implementation completion and results report (icr)...

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: ICR00004943

IMPLEMENTATION COMPLETION AND RESULTS REPORT

Loan Number 8471-IN

ON A

LOAN

IN THE AMOUNT OF US$500 MILLION

TO THE

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA

WITH

THE GUARANTEE OF INDIA

FOR A

INDIA: MSME GROWTH INNOVATION AND INCLUSIVE

FINANCE PROJECT

September 24, 2019

Finance, Competitiveness And Innovation Global

Practice South Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective {Jul 30, 2019})

Currency Unit = India Rupees (INR)

INR 68.88 = US$1

FISCAL YEAR April 1 - March 31

Regional Vice President: Hartwig Schafer

Country Director: Junaid Kamal Ahmad

Regional Director: Zoubida Kherous Allaoua

Practice Manager: Esperanza Lasagabaster

Task Team Leader(s): Mihasonirina Andrianaivo

ICR Main Contributor(s): Mihasonirina Andrianaivo, Yunfan Gu

ABBREVIATIONS AND ACRONYMS

AIF Alternative Investment Fund

CPF Country Partnership Framework

CPS Country Partnership Strategy

GDP Gross Domestic Product

GoI Government of India

IBRD International Bank for Reconstruction and Development

ICR Implementation Completion and Results Report

IFC International Finance Corporation

INR Indian Rupee

IRR Internal Rate of Return

ISR Implementation Status and Results Report

M&E Monitoring & Evaluation

MSMEs Micro, Small and Medium Enterprises

NBFC Non-bank Financial Companies

NPL Nonperforming Loan

OEM Original Equipment Manufacturer

PAD Project Appraisal Document

PDO Project Development Objective

RBI Reserve Bank of India

SEG Startup to Growth Stage

SFB Small Finance Bank

SIDBI Small Industries Development Bank of India

SME Small and Medium Enterprise

SMILE SIDBI Make in India Loan for Enterprises

TA Technical Assistance

UM Udyami Mitra

US$ United States Dollar

USD United States Dollar

UX User Experience

WB World Bank

WBG World Bank Group

TABLE OF CONTENTS

DATA SHEET .......................................................................................................................... 1

I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ....................................................... 5

A. CONTEXT AT APPRAISAL .........................................................................................................5

B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) ..................................... 10

II. OUTCOME .................................................................................................................... 13

A. RELEVANCE OF PDO .............................................................................................................. 13

B. ACHIEVEMENT OF PDO (EFFICACY) ........................................................................................ 14

C. EFFICIENCY ........................................................................................................................... 20

D. JUSTIFICATION OF OVERALL OUTCOME RATING .................................................................... 21

III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ................................ 21

A. KEY FACTORS DURING PREPARATION ................................................................................... 21

B. KEY FACTORS DURING IMPLEMENTATION ............................................................................. 22

IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME .. 24

A. QUALITY OF MONITORING AND EVALUATION (M&E) ............................................................ 24

B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ..................................................... 25

C. BANK PERFORMANCE ........................................................................................................... 26

D. RISK TO DEVELOPMENT OUTCOME ....................................................................................... 29

V. LESSONS AND RECOMMENDATIONS ............................................................................. 29

ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ........................................................... 31

ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ......................... 45

ANNEX 3. PROJECT COST BY COMPONENT ........................................................................... 48

ANNEX 4. EFFICIENCY ANALYSIS ........................................................................................... 49

ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS ... 53

ANNEX 6. SUPPORTING DOCUMENTS .................................................................................. 57

The World Bank MSME Growth Innovation and Inclusive Finance Project (P151544)

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DATA SHEET

BASIC INFORMATION

Product Information

Project ID Project Name

P151544 MSME Growth Innovation and Inclusive Finance Project

Country Financing Instrument

India Investment Project Financing

Original EA Category Revised EA Category

Financial Intermediary Assessment (F) Financial Intermediary Assessment (F)

Organizations

Borrower Implementing Agency

Small Industries Development Bank of India Small Industries Development Bank of India

Project Development Objective (PDO) Original PDO

The project development objective is to improve access to finance of MSMEs in manufacturing and service sectors from early to growth stage, including through innovative financial products.


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FINANCING

Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$)

World Bank Financing IBRD-84710

500,000,000 265,375,415 265,375,415

Total 500,000,000 265,375,415 265,375,415

Non-World Bank Financing 0 0 0

Borrower/Recipient 50,000,000 26,537,541 26,537,541

Total 50,000,000 26,537,541 26,537,541

Total Project Cost 550,000,000 291,912,956 291,912,956

KEY DATES

Approval Effectiveness MTR Review Original Closing Actual Closing

24-Feb-2015 26-Jun-2015 09-Apr-2018 31-Mar-2020 31-Mar-2019

RESTRUCTURING AND/OR ADDITIONAL FINANCING

Date(s) Amount Disbursed (US$M) Key Revisions

21-Mar-2019 264.13 Cancellation of Financing Reallocation between Disbursement Categories

KEY RATINGS

Outcome Bank Performance M&E Quality

Moderately Unsatisfactory Moderately Satisfactory Modest

RATINGS OF PROJECT PERFORMANCE IN ISRs

No. Date ISR Archived DO Rating IP Rating Actual

Disbursements (US$M)

01 11-Jun-2015 Satisfactory Satisfactory 0

02 02-Aug-2015 Satisfactory Satisfactory 100.00


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03 01-Feb-2016 Satisfactory Satisfactory 100.00

04 16-Mar-2016 Satisfactory Satisfactory 187.38

05 21-Sep-2016 Moderately Satisfactory Satisfactory 187.38

06 24-Jan-2017 Moderately Satisfactory Satisfactory 187.38

07 15-Jun-2017 Moderately Satisfactory Satisfactory 264.13

08 24-Oct-2017 Moderately Satisfactory Satisfactory 264.13

09 11-Apr-2018 Moderately Satisfactory Satisfactory 264.13

10 31-May-2018 Moderately Satisfactory Moderately Satisfactory 264.13

11 25-Jan-2019 Moderately Satisfactory Moderately Satisfactory 264.13

12 01-Aug-2019 Moderately Satisfactory Moderately Satisfactory 264.13

SECTORS AND THEMES

Sectors

Major Sector/Sector (%)

Financial Sector 100

Banking Institutions 75

Other Non-bank Financial Institutions 25

Themes

Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Private Sector Development 150

Jobs 100

Enterprise Development 50

MSME Development 50

Finance 50

Financial Infrastructure and Access 50

MSME Finance 50


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ADM STAFF

Role At Approval At ICR

Regional Vice President: Annette Dixon Hartwig Schafer

Country Director: Onno Ruhl Junaid Kamal Ahmad

Director: Gloria M. Grandolini Zoubida Kherous Allaoua

Practice Manager: Henry K Bagazonzya Esperanza Lasagabaster

Task Team Leader(s): Niraj Verma, Rosanna Chan, Mihasonirina Andrianaivo

Mihasonirina Andrianaivo

ICR Contributing Author: Yunfan Gu


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I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES

A. CONTEXT AT APPRAISAL

Context

1. At project appraisal, India was among the world’s fastest growing economies, driven by strong

growth in the manufacturing and service sectors. Real gross domestic product (GDP) grew at an average

annual rate of 8.3 percent between 2004 to 2012, and was accompanied by an impressive reduction in

poverty.1 The service sector constituted more than 65 percent of GDP in 2012, up from 59 percent in

2003,2 and service sector growth in several low-income states outperformed that in many other states.3

The manufacturing sector accounted for 16 percent of GDP in 2012, and served as a key sector for

innovation and job creation, as it offered a larger share of formal and quality jobs than other sectors.4

2. To sustain the fast and inclusive growth trajectory and provide gainful employment to the

growing young population entering into the labor force,5 the economy would need to create more than

10 million jobs per year. At project appraisal, 75 percent of all employed persons in India were working

in the informal sector, but a large amount of high-quality and productive jobs in the formal sector would

be needed to lift the households into the ranks of the global middle class.6

3. Support for micro, small and medium enterprises (MSMEs) was identified as central to this

transition. MSMEs accounted for 45 percent of India’s industrial output and 40 percent of exports in

2012.7 The MSME sector was also an important engine of growth, having grown at an annual rate of 11.5

percent between 2004 and 2012, compared to real GDP growth rate of 8.3 percent. Entrepreneurship

and business creation by MSMEs were especially crucial for large-scale employment generation and

productivity growth.

