million ($52,083) < Rs1 million ($20,833) Small ≥ Rs2.5 million and < Rs5.0 million

($52,083 and $104,167) Medium ≥ Rs5.0 million and < Rs100 million

($104,167 and $2.083 million)

≥ Rs1 million and < Rs20 million ($20,833 and $416,667) ≥ Rs20 million < Rs50 million ($416,667 and $1.041 million)

Funding

Unlike commercial banks, SIDBI is not allowed to take direct deposits to fund its lending activities. Many of its funding sources which is currently provided interest-free from Government ,RBI and IDBI. SIDBI has other funding sources these include priority sector bonds and capital gains bonds which are exempt from capital gains tax, as well as deposits from foreign banks where operations in India are required to make deposits with SIDBI for any shortfall in their domestic lending programs toward “priority” sectors.

SIDBI has also received significant funding from multilateral financial institutions such as the World Bank , the Japan Bank for International Cooperation, German development assistance through KfW , the International Fund for Agricultural Development and Asian development bank .These deposits, along with the capital gains bonds, form the bulk of SIDBI’s resources and enable it to significantly reduce its cost of borrowings

Operations

SIDBI has played a central role in the recent development of the MSME sector by providing financing, both direct and indirect, for new business establishment, expansion, diversification, modernization, quality improvement, and the rehabilitation of MSMEs

SIDBI has also helped to shape the development of the MSME sector by providing developmental assistance to financial institutions and businesses for technology upgrading, environmental management, and domestic and international marketing.

It provides indirect assistance to MSMEs by refinancing primary lending institutions (PLIs) such as commercial banks, state finance companies (SFCs), and state industrial development corporations (SIDCs).

It also provides direct support to MSMEs through term loans, bill discounting, pre-shipment and post-shipment credit, and ordinates the functions of other institutions involved in MSME sector financing and development.

Small Industries Development Bank of India

Scheme FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 Indirect Assistance - Refinancing (including STL to banks) 63.74 80.34 42.5 44.19 58.98 54.30 101.14

Direct Assistance - Equity Assistance 0.54 0.54 0.42 0.43 0.41 0.34 0.25 - Bills Financing 7.82 7.53 9.51 13.05 18.43 24.04 29.54 - Resource Support 4.92 10.49 13.02 16.03 8.94 5.50 8.26 - Project Financing 12.76 9.65 16.19 15.21 29.45 22.64 14.72 Microfinance (including P&D Assistance) 0.45 0.46 0.79 1.96 3.56 4.20 7.73 Total 90.25 109.03 82.46 90.9 119.75 111.02 161.64

FY = fiscal year, P&D = promotional and development support, STL = short-term lending. Source: Small Industries Development Bank of India.

• Indirect assistance or the refinancing of PLIs (Primary Lending Institutions) accounted for 62.6% of SIDBI’s total loan portfolio as of the end of FY2008.

• Direct assistance schemes comprised 37.4% of its total loan portfolio as of FY2008

Indirect Assistance

• SIDBI refinances eligible PLIs—which are predominantly commercial banks, SFCs, and SIDCs—against term loans given to industrial concerns in the MSME sector for setting up, expanding, modernizing, or diversifying their operations.

• Commercial banks have been the largest recipients of assistance under SIDBI’s refinancing scheme, accounting for 91.3% of the total amount of refinancing assistance as of FY2008.

• SIDBI became the second largest shareholder in SFCs and the single largest resource provider. As of FY2008, SFCs account for 8.7% of the total amount of SIDBI’s refinancing assistance.

Institution FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008

Banks - Loans 51.99 72.66 37.25 39.45 51.55 45.15 92.38

- Disbursements 32.69 42.75 12.97 20.70 40.29 44.29 85.01

SFCs - Loans 10.99 7.49 5.18 8.86 7.32 9.13 8.76

- Disbursements 8.11 5.80 4.16 6.02 5.66 7.58 6.52

SIDCs - Loans 0.76 0.18 0.06 0.37 0.09 0.01 0.00

- Disbursements 0.64 0.16 0.05 0.20 0.03 0.02 0.00

Totals - Loans 63.75 80.34 42.50 44.19 58.97 54.30 101.14 - Disbursements 41.44 48.72 17.19 26.93 45.98 51.89 91.54

FY = fiscal year, SFC = state financial corporation, SIDC = state industrial development corporation. Source: Small Industries Development Bank of India.

Direct Assistance

Direct assistance is also a key business area of the SIDBI's growth strategy. These schemes are broken into three broad categories: I. Non fund-based facility-SIDBI provides guarantees and

letters of credit on behalf of MSMEs.II. Receivable finance and working capital facility-SIDBI

meets the short-term working capital needs of the MSMEs through its MSME receivable finance scheme, invoice discounting, and other similar means.

III. Term loan assistance-Assistance is provided for various term-funding needs of MSMEs. SIDBI increased its outreach through various channels to reach new segments of the MSME sector. It has also helped MSMEs undertake modernization and upgrades under different government schemes.

IV. Other Credit Facilities-In addition to retail credit, SIDBI provides assistance through infrastructure financing, venture capital, and securitization to help increase the flow of credit to the MSME sector.