4. The growth of the MSME sector, however, was severely constrained by lack of access to

finance. It was estimated that about 87 percent of MSMEs did not have access to finance and were self-

1 The average growth rate is computed using data from Central Statistics Office. The Poverty headcount ratio has been declining from 37.2 percent from 2004 to 21.9 percent in 2011, according to data from the World Bank. 2 The service sector includes construction. Excluding construction, the service sector share grows from 45 percent in 2003 to 46 percent in 2012. 3 Service sector growth in low income states such as Bihar, Tripura, Manipur and Chhattisgarh outperformed the growth rate of the service sector in many other states. 4 See “Role of Manufacturing in Employment Generation in India” and “Innovation in India Manufacturing”, both by India Brand Equity Foundation, for a discussion on the importance of manufacturing in employment generation and innovation in India. According to World Bank data, the share of manufacturing in India GDP has remained relatively stable between 2003 (15.5 percent) to 2012 (15.8 percent). 5 See “Creating a Vibrant Entrepreneurial Ecosystem in India”, Planning Commission, 2012, and “South Asia Economic Focus: Jobless Growth?” World Bank, Spring 2018 for the importance of job creation in India. 6 Employers in the formal sector are more productive, especially in the manufacturing sector. See “Global Economic Perspectives, Darkening Skies”, World Bank, January 2019. 7 MSME definition is based on MSME Act 2006. Essentially, firms with employee below 100 (50 for service sector) and revenue below INR 2 million (1 million for services) are included as MSMEs. IFC-Intellecap, “Study on Micro, Small and Medium Enterprise Finance in India”, October 2012.


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financed.8 Financial institutions limited their exposure to the sector due to a perceived high level of risk,

information asymmetries, high transaction costs and the lack of collateral.9 Credit to MSMEs represented

only 14 percent of formal financial institutions’ portfolios, with only 11 percent of Indian enterprise loan

accounts in commercial banks were held by MSMEs in 2013.10 Bank loans to MSMEs represented only 15

percent of all bank loans, and MSMEs lacked alternative sources of financing.11 These financial constraints

hampered the competitiveness of MSMEs and slowed job creation and economic growth.

5. The project aimed to improve access to finance for MSMEs in three vital but underserved

segments: early stage/startups, services and manufacturing.

• Early stage/startups: India’s startup ecosystem was growing rapidly, but startups suffered from a

lack of debt and risk capital financing. The lack of risk capital financing hampered growth of MSMEs,

as firms in the early stage lacked access to capital willing to bear higher risk and invest longer-term,

while this could have eased MSMEs’ working capital needs and strengthened their balance sheet. The

lack of debt financing in the ecosystem meant that firms evolving from the early to growth stage

were forced to turn to more expensive equity financing for working capital, which reduced

entrepreneurial capacity.12

• Services: MSMEs in the service sector lacked the ability to provide physical and immovable collateral,

since most businesses in the sector invest only in light assets and operate from leased premises.13

This made access to formal finance challenging, as financial institutions did not have appropriate

financing tools and risk assessment frameworks to assess such enterprises.

• Manufacturing: Despite the availability of immovable collateral, MSMEs in the manufacturing sector

were still among the most underserved in terms of formal financing, accounting for more than 70

percent of the MSME debt financing gap.14 This was due largely to their longer working capital cycles

and their larger and longer-term financing needs.

6. At appraisal, the project supported the Government of India (GoI)’s strategy on MSMEs and was well-aligned with the Country Partnership Strategy (CPS FY13-17). The Twelfth Five-Year Plan of India (2012-17) clearly articulated the critical role of MSMEs in supporting sustained growth and job creation, and recognized the urgent need to improve their access to finance.15 With a strong focus on inclusive growth, jobs and private sector development, the CPS highlighted the need to facilitate access to finance for MSMEs, particularly in the manufacturing sector. The project contributed to the CPS’ first

8 Estimation provided in the Project appraisal document, based on MSME census 2006-07. 9 IFC-Intellecap, “Study on Micro, Small and Medium Enterprise Finance in India”, October 2012. 10 IMF Financial Access Survey (2014). This is compared to around 40 percent for comparable middle-income countries. 11 This is compared with 28 percent in Vietnam and 35 percent in Thailand. Data is for 2014. 12 Mitra (2012), “Creating a Vibrant Entrepreneurial Ecosystem in India”, Report of The Committee on Angel Investment & Early Stage Venture Capital, Government of India, Planning Commission, New Delhi, June 2012. India has potential to build 2,500 highly scalable businesses that could generate revenue of US$160 billion in the 10 years after 2012. However, the market for debt financing is virtually nonexistent. 13 Light assets include fixtures, furnishings, equipment, etc. Immovable collaterals are lacking. Some businesses also operate from a single-purpose commercial building – e.g. bowling lanes, movie theaters and franchises (where customizing the inside and outside is part of the branding) – for such firms, lenders typically further discount the single purpose building collateral by the amount of the renovation cost in the event of default. 14 IFC-Intellecap, “Study on Micro, Small and Medium Enterprise Finance in India”, October 2012. 15 This focus on MSMEs has been echoed by the Reserve Bank of India that has advised banks to achieve a 20 percent annual growth in credit to MSMEs.


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area of engagement - on integration - by increasing access to finance for MSMEs., particularly in manufacturing, and contributing to the sector’s growth. Also, by supporting MSMEs, the project directly contributed to the CPS’ third area of engagement - on inclusion - and to the achievement of the CPS outcome indicator on additional loans to MSMEs.

7. The Borrower and implementing agency for the project was the Small Industries Development

Bank of India (SIDBI), established by the GoI in 1990 to implement its national agenda of addressing

MSME financing gaps.16 At appraisal, SIDBI had formulated a new strategic business plan that aimed to

meet the changing needs of MSMEs in growing areas of the economy. This entailed expanding credit lines

as well as developing new products and services to address the market failures in MSME financing. The

project supported and leveraged SIDBI’s role as a market-making financial institution by enabling it to

target underserved segments, including creating markets for new and innovative financial products and

services to crowd in private sector financing.

8. The project built on previous successful engagements between SIDBI and the World Bank

Group (WBG). This partnership had made a substantial impact on developing India’s rapidly evolving

MSME landscape over the last 15 years.17 It had supported commercial introduction of innovative

financial products and procedures (including risk-sharing facilities, equity/subordinated debt

investments, and long-term financing) and established key market infrastructure such as the Small and

Medium Enterprise (SME) Rating Agency (SMERA) and Code of Conduct Assessments (COCAs) for

microfinance. WBG’s engagements in the SME sector (2004 and 2009) focused on providing MSMEs with

access to longer-term financing.18 This project aimed to further improve access to finance for MSMEs in

underserved and strategic sectors, with particular focus on developing innovative and appropriately

designed products, mechanisms and partnerships (including with fintech) to address the key constraints

to finance for startup/early stage, service and manufacturing MSMEs. The experience and lessons learned

from WB projects in other countries and previous engagements with SIDBI informed the project design.

Based on the lesson that credit lines with technical assistance (TA) outperform stand-alone credit lines,

TA was fully part of the project.

9. The project’s main beneficiaries were to be the funded MSMEs. The project also aimed to

strengthen the capacity of SIDBI and participating financial institutions (PFIs) to serve MSMEs. In

particular, the project benefited SIDBI by enhancing its financial and institutional capacity in the areas of

early stage, service, and manufacturing sector financing, and also originally aimed to support PFIs through

financing and the parallel technical assistance. Due to SIDBI’s preference, however, the project financing

was eventually disbursed through SIDBI’s direct lending business to MSMEs instead of going through the

PFIs during implementation.

16 SIDBI was established in April 1990 through an Act of Parliament, as the principal financial institution for Promotion, Financing and Development of the MSME sector and for co-ordination of functions of institutions engaged in similar activities. The business strategy of SIDBI is to address the financial and non-financial gaps in MSME ecosystem. Financial support to MSMEs is provided by way of both 1) indirect lending to financial institutions for onward lending to MSMEs, and 2) direct lending to MSMEs in underserved market segments to improve access to finance and create demonstration effect in the wider economy. For more information see: https://www.sidbi.in/en. 17 The partnership included several lending projects with a total financing of over US$1.3 billion. 18 India SME Financing & Development Project (2004), and Additional Financing (2009) (P086518).


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Theory of Change (Results Chain)

10. The project provided integrated financing plus TA.19 The financing was designed to provide an

affordable (cost-efficient), longer-term source of funding for underserved MSMEs in the early stage,

services and manufacturing sectors. These targeted segments were perceived by financial institutions as

risky and costly to serve. However, to improve access to finance for MSMEs in these underserved sectors,

it would also be necessary to improve the capacity of financial institutions to deliver credit, including

through developing innovative lending products, partnerships, and tools such as fintech. Therefore, to

complement the provision of affordable and stable financing, the project included TA to improve the

capacity of SIDBI and the PFIs to deliver credit to underserved MSMEs. In particular, the project focused

on developing and using innovative lending methods to reach underserved MSMEs, with the aim of

creating a demonstration effect in the wider economy and crowding-in private sector financing. As such,

two outcomes were intended for the project’s targeted segments: improving access to finance through

SIDBI’s lending business, and improving access to finance by crowding-in private sector financing.

Figure 1: Theory of Change20

19 This is in line with the recommendation from previous engagements with SIDBI. The implementation completion and results report (ICR) of the previous engagement with SIDBI also highlighted the impact of the technical assistance and recommended the design of combining line of credit with technical assistance. 20 There was no requirement for a Theory of Change at the project design stage. The Theory of Change below is constructed from the Project Appraisal Document (PAD) for this ICR.


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Project Development Objectives (PDOs) The Project Development Objective (PDO) was to improve access to finance for MSMEs in the manufacturing and service sectors from early to growth stage, including through innovative financial products.

Key Expected Outcomes and Outcome Indicators

Key Expected Outcomes were:

• Improved access to finance for MSMEs in early stage/startup, manufacturing, and service sectors,

supported by SIDBI’s lending business.

• Private sector financing for MSMEs crowded-in using innovative financial products, partnerships,

and tools including fintech supported by SIDBI and PFIs.

Key Outcome Indicators were:

• Outstanding MSME loan portfolio in risk-capital financing including startups.

• Outstanding MSME loan portfolio in the service sector.

• Outstanding MSME loan portfolio in the manufacturing sector.

• Total number of MSME beneficiaries under the credit line.

• Turnover of startups supported through the project.

Components

The project comprised the following components:

• Component 1: Spurring Early Stage and Risk Capital Financing (US$165 million, of which US$150 million was an International Bank of Reconstruction and Development (IBRD) loan: This component was designed to support early stage debt (startup and venture debt) and risk capital financing to MSMEs. Around a third of the component was expected to be utilized for debt financing to startups and early stage MSMEs. Typically, these enterprises were in the growth stage; they had already placed products on the market and had revenue streams, even though they may not have been making a profit. Some of these firms may have already entered early stage venture capital. Around two thirds of the component was to be utilized for risk capital financing to MSMEs, including supporting innovative risk capital products such as mezzanine debt capital.

• Component 2: Supporting Service Sector Financing Models (US$220 million, of which US$200 million an IBRD loan): This component was designed to support products offered by SIDBI and PFIs tailored for the service sector. The component included the introduction and scale-up of innovative models of financing with customized appraisal parameters that relied on business viability and cash flow assessments. This component also sought to support innovative products such as asset-light loans and franchisee financing.


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• Component 3: Supporting Finance to Manufacturing MSMEs (US$165 million, of which US$150 million an IBRD loan): This component aimed to support various manufacturing sector MSME financing products.21 It also aimed to support sustainable improvements in manufacturing MSMEs.22 Several activities were envisaged such as loan extension services and pilots of cluster financing.23

• Parallel Technical Assistance (US$5 million): The integrated TA was designed to support implementation of the three components and achievement of the PDO. It supported SIDBI and the PFIs in the development of innovative financial products, services and partnerships targeting underserved MSMEs, including leveraging digital finance models.24 The TA also included various capacity building activities such as strengthening the credit appraisal methods of SIDBI and PFIs. Further, the TA would support a beneficiary survey and communication/dissemination efforts. The TA was financed by grants from coordinated trust funds (FIRST and IFC SME Global Facility) and was included as parallel technical assistance in the project documents.

B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) 11. The project disbursed 53 percent of the original loan amount allocated towards MSMEs. A project restructuring was implemented in March 2019 to cancel the remaining undisbursed balance of the IBRD line of credit, which amounted to US$234.62 million (47 percent of the credit line). The remaining trust funding for the technical assistance25 was not canceled and continues to support the PDO. All loan disbursements under the World Bank (WB) credit line were accompanied by 10 percent of co-financing from SIDBI in addition to the World Bank financing.

Table 1: Disbursement of the IBRD Loan by Component

Planned Disbursement Amount (US$ million)

Canceled Amount (US$ million)

Actual Disbursement Amount (US$ million)

Component 1 150 125 25

Component 2 200 100 100

Component 3 150 9 141

Total 500 234 266

Rationale for Changes and Their Implication for the Original Theory of Change

12. SIDBI requested cancellation of the remaining undisbursed balance of the WB line of credit due to its higher cost compared with other domestic funding sources (including concessional funds).

21 This includes the introduction of new financial products and/or financing mechanisms for the manufacturing sector. 22 Through promotion of better management practices that will support manufacturing MSME competitiveness in India but also globally. For those MSMEs that are interested (particularly relevant for more energy consuming firms), the parallel TA would support a quick opportunity assessment (for example energy efficiency audit) for overall improvement of the MSME unit. 23 Namely credit delivery arrangements with NBFCs, MSMEs associations, machineries manufacturers, dealer financing where PFIs/SIDBI could leverage cluster level association to help reduce information asymmetries. 24 Various potential new and innovative products were envisaged at the project appraisal stage. For example, products that leverage the use of movable and intangible assets, including light assets, which will be relevant for both early stage as well as service sector firms. For the manufacturing sector, support was envisaged during the initial stages of the project to cover assessments for the Loan Extension Services. 25 FIRST and IFC SME Global Facility.


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Disbursement was fast in the first two years; in fact, the project was the best disbursing project in the entire WB financing portfolio in India. The funding cost for the WB credit line was competitive in the earlier years of the project, but due to changing market conditions, the landed funding cost inclusive of hedging cost for SIDBI’s foreign exchange (FX) credit lines, including the WB credit line, increased substantially in 2016.26 In discussion with the WB, SIDBI opted to request annual bulk disbursements of the loan (instead of submitting quarterly withdrawal requests) in order to better take advantage of opportunities arising in the financial markets to lower overall hedging costs. From early 2017, the landed funding cost for the WB line of credit became significantly higher than what SIDBI could raise in the domestic capital market (Figure 2). One key constraint of the total landed cost of the WB financing was the need for a sovereign guarantee, which cost an additional 1.20 percent (even though it was paid to the GoI). In addition to adverse market conditions and increasing cost to hedge the currency risk, there was also increasing access to domestic concessional funding sources (Figure 3), including the Fund of Funds for Startups27 and SIDBI’s Make in India Loan for Enterprises (SMILE) scheme.28 Various teams at SIDBI and the WB team explored a partial currency conversion of the loan and reviewed the borrowing cost of the WB line of credit in Indian rupees (INR). In addition, SIDBI explored submitting a request to the GoI for a reduction in the government guarantee fee. After reviewing all these options, SIDBI concluded that it was unlikely that the remaining undisbursed balance of the WB line of credit would be drawn down before project closing, given the availability of more cost-effective sources of funds.29 A cancellation of the remaining undisbursed balance was agreed within SIDBI and the GoI and an official request was sent by the GoI to the WB in March 2019. 13. While part of the loan was cancelled, the Theory of Change remained intact. The project’s financing was designed to provide a stable, longer-term and affordable (cost-efficient) source of funding for underserved MSMEs, and the integrated TA was designed to improve the capacity of SIDBI and the PFIs to develop and deliver innovative lending products to underserved MSMEs. As part of the financing was canceled, certain complementarities between the financing and the technical assistance were lost, since the WB team could no longer push for quick expansion of innovative lending methods through the WB financing. However, SIDBI borrowed more cheaply from the domestic capital market and also received concessional funding from the GoI. With these cheaper funds, SIDBI continued supporting the underserved segments targeted by the project and mobilized private sector financing, relying on the innovative lending tools, skills and frameworks developed under the project.

26 Since most MSMEs demand local currency financing, the majority of SIDBI’s assets are in the local currency (INR), hence SIDBI needs to hedge the currency risk of the World Bank line of credit. In addition, the variable spread on the WB lines of credit had been increasing over a period of time (from 33 bps in June 2015 to 47 bps as in July 2018). Further, the applicable LIBOR rate has also gone up from 1.30 percent at the time of contracting the line of credit to 2.51 percent during July 2018. 27 The Fund of Funds for Startups aims to disburse INR 100 billion indirectly to startups (US$1.5 billion) by 2025. SIDBI is operating as the Fund manager for the FFS, with the funding provided by the GoI. 28 The SMILE scheme was launched in August 2015. It aimed to provide INR 100 billion financing at concessional rates targeting 25 priority sectors in manufacturing and service sectors as part of the Government of India’s “Make in India” Program. Most of the 25 sectors supported under the Scheme are in the manufacturing sector. The SMILE scheme was initially planned for 3 years but was extended and would go beyond the life of the World Bank credit line. 29 SIDBI’s request to cancellation states “Since comparatively cost-effective resources can be raised from domestic market, complete drawdown under World Bank Line seems to be unviable at present due to high landed cost of funds.”