FUNCTIONS

Subsidiaries and Associates

Credit Guarantee Fund Trust for Micro and Small Enterprises-CGTMSE operates the credit guarantee scheme for micro and small enterprises (MSEs), which guarantees credit facilities extended by member lending institutions to MSEs that are not backed by collateral security and third party guarantees.

Small Industries Development Bank of India Venture Capital Limited-The SIDBI Venture Capital Limited is a wholly owned subsidiary of SIDBI. SIDBI Venture Capital Limited manages the two venture capital funds :

1. National Venture Fund for Software and Information Technology.-This fund provides assistance to software and information technology companies in the MSME sector to enable them to achieve rapid growth and maintain their competitive edge in domestic and international markets.

2. SME Growth Fund-This fund was established by SIDBI in association with leading commercial banks to invest in companies, both at early stage and during second-round financing for companies with a proven technology or business model and opportunities for growth and earnings.

India SME Technology Services Ltd-it provide professional services related to technology transfer, joint ventures, business collaboration, finance syndication, and attendant support services to MSMEs. India SME Technology Services Limited identified CDM and carbon credits as its area of focus .

India SME Asset Reconstruction Company Ltd- SIDBI set up India SME Asset Reconstruction Company Ltd as an asset reconstruction company. The shareholders are expected to include ten large public sector banks, Life Insurance Corporation of India, and three state-level institutions.

SME Rating Agency of India Limited-(SMERA) SMERA is the country's first and still the only rating agency to focus primarily on MSMEs. SMERA's primary objective is to provide ratings that are comprehensive, transparent, and reliable so as to facilitate greater and easier flow of credit from the banking sector to SMEs.

Credit Appraisal and Credit Risk Management SIDBI uses standard loan application forms and for loan

applications up to Rs20 million ($400,000) for existing MSME ,the appraisal and credit rating is carried out using the credit analysis and rating tool (CART). These models are used to streamline and simplify the credit risk review process, thereby enabling a risk-based management system.

For credit ratings for loans other than in CART, SIDBI has adopted the risk assessment model (RAM). Developed by CRISIL, RAM assigns a separate obligor rating, which reflects the probability of default, and a facility rating, which reflects the loss given default. These two ratings are then combined to provide a final rating, which is displayed in the form of a risk grade.

Credit risk mitigation issues relating to individual projects are also addressed by loan covenants and by obtaining collateral.

Delegation of Power

In keeping with the strategy to standardize credit appraisal and credit risk management, SIDBI has recently adopted a more centralized credit approval process. Loan approval and other related powers have been delegated to credit committees for consistency and quick decision making. At least two members of senior management sit on each committee, in addition to the chairman. The members of the committee are individually and collectively responsible for the decisions taken by the committee.

Table A3.4: Delegated Lending Powers

Committee Approval Limits Zonal Office-Level Committees -Assistant General Manager Committee Up to Rs5 million -Deputy General Manager Committee Rs5 million to Rs10 million -General Manager Committee Rs10 million to Rs30 million -Zonal Credit Committee Rs30 million to Rs75 million Head Office-Level Committees -Chief General Manager Committee Rs75 million to Rs100 million -Executive Director Committee Rs100 million to Rs150 million -Deputy Managing Director Committee Rs150 million to Rs225 million -Chairman and Managing Director Committee Rs225 million to Rs300 million -Executive Committee Rs300 million and above

Source: Small Industries Development Bank of India.

Exposure Limits

For risk mitigation at the portfolio level, the loan policy lays out the exposure limits in terms of single borrower exposure and group exposure, relative to SIDBI's capital funds

Table A3.5: Reserve Bank of India Exposure Lim its

Particular Exposure Limit prescribed by Reserve Bank of India Single Borrower 15% of the capital funds of the financial institution

(additional 5%–10% in case of infrastructure projects) For Group Exposure 40% of the capital funds of the financial institution

(additional10%–15% in case of infrastructure projects) Source: Small Industries Development Bank of India.

Table A3.6 Small Industries Development Bank of India Exposure Lim its

Particulars SIDBI Exposure Limit

Direct Assistance SIDBI Exposure Limit Indirect Assistance

Single Borrower 3% of SIDBI’s capital funds 10% of SIDBI’s capital funds

Group Exposure 6% of SIDBI’s capital funds 15% of SIDBI’s capital funds

Capital Adequacy

Capital adequacy ratio is strong, reflecting demonstrated support from the Government and the subsequent strong resource profile. It reflects SIDBI’s ability to

I. maintain asset quality in its direct financing portfolio during the overall economic slowdown,

II. minimize losses despite its significant exposure to financially weak SFCs, and

III. access low-cost resources.

Nonperforming Assets

Assets representing loan and other assistance portfolios are classified based on record of recovery as standard, substandard, doubtful, and loss assets. Provision is made for assets, as per the guidelines issued by RBI as applicable to the term lending and refinancing institutions, under the following categories:

Classification and Provisioning Policy of the Reserve Bank of India

Classification Definition Provisioning Level Standard Performing 4% Stressed Performing, but concerns after 30 days 4% Substandard Up to 90 days overdue 10% Doubtful A1 90 days to 1 year overdue 20% (secured), 100% (unsecured) Doubtful A2 1 to 3 years 30% (secured), 100% (unsecured) Doubtful A3 3 years 100% (secured), 100% (unsecured) Loss Over 3 years 100% (secured), 100% (unsecured)

Source: Small Industries Development Bank of India.