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Figure 2: Increasing Cost Difference in INR between WB Credit Line and SIDBI Capital Market Borrowing

Source: “Report on Assessment of Costs of Line of Credit to Small Industries Development Bank of India”, the WBG (2017). Note: The report is commissioned under the project in early 2017. Subsequently, the funding cost difference in INR has remained at an elevated level, as confirmed by the Treasury. The funding cost for the WB line of credit is inclusive of hedging cost and sovereign guarantee fee of 1.20 percent. A commitment fee of 0.25percent must also be paid on undrawn WB line of credit. The commitment fee is not included in the funding cost of WB credit line above. Figure 3: Cost of WB Credit Line Higher than Alternative SIDBI Funding Sources (July 24, 2018)

Source: SIDBI. Note: 1) The left-hand side bar shows the funding cost difference of the WB credit line and the SMILE scheme, the right-hand bar shows the funding cost difference between the WB credit line and SIDBI funding cost from domestic capital market. 2) The date July 24, 2018 is the date when SIDBI submitted a request of cancellation to the Department of Financial Services. The request was approved by the Department of Economic Affairs in March 11, 2019. 3) The WB line of credit is inclusive of hedging cost and a sovereign guarantee fee of 1.20 percent. A commitment fee of 0.25 percent must also be paid on the undrawn WB line of credit. The commitment fee is not included in the funding cost of WB line of credit used above. 4) Based on SIDBI’s input, SIDBI’s funding cost from domestic capital market is proxied by adding 50 basis points to the Government 10-year bond yield, which is in line with the funding cost for AAA-rated institutions in India (Report on Assessment of Costs of Line of Credit to Small Industries Development Bank of India). 5) The funding cost for the SMILE scheme is based on the estimated average provided by SIDBI staff.

-0.50%

0.00%

0.50%

1.00%

1.50%

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

Funding Cost Difference in INR between 10 Years World Bank Credit Line (inclusive of hedging cost and sovereign guarantee fee) over 10 Years SIDBI Financing in Domestic

Capital Markets (WB Credit Line - SIDBI Domestic Borrowing)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

World Bank Credit Line over SMILE Scheme World Bank Credit Line over Domestic CapitalMarket

Funding Cost Difference in INR of World Bank Credit Line (inclusive of hedging cost and sovereign guarantee fee) over Alternative SIDBI Funding Sources


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II. OUTCOME

A. RELEVANCE OF PDO

14. The PDO was highly relevant at appraisal and remains highly relevant in the current country

context of India. As discussed in the Systematic Country Diagnostic (SCD, 2018), most Indian citizens can

be expected to join the ranks of the global middle class by 2047, provided there is sustained economic

growth and creation of an unprecedented number of well-paid jobs. That requires a booming private

sector and productive enterprises, which put MSMEs at center stage.30 The MSME sector grew faster than

the overall economy and created around 13.5 to 14.9 million jobs per annum from 2015 to 2018, making

MSMEs the largest job creator in India.31 However, despite recent progress (which will be partly discussed

in the Efficacy Section, IIB), MSMEs in India still face severe financing constraints. Outstanding MSME loans

are still only 6.5 percent of GDP, low by middle-income country standards,32 and the MSME financing gap

is still a key barrier to job creation. Access to credit is central to Prime Minister Modi’s 2018 “Support and

Outreach Initiative for the MSME Sector.”33 The 2019 Report of the Expert Committee on MSMEs from

the Reserve Bank of India (RBI) identified high risks, high operational cost, and low access as the main

barriers to MSME financing.

15. The PDO was also well aligned with the key focus areas of the current WB Country Partnership

Framework (CPF, FY18-22), which was developed while the project was still operational. The project

directly contributed to the second focus area of the CPF, “Enhancing Competitiveness and Enabling Job

Creation,” a key objective of which is to “increase resilience of the financial sector and financial inclusion”

by providing financing and technical assistance to facilitate funding to underserved MSMEs. The project

also indirectly contributed to the first CPF focus area, “Promoting Resource Efficient Growth,” by providing

MSMEs with necessary capital to improve the efficiency of their production processes. The project was

also well-aligned with the CPS (FY13-17) at appraisal (see para. 6).

Assessment of Relevance of PDO and Rating

16. The relevance of the PDO was High. As discussed, the project was highly relevant in the

development context of India and was well-aligned with focus areas of the India CPF (FY18-22).

30 India Systematic Country Diagnostic (2018). 31 This exceeds the number of jobs created by larger firms. “Survey on Jobs Creation and Outlook in MSME Sector”, Confederation of Indian Industry, March 2019. 32 This is low by international standard and lower than 10.4 percent of GDP in Bangladesh, 27 percent in Thailand and 36 percent in China. Data are from IMF Financial Access Survey. 33 Access to credit is one of the five key aspects in the initiative for facilitating the MSME sector. The other four aspects are access to market, technology upgradation, ease of doing business, and a sense of security for employees.


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B. ACHIEVEMENT OF PDO (EFFICACY)

Assessment of Achievement of Each Objective/Outcome

17. In addition to directly financing MSMEs, the project pushed the frontiers of MSME financing

through the development of innovative lending methods that reduced turnaround time, reached more

underserved MSMEs and crowded in more private sector financing.

Outcome: Improved access to finance for MSMEs in early stage/startups, manufacturing and service sectors supported by SIDBI’s lending business. 18. The project’s financing reached underserved MSMEs (Table 2) with enhanced credit appraisal

methods and reduced turnaround time by SIDBI. The project disbursed US$265 million (53 percent of

WB financing), benefiting underserved MSMEs in targeted segments with faster turnaround time.34 It

also reached new clients, women-owned MSMEs and MSMEs in low-income states (Table 2).

• Early stage and risk capital financing (Component 1). The project financing reached 82 MSMEs

through SIDBI’s startup and risk capital financing business, and supported an improvement in

appraisal tools and a significant reduction in the average time for processing credit for startups from

6 months in 2014 to 2.9 months in 2018, mainly through training, analytical work and implementation

support.35 In response to the slow disbursement under this component (17 percent disbursement

ratio), the project also informed SIDBI’s decision to support startup / early stage MSMEs indirectly by

fostering the venture capital ecosystem through the Fund of Funds for Startup (see para. 21).

• Service sector financing (Component 2). With a 50 percent disbursement ratio, project financing

reached 175 service sector MSMEs, with enhanced credit appraisal methods and reduced turnaround

time achieved through training and implementation support.36

• Manufacturing sector financing (Component 3). With a 94 percent disbursement ratio, project

financing reached new SIDBI clients and improved the flow of credit to 804 MSMEs in the

manufacturing sector.

34 The project was the best disbursing project in the India portfolio by the end of Year 2, before market conditions changed and slowed down disbursements. 35 The project team helped revamp SIDBI’s Startup Assistance Scheme (SAS) and Growth Capital and Equity Assistance for MSMEs (GEMS) mainly through revamping of credit appraisal notes and creation of new risk rating tools. The project supported analytical work to revamp the end to end loan processing and to improve risk assessment tools for the SEG segment. Training sessions on risk capital financing for SIDBI officials from various branches were also conducted. 35 36 Trainings of SIDBI’s officers from various branches on cash flow-based lending for asset light businesses were conducted and end-to-end credit processes were enhanced.


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Table 2: Disbursement of the WB Financing by Component

Early Stage and Risk Capital Financing (Component 1)

Services (Component 2)

Manufacturing (Component 3)

Total

Loans (number) 90 186 920 1196

MSME beneficiaries (number)

82 175 804 1061

Women-owned MSME beneficiaries (percent)

16 22 19 19a

MSME beneficiaries in low-income states (percent)

13 21 19 19b

Total amount disbursed (US$ million)

25 100 141 265

Source: SIDBI.

Notes: a The project financed 205 women-owned MSMEs, in line with the project’s target of 400 given its 53 percent disbursement ratio. The

19 percent share is also at least 4 percentage points higher than the percentage in SIDBI direct lending portfolio. It is also larger than the 11 percent share of women-owned/managed MSMEs in India. b The project financed 201 MSMEs in Low Income States, in line with the project’s target of 400 given its 53 percent disbursement ratio. The

Low Income States are ranked at the bottom-end in the state ranking by lending to MSMEs (the state ranking can be found in MSME Pulse by Transunion Cibil, July 2019). Low Income States include Bihar, Manipur, Tripura, Jharkhand, Chhattisgarh, Uttar Pradesh, Madhya Pradesh, Odisha. These states account for roughly 20 percent of national output but have less developed financial systems to finance MSMEs.

19. Innovative products and partnerships have materialized in SIDBI’s direct lending business

under Project support (Table 3). These products were launched and are being scaled up by SIDBI and

could be further replicated by other financial institutions to improve access to finance (Table 3).

• Service and manufacturing sector financing (Components 2 and 3). The project supported the

development of innovative lending products. SIDBI improved its working capital facility, including

quicker processing and multiple collateral options, through a single window for customers. SIDBI also

piloted a co-lending scheme with Small Finance Banks (SFBs)37 to provide term loans to underserved

micro and small enterprises in areas where SIDBI previously cannot reach, as well as a trade finance

scheme for retailers and wholesalers.38 These new products were designed and implemented with

support of a project implementation and data analytics firm (financed by the project) and were

informed by project analytical work.39

• Manufacturing sector financing (Component 3). Innovative lending tools developed by SIDBI with

project support included partnerships with original equipment manufacturers (OEMs) to finance

MSMEs’ equipment purchases.40 In addition, SIDBI launched a Loan for Purchase of Equipment for

37 This co-lending model is only beginning to pick up traction mainly because the framework for co-lending from the RBI was only issued in early 2019. As of June 2019, one transaction worth INR 9.5 million was piloted under the co-lending model. 38 Currently, one transaction worth INR 4.7 million was piloted. 39 The analytical work that informed the products included a strategic market assessment on financing gaps for service sector MSMEs and a mapping of potential partnerships for lending. The project also provided a PIU and data team to support implementation and support SIDBI own PIU. 40 The product was launched in August 2018. As of June 2019, loans with partnership with OEMs benefited 212 MSMEs with a total disbursement of INR 828 million (US$12.7 million). The product provided a quicker credit delivery mechanism to MSMEs for purchasing machines from the identified OEMs. Partnership with OEMs has a lot of potential for scale up. SIDBI has entered into MOU with the 20 OEMs and another 4-5 are in pipeline.


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Enterprise Development (SPEED) program to provide easier access to credit for the purpose of

machinery purchasing41. Further, SMILE Equipment Finance (SEF), an online platform for MSME

equipment financing, was developed and launched with the project’s support. These new products

were developed with the support of the project implementation unit (PIU) team and benefited from

project analytical work.42

20. The project also supported the development of innovative products that are currently in the

pipeline. Products tailored to underserved MSMEs such as franchises, MSME vendors and MSME dealers

were designed, along with capacity building to carry out the transactions. Franchisee financing, supply

chain financing with automated solutions and securitization are in the pipeline and ready to be piloted

as soon as market conditions improve. Co-lending schemes with Non-bank Financial Companies (NBFCs)

are also currently being further developed, based on initial inputs to the schemes by the project.

Table 3: Innovative Products / Partnerships / Financing Frameworks under the Project

Designed and Launched/Piloted Designed and To Be Piloted a

• Partnership with OEMs (Fully Launched)

• SIDBI Loan for Purchase of Equipment for Enterprise Development (SPEED, Fully Launched)

• SMILE Equipment Finance (SEF, Fully Launched)

• Working Capital Facility with New Features (Fully Launched)

• Trade Finance Scheme for Retailers and Wholesalers (Piloted with Potential for Scaleup by SIDBI and other financial institutions)

• Co-lending with SFBs (Piloted with Potential for Scale up by SIDBI and other financial institutions)

• Co-lending with NBFCs

• Securitization

• Franchisee Financing

• Supply Chain Financing with Automated Solutions

Source: SIDBI.

Note: aThe exact dates for launching the pilots depend on market conditions.

Outcome: Private sector financing for MSMEs crowded in using innovative financial products, partnerships and tools including fintech.

21. The project supported SIDBI to crowd in private sector financing through the fast scale-up of

the Fund of Funds for Startups (FFS) and the successful launch of digital lending platforms (Table 4).

• Early stage and risk capital financing (Component 1).

o The FFS, which crowded in private sector financing by investing up to 35 percent in alternative

investment funds (AIFs)43, grew quickly under project support, with outstanding disbursement to

48 AIFs at US$480 million by June 2019, up from 26 AIFs and around US$200 million one year

earlier.44 More than half of the funds (INR 16.8 billion, US$258 million) had benefited 251 startups as

41 322 cases have been sanctioned amounting to INR 1,470 million, out of which 214 cases have been disbursed amounting to INR 850 million. 42 The analytical work included a strategic market assessment on financing gaps for manufacturing sector MSMEs. 43 AIFs here mainly refer to venture capital funds including both venture equity and venture debt funds. 44 The Fund of Funds for Startups aims to disburse INR 100 billion indirectly to startups (US$1.5 billion) by 2025. SIDBI is operating as the Fund manager for the FFS, with the funding provided by the GoI.


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of June 2019.45 The current disbursement under the FFS is expected to generate a multiplier of 7 and

attract a total of US$3,958 million investment to the AIFs.46 Industry stakeholders have recognized

the strong crowding-in effect of the FFS, with many private investors considering the FFS as the

“anchor” investor and only followed FFS to invest in the AIFs.47 The project supported the FFS in three

ways. First, it produced a Strategy and Blueprint to “augment SIDBI’s roles in the startup to growth

stage segment.” This Blueprint informed SIDBI’s decision to more holistically foster the venture

capital ecosystem, including the venture equity and venture debt markets, through the Fund of Funds

for Startups (FFS), which served that segment in line with the PDO.48 Second, the project provided

extensive implementation support aimed to produce a comprehensive end to end automated

process for the FFS operation, including through a full time local venture capital expert.49 Third, the

project conducted tailored marketing campaigns50 and analytical work51 to inform the operation of

the FFS. With project support, SIDBI collected data on past startup funds, improved its fund rating

tools and digitalized the fund selection process in the FFS. These efforts are expected to yield further

benefits in FFS deployment and mobilization of private financing for the startup to growth segment.

o Beyond the FFS, the project supported the ongoing development of SIDBI’s Startup Mitra portal, an

automated loan-origination platform exclusively for startups. The portal registered more than 13,925

startups, 121 incubators and 92 investors as of October 2018. The project supported the portal’s

development through analytical work and a senior expert onboarded at SIDBI.52

• Service and manufacturing sector financing (Components 2 and 3).

o The project supported SIDBI’s pioneering Udyami Mitra (UM) digital portal, and the learning from

the UM portal informed the launch of the “contactless lending” platform, which has crowded in

US$1.9 billion of private sector financing for MSMEs with a reduction in turnaround time and credit

cost. The UM portal, a digital MSME lending aggregator and matchmaking platform, was launched

by SIDBI in 2017.53 By June 2019, 151 eligible lenders, including commercial banks, SFBs, NBFCs and

fintech companies, as well as more than 250,000 MSMEs, were on the platform together with

certified credit counselors, credit bureaus and MSME assistance agencies. The Project supported the

UM portal by providing key recommendations in a white paper for UM portal’s enhancement54 and

45 Most of these investments went to startups in the service sector. 46 Multiplier effect of 7 means that US$1 of investment by the FFS is matched by US$7 of investment from other private sources. 47 This is particularly the case for 18 new funds invested under the FFS. 48 The Blueprint was produced amid slow disbursement in this component and SIDBI’s decision to suspend and review its risk capital financing business amid its transition to SIDBI 2.0. 49 Key strategic inputs and implementation support were provided on investment framework, rating tools, data analytics, appraisal process on fund manager selection and performance monitoring. 50 The launch of the first quarterly Investor Day was supported by the project. The event brings together key stakeholders in the startup financing ecosystem. The event is now organized on a quarterly basis. 51 A state-of-sector study for India’s venture capital and private equity investment market was completed to identify key gaps in the venture capital market and inform the implementation of the FFS. 52 The project support included a portal stakeholder analysis (survey), inputs to UI/UX (user interface/user experience) design, and action plans for the various development phases of the portal including the proposed phase 3, which is part of the Blueprint. 53 The portal is part of the GoI’s “Stand Up India” initiative. Stand Up India initiative was launched in April 2016 as part of the government’s effort to support entrepreneurship. 54 Recommendations incorporated into the enhancement of the UM portal include the inclusion of stakeholders including non-bank financial companies (NBFCs), credit bureau, an interactive user interface, , improved dash boards with data analytics, the inclusion of MSME data analytics


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a study on fintech solutions for SIDBI.55 A contactless lending platform built on the learning from the

UM portal and was launched in 2018. By June 2019, 45,265 new loans, worth INR 127 billion (US$1.9

billion), have been sanctioned on the contactless lending platform, making it the largest online lender

in India.56 The contactless lending platform enabled more efficient matching between lenders and

MSME borrowers and significantly reduced turnaround time and credit cost, leveraging fintech

solutions and data analytics tools. An in-principle approval is issued to approved borrowers within 59

minutes of the online loan application, and MSMEs can choose the most cost-effective loan from a

list of financial institutions that provide in-principle approvals. The loan is to be sanctioned/disbursed

within 5-7 working days after in-principle approval.

Table 4: Fund of Funds for Startups and Digital Lending Platforms

Fund of Funds for Startups (Launched in 2016)

Volume of disbursement to AIFs under the FFS March 2018 (before project support) US$175 million

Volume of disbursement to AIFs under the FFS as of June 209 US$480 million

of which, disbursement to venture debt funds US$48 million

Number of AIFs invested as of March 2018 (before project support) 25

Number of AIFs invested as of June 2019 48

Total expected commitment to AIFs currently invested under the FFS US$3,958 million

Expected multiplier: Amount (US$) of private investment in the AIFs for each US$ invested in under FFS. 7.2

Volume of FFS investment sanctioned to startups US$258 million

Volume of FFS investment sanctioned to startups in the service sector US$206 million

Number of startups supported under the FFS 251

Jobs created by startups supported under the FFS >11,000

Contactless Lending (Launched in 2018)

Volume of lending in contactless lending platform US$1,900 million

Number of MSME loans sanctioned under the platform 127,884

Udyami Mitra Portal (Launched in 2017)

Volume of MSME loans sanctioned US$186 million

Number of lenders registered including fintech NBFCs 151

Number of MSMEs registered >250,000 Source: SIDBI.

etc. and further improvements are underway. 55 The fintech study recommendations informed several digital initiatives for lending and for support to new emerging financial intermediaries (such as fintech NBFCs) that can further mobilize finance for MSMEs. A few examples of the fintech study recommendations which have been taken up by SIDBI under the project or are currently being further developed are (i) to support the capital scarce fintech industry through co-lending, quasi-equity, onlending and credit guarantee schemes, (ii) to use a digital platform for equipment financing, (iii) to open the UM portal to all financial services players including fintech players and (iv) to standardize loan-processing mechanism across banks. The fintech study recommended the collaboration with India Banking Association to set-up a standardized loan-processing mechanism across banks for most of processing, which was done in the contactless lending platform. The project also supported two fintech workshops with stakeholders. 56 The contactless lending platform became the largest online lender three months after its launch. The platform is also changing the dynamics of access to credit. Contactless initiative is now being used for all type of financing (housing, consumer etc.) besides MSMEs.


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Note on Results Indicators57

22. The PDO indicators fell below targets (Table 5). However, the project developed innovative

lending methods and leveraged private sector financing for MSMEs (primarily through the FFS and

digital lending platforms), in line with the PDO, which were not captured by the outcome indicators.

Below are further explanations on why the PDO indicators did not fully capture the Project’s outcomes.

• First, indicators on outstanding SIDBI MSME loans to startup/early stage, manufacturing and service

sectors (indicators 1, 2, and 3 in Table 5) focused exclusively on outstanding MSME loans in SIDBI’s

direct lending. There were no indicators for the design and implementation of innovative lending

products (para. 19 and Table 3) or for the crowding-in of private sector financing (para. 21 and Table

4).58

• Second, SIDBI’s direct lending business increasingly shifted towards the manufacturing sector, in line

with the GoI’s “Make in India” vision,59 and with concessional funding to the manufacturing sector

through the SMILE scheme with a strong focus on the manufacturing sector (Table 5).60 SIDBI’s

indirect lending business grew quickly from INR 438 billion in 2015 to INR 856 billion in 2018 and

remained focused on both the service and manufacturing sectors, but this was not captured by the

results indicators.

• Third, the indicator on turnover of startups was deemed not to be useful by project midterm, as it

incentivized lending to larger firms.

23. A project restructuring to (a) revise the results indicators and adjust the targets, and (b)

reallocate financing from Component 1 to Components 2 and 3 was discussed with SIDBI and agreed

during the midterm review but not implemented, as SIDBI opted to cancel the remaining undisbursed

balance amid changes in market conditions (para. 33).

57 Analysis of each of the results indicators is provided in Annex 1. 58 The outstanding loans also vary depending on exchange rate fluctuations, as a 15 percent depreciation of INR from June 2015 to September 2018 adversely affect the results indicators in US$. In addition, the amount of outstanding loans, reflect both repayment and disbursement and hence is an imperfect measure of access to finance. 59 The GoI’s Make in India Vision aims to raise the contribution of the manufacturing sector to 25 percent of GDP in 2025. 60 Funding from the SMILE scheme provided up to 60 percent of SIDBI’s funding for its direct lending business from 2017 to 2019.


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Table 5: PDO Results Indicators

Results Indicators March 2014

(baseline)

March 2019

Closing date

targets

Achievement of targets using

53% of project funds

Outstanding SIDBI MSME loan portfolio in risk capital financing including startups (in SIDBI direct lending

only, US$ million) 149 62 260 Negligible

Outstanding SIDBI MSME loan portfolio in the service sector (in SIDBI direct lending only, US$

million) 382 174 900 Negligible

Outstanding SIDBI MSME loan portfolio in the manufacturing sector (in SIDBI direct lending only,

US$ million) 586 946 1033

Significantly Achieved

Total number of MSMEs beneficiaries under the WB credit line

0 1061 1320 Significantly

Achieved

Turnover of startups supported through the project (US$ million)

0 34 65 Partially Achieved

Source: SIDBI.

Justification for Overall Efficacy Rating

24. The Efficacy of the project is rated Modest. As discussed above, the project reached the targeted

underserved MSMEs (Table 2); improved credit appraisal methods and laid the foundations for scaling

up new lending initiatives (Table 3); and crowded-in more private sector financing to MSMEs (Table 4).

The tools, skills and frameworks developed and piloted under the project are being mainstreamed in

SIDBI and are expected to yield additional significant results towards the PDO in the period ahead, even

though the full impact of the project could not be realized during the project life due to early cancellation.

Gaps in the results framework were identified but also could not be formally corrected because of the

early cancellation. The results indicators fell, on average, below targets due, among the factors, to the

results framework not capturing the crowding-in of private sector financing even though it was part of

the project design. Considering both the positive impact and the shortcomings as discussed above, the

Efficacy of the project is rated Modest.

C. EFFICIENCY

25. Using the economic analysis in the Project Appraisal Document (PAD) and actual disbursement

figures, the internal rate of return (IRR) for the project financing was calculated to be 20 percent. This

was lower than the estimated IRR of 26 percent in the PAD but higher than the counterfactual (varying

the degree of credit constraints) of 13 percent. While the quick disbursement in the first two years of the

project helped boost the efficiency of project financing, slower disbursement in the third and fourth years

reduced efficiency, as the undisbursed balance did not reach the underserved MSMEs as initially planned,

leading to a lower IRR than envisaged in the PAD. The detailed efficiency analysis in line with the PAD is

provided in Annex 4.


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26. SIDBI implemented key activities to improve access to finance for MSMEs, although frequent

PIU and management changes caused delays in decision making. Despite the early partial cancellation

of the loan due to changes in market conditions, the WB financing still reached the targeted underserved

segments, and the design and implementation of innovative lending methods succeeded in crowding-in

financing from the private sector. In addition, SIDBI launched the contactless lending platform, which has

become the largest online lending marketplace for MSMEs in India. Existing lending practices were

improved and new products and partnerships were implemented to bring finance to underserved MSMEs.

However, frequent SIDBI PIU staff changes (seven times) and frequent changes in SIDBI’s top management

led to delays in certain key decisions, including the extent and scope of the project restructuring.

Assessment of Efficiency and Rating

27. The Efficiency of the project is rated Modest. As discussed above, while the project improved

access to finance for targeted underserved MSMEs and supported SIDBI in implementing innovative

lending methods and crowding-in private sector financing, the partial cancellation of the financing

component, albeit due to changes in market conditions, as well as the frequent organizational changes

in SIDBI, reduced the efficiency of the project, leading to a Modest rating.

D. JUSTIFICATION OF OVERALL OUTCOME RATING

The overall outcome rating is based on the preceding assessment and is provided in Table 6.

Table 6: Summary of Outcome Ratings

Relevance of PDO

Efficacy Assessment Efficiency Assessment Outcome

High Modest Modest Moderately Unsatisfactory

III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME

A. KEY FACTORS DURING PREPARATION

28. The project was designed as an integrated solution combining financing with technical

assistance, in line with learning from earlier WB operations with SIDBI. Such design was based on the

WB experience that credit lines combined with TA outperform stand-alone credit lines. However, given

that SIDBI was reluctant to borrow at market rates for TA at project appraisal, the TA was financed by

coordinated trust funds mobilized by the WB and included as a parallel program.

29. The project design focused on supporting early stage MSMEs through debt financing, based on

analysis of financing gaps at appraisal. However, the project team recognized during implementation

that the intervention in India’s early stage and risk capital financing market would benefit more from a


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holistic support in both equity and debt financing.61 At project appraisal, a significant gap in debt financing

for early stage and risk capital financing was identified through analytical work and market consultations.62

The project design hence focused on the gap in debt financing to the early stage segment. Such design

was also motivated by SIDBI’s comparative advantage in debt financing. However, the allocation of

US$150 million towards Component 1 was over ambitious given that SIDBI’s direct lending towards the

startup and early stage segment was still at a pilot stage. A smaller allocation, serving as a pilot, would

have been more sensible. During project implementation, the project supported both debt and equity

financing through the FFS, which is in line with the PDO but slightly different from what had been

envisaged at design. It, however, solidifies SIDBI’s contribution and multiplies the benefits to the startup

and early stage MSMEs although it is not captured by the PDO indicators.

B. KEY FACTORS DURING IMPLEMENTATION

Factors subject to implementing entities’ control 30. SIDBI increasingly focused its direct lending business towards the manufacturing sector, in line

with the “Make in India” vision of the GoI. In addition, for the early stage and risk capital financing, SIDBI

strategically decided to consolidate its support towards the FFS following an internal business review in

the transition to SIDBI Vision 2.0.63 The decision was also informed by the Blueprint prepared under the

project.

31. SIDBI’s frequent changes in its PIU team and in top management created frictions in project

implementation. The SIDBI PIU team (including SIDBI Treasury and Resource management team) changed

seven times, as documented in the aides-mémoires64, and there were also frequent changes in

responsibilities among top management. Key decisions, including on project restructuring and the

adoption of new products, were delayed due to frictions caused by these changes.

32. SIDBI preferred to use the WB financing for its direct lending business, while funding its indirect

lending business using funds from the capital market and from the GoI. In addition to the rising cost of

WB financing (making it unattractive when domestic markets were very liquid), there was also a better

match of maturity profile between the WB credit line and the assets on SIDBI’s direct lending business.

SIDBI’s refinance business involves lending to banks at an average maturity of 1 to 2 years, which is much

shorter than the tenor profile of the WB credit line. In addition, a large share of SIDBI’s funding for indirect

lending came from the Refinance Scheme for MSMEs, with funding allocated by the Reserve Bank of

India.65

61 The venture debt market would benefit from a vibrant venture equity market and a large group of venture capital investors. 62 See para. 5, first bullet point. 63 SIDBI Vision 2.0 states that SIDBI aims “to transform as an All India financial institution to create an integrated credit and development support role for the Bank by being a thought leader, adopting a credit-plus approach, creating a multiplier effect and serving as an aggregator, in the MSME space”. 64 The changes were caused by both SIDBI’s business considerations and staff rotation policy. 65 The funding is being allocated by RBI and contributed by scheduled commercial banks having shortfall in achievement of priority sector lending targets. For FY 2019, a corpus of INR 300 billion was allocated. The funding is used in SIDBI’s indirect lending business.


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33. A comprehensive project restructuring to reallocate funding from the early/startup component

to the services and manufacturing components and to revise the results indicators was discussed in

detail with SIDBI and agreed during the midterm review mission in April 2018. The midterm review was

planned for end-June 2018 but advanced to April 2018, which was one year after the last annual

disbursement (March 2017). The restructuring was not implemented due to a delay from SIDBI to send

the restructuring request as SIDBI opted instead to cancel the remaining undisbursed balance of the

project estimating that in the prevailing market conditions there was limited likelihood in withdrawing the

balance of the credit line.

34. Fintech solutions were used to crowd-in private sector financing, leveraging India’s digital

infrastructure. Digital platforms (including the contactless lending platform) were highly successful in

bringing together key stakeholders and crowding-in financing for MSMEs. Key market infrastructure,

including the India Stack,66 supported the project’s efforts on fintech solutions.

Factors subject to World Bank Group control 35. The WB team collaborated closely with the International Finance Corporation (IFC) to

proactively support the project. The project team and IFC worked together on a solution to resolve the

bottlenecks in releasing the part of an IFC trust fund to finance the TA. The project was managed by a

coordinated team consisting of WB and IFC advisory staff that leveraged the respective expertise and

convening power of each institution. Various market consultations were carried out with local IFC clients

to inform project design and implementation and stakeholders’ workshops on (a) venture debt, (b) fintech

for MSME lending, and (c) global trends in digital lending.

Factors outside the control of implementing entities 36. The volatile foreign exchange market, ample domestic liquidity, and increasing concessional

funding from the GoI to SIDBI in the project’s targeted segments made the cost of any FX commercial

borrowing by SIDBI, including the WB financing, unattractive (para. 12), leading to the cancellation of

the undisbursed balance of the WB credit line.

37. The rising costs of the WB credit line and early cancellation of the undisbursed balance reduced

the capacity of the project team to quickly expand lending to MSMEs using the credit line along with

innovative tools and partnerships developed under the project (including scaling up of pilot products).

Nevertheless, SIDBI took forward the project’s interventions and tools and continues to serve the targeted

segments using cheaper domestic resources.

38. India’s banking sector suffered from slow lending growth and rising nonperforming loans (NPLs)

during the project implementation period. With a healthier banking system, SIDBI’s efforts to crowd-in

66 India Stack is a set of APIs (application programming interfaces) that allows government, business, startups and developers to utilize a digital infrastructure to design solutions based on presence-less, paperless and cashless service delivery. The India Stack has been important to support the digital platforms as well as other fintech firms in the MSME financing circle.


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private sector financing would have achieved even better results. The overall NPL level in the banking

sector rose from around 4.3 percent in 2015 to more than 11.2 percent in 2018, leading to more cautious

lending behavior and adversely affecting lending to MSMEs.67 The overall high NPL ratio in the financial

sector reduced the risk appetite of banks, and the overall growth of MSME financing was slower than

envisioned at the project design stage. Despite the nominal GDP growing at double digits, nominal bank

financing for MSMEs grew only at 4 percent a year from 2015 to 2018, meaning a real decline in lending

after taking inflation into consideration.

IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME

A. QUALITY OF MONITORING AND EVALUATION (M&E)

M&E Design

39. A clear results framework to track inputs, outputs and outcomes in a systematic and timely

fashion was developed. However, the PDO indicators could have been designed to better capture the

private sector financing mobilized by the project, instead of focusing narrowly on SIDBI’s outstanding

loan portfolio in its direct lending business. In addition to the results indicators, a beneficiary survey was

designed to monitor the final impact of the project, in particular on financial access and on MSME growth

and employment creation.

M&E Implementation

40. SIDBI regularly reported key project data through its management information system (MIS),

which was strengthened through the project, as SIDBI implemented tagging of loans to women-

owned/managed businesses and loans made in low-income states. Data outside the results framework

were also collected by the WB team to evaluate the efficacy of the project, such as data on new lending

methods such as the Fund of Funds for Startups and the digital lending platforms. The WB team also

conducted frequent market consultations with key stakeholders during project implementation to

understand progress and key challenges. However, the designed beneficiary survey was not carried out

due to delays in the onboarding of funding from IFC’s SME Global Facility68 as well as the subsequently

slower pace of disbursement and early cancellation of the undisbursed balance.

67 Most of the NPLs come from large borrowers, and the gross NPL ratio for the MSME sector has remained relatively steady, with the NPL ratio for loans to small and medium enterprises increasing slightly from 10.6 percent in 2016 to 11.3 percent in 2018. 68 The IFC SME Global Facility, one of the two coordinated trust funds for the TA, was available only in end-2016/early 2017, adversely affecting planned activities including a beneficiary survey. The delay was due to a pro-longed onboarding process mainly caused by administrative bottlenecks to sign a separate cooperation agreement between SIDBI and IFC as required by the Trust Fund governance. The issues were solved by the project team and IFC using an innovative approach of coordinated funding for WBG operations. The TA funding from FIRST was available in August 2015, soon after project’s effectiveness.


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M&E Utilization

41. Monitoring data was regularly analyzed to track performance and identify problems in project

implementation. The ambitious targets in the results framework also served to push SIDBI to move fast

on new and innovative products and partnerships. Faced with a slower pace of disbursement in early

stage and risk capital financing compared to faster disbursement in the manufacturing sector, a project

restructuring was proposed by the WB team and agreed during project midterm to reallocate more

project financing towards the service and manufacturing sectors and revise the results indicators.

However, the restructuring ultimately did not take place due to a delay by SIDBI in submitting the

restructuring request despite frequent follow-ups by the WB task team. SIDBI eventually decided to

cancel the remaining undisbursed balance.

Justification for Overall Rating of Quality of M&E

42. The overall M&E is rated Modest. The M&E system as designed and implemented informed

project implementation and enabled the timely action of the WB team, and supplemental data outside

the results framework were constantly collected by the PIU and the WB team to inform project

implementation. However, due to the shortcomings of the PDO indicators and the inability to proceed

with a proposed restructuring to improve the results indicators, the M&E is rated Modest.

B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE

43. The overall environmental safeguards performance was upgraded by the project’s safeguards

team to Moderately Satisfactory from the Moderately Unsatisfactory rating of the last ISR. Though

taking more time than expected, the overall environmental safeguards management at the SIDBI

corporate level was streamlined, since the last ISR, through the following measures: (a) integration of

environmental risk management aspects into the overall credit risk management mechanism; (b)

adoption of environmental sustainability and gender inclusion principles as part of SIDBI’s corporate

policies; and (c) integration of Resource Efficiency and Cleaner Production initiatives as part of its lending

programs. These initiatives at the corporate level in the recent past can be attributed to the capacity

building initiatives under the project. The project did not encounter any issues related to social safeguard

policies. Both the social safeguards policies “OP 4.10 Indigenous Peoples” and “OP 4.12 Involuntary

Resettlement” were not triggered by the project.

44. SIDBI had strong internal arrangements for grievance redressal. The system relied on a web-based and branch-based system to channel complaints. On disclosure, SIDBI was compliant with the far-reaching provisions of the Indian Right to Information Act. In addition to on-demand disclosure of information, SIDBI has proposed suo-moto disclosure of information related to the project, including key information related to the project on its website. 45. Financial management (FM) performance was Satisfactory. SIDBI has operational systems and a framework in place to carry out the project’s FM functions, as well as a credit policy for loan appraisals


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and end-use monitoring of project funds. The computerized accounting system facilitated capturing of sources and uses of project funds through a separate account code. The financial reports were prepared from the statements generated from the accounting system and these were regularly submitted to the WB for financial monitoring and disbursement claims. The project accounts were annually audited by an external auditor and were submitted to the WB by the due date and were found to be satisfactory.69 46. Procurement performance was Satisfactory. As the project was a financial intermediary project,

the sub-borrowers of SIDBI were required to follow private sector commercial practices using an

Operational Manual which was developed by SIDBI with WB’s guidance. In the initial years, trainings were

organized for SIDBI officials to create awareness about the impact of goods procurement on the success

of sub-projects, thus improving the chances for SIDBI to recover the sub-loans. A database was also

developed to capture procurement-related information (in addition to other parameters of sub-loans)

during receipt of sub-loan applications, their appraisal, disbursal and utilization phases.70

C. BANK PERFORMANCE

Quality at Entry

47. The WB effectively responded to SIDBI’s request for a US$500 million loan to improve access to

finance for MSMEs at project appraisal. SIDBI agreed to contribute 10 percent (US$50 million) of the

eligible loans to MSMEs.

• The project’s design leveraged SIDBI’s role as the apex development bank in India. SIDBI was well

positioned to develop and demonstrate new products and markets, create new ways to reach

underserved segments and crowd-in private sector financing. The innovative products and

partnerships designed, piloted and launched by SIDBI were also intended to achieve high visibility

and significant demonstration effect.

• The project was designed as an integrated solution combining financing with TA, in line with

learning from other projects with lines of credit and previous WB operations with SIDBI. With the TA,

SIDBI would be able to better deploy the stable and affordable (cost-efficient) financing resources to

underserved and strategic sectors with innovative lending methods/frameworks. Since SIDBI did not

wish to borrow at market rates for TA, the project team raised trust funds with FIRST and IFC for the

integrated TA.

• To maximize outcomes, the project design targeted a wide range of underserved MSMEs in the

early stage, service and manufacturing sectors. Through strong analytical work and market

69 The audit reports till FY 2016-17 report no significant accountability issues. For FY 2017-18, since no disbursements were made under the project, the requirement to submit a project audit report was exempted by the World Bank. 70 In view of simple and small value contracts, the World Bank team decided to entrust the procurement post review responsibilities to external auditors for the project. This arrangement worked well except for a few instances where procurement audit findings were not presented in requisite format.


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consultations with stakeholders, the WB team identified underserved MSMEs in these sectors and

underlying market failures. Various tools were envisaged to address both sector-specific market

failures and those that were common across sectors. Given the wide focus, the project also left

certain flexibility as to the exact products in order to better align with SIDBI’s evolving strategic

priorities and to allow for testing and piloting.

• However, the PDO results indicators at the design stage focused mostly on SIDBI’s direct lending

business and did not fully capture the intended outcomes of the project. In addition, the large size

of Component 1 was a shortcoming given its pilot nature (para. 29).

Quality of Supervision

48. The active engagement of the WB team was critical to ensure the project outcomes, and its

flexibility and agility were critical in responding to the project’s changing needs and emerging

opportunities.

• The WB team’s support was key to ensuring that the project pushed the frontiers of MSME

financing through the development of innovative lending methods.

o The WB team mobilized donor support for the project objectives, with funding for the TA coming

from coordinated trust funds. The team used an innovative approach to resolve the bottleneck in

releasing one of the IFC trust funds. The onboarding of TA funding was critical to support SIDBI in the

design and implementation of the innovative lending methods.

o The WB team provided proactive support to ensure the project’s continuous focus on innovative

lending tools. In addition to a total of eight implementation support missions, close advice was

regularly provided by the WBG country team in Delhi and Mumbai. Training sessions were

organized71 and various senior experts in early stage financing and MSME financing were onboarded

at SIDBI, including a project implementation and data analytics firm comprising of several senior staff.

Video conferences and phone calls were conducted regularly, including a scheduled monthly call with

SIDBI PIU. The WB team also demonstrated flexibility to changing needs and opportunities, such as

leveraging digital infrastructure development, including India Stack, to achieve the PDO. Through

proactive support from the WB team, many innovative products and services have materialized while

others are in the pipeline (Tables 3 and 4).

• The WB team responded proactively to the slow disbursement and the shortcomings in the results

indicators.

71 The trainings included sessions for SIDBI staff from various branches on cash-flow based lending in the service sector and sessions on early stage and risk capital financing.


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o The WB team accommodated SIDBI’s preference to use annual bulk disbursement (instead of

quarterly withdrawal requests) in order to better take advantage of opportunities arising in the

financial markets to lower overall hedging costs. Given the slower-than-envisioned disbursement

under Component 1 (early stage and risk capital financing) and the deficiencies in certain results

indicators to capture real progress of the project, the WB team was active in proposing a project

restructuring to (a) make modifications to the results framework to better reflect the outcomes of

the project, and (b) reallocate funding from Component 1 to Component 2 (service sector financing)

and Component 3 (manufacturing sector financing). The restructuring was discussed in detail during

the monthly calls with the SIDBI PIU prior to the midterm review and agreed with SIDBI during the

project midterm review mission in early April 2018. Regular follow-ups on the restructuring request

were conducted through emails and field visits by the team in-country. However, the restructuring

of the results indicators was eventually not processed due to SIDBI’s delay in sending such a request

and opting to cancel the undisbursed balance of the credit line, given the rising costs of foreign

exchange borrowing.72

o Amid the higher cost of the WB credit line, the WB task team worked proactively together with the

WB Treasury and presented alternative financing instruments, including local currency financing

options. Regular quotes of the credit line in INR were also shared with SIDBI. The WB task team

received strong support from the Country Management Unit, the practice manager and the Treasury,

and the director of the Treasury also visited SIDBI as part of a country visit to discuss various WB

financial products and loan options. However, after reviewing all options, including considering a

request to reduce the government guarantee fee, SIDBI management eventually concluded that the

cost of WB financing was comparatively higher than alternative funding sources and decided to

cancel the undisbursed balance. The cancellation request from the GoI was received by the WB in

March 2019, and a level 2 restructuring was approved by the WB in the same month.73

Justification for Overall Rating of Bank Performance

49. Bank Performance was rated Moderately Satisfactory. As discussed above, the WB team worked

effectively and proactively towards the PDO during project preparation and implementation, and was key

to ensuring that the project pushed the frontiers of MSME financing through the development of

innovative lending methods. The WB team was also agile in responding to new opportunities in leveraging

fintech solutions for MSME finance and in exploring ways of making WB financing more attractive when

external market conditions changed. Nevertheless, the financing for Component 1 could have been

smaller due to the piloting nature of the instrument, and the design of some results indicators could have

been improved to better capture the effect of the project in crowding-in private sector financing. Bank

Performance is hence rated Moderately Satisfactory.

72 SIDBI sent a cancellation request to its authorizing Ministry in end-July 2018 and the request was received by the World Bank in March 2019. 73 The cancellation was first discussed in a meeting with the World Bank in early October 2018. The World Bank team followed up consistently by emails and cancellation was discussed also in a tripartite portfolio review meeting with the Government of India in November 2018 and during a World Bank mission in December 2018.


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D. RISK TO DEVELOPMENT OUTCOME

50. Deterioration in asset quality and inadequate risk management measures imposed some risk to

project outcomes. The gross NPL ratio in the India banking sector rose from 4.3 percent in 2015 to 11.2

percent in 2018. The GoI is aware of the risk and has taken steps to improve asset quality for banks and

strengthen the capacity of financial institutions to serve MSMEs.74 If not properly managed, fast increasing

NPL ratio and deteriorating asset quality in the banking sector could result in banks markedly slowing

down lending, reducing the availability of private sector financing for MSMEs.

V. LESSONS AND RECOMMENDATIONS

Lessons and Recommendations 1

Factors that Affected Performance

The landed cost of the WB (IBRD) credit line inclusive of the hedging cost and the sovereign guarantee fee (currently at 1.20 percent for SIDBI) turned unattractive to institutions like SIDBI with AAA-rating in India given the adverse movement in the foreign exchange market and the increased amount of domestic concessional funding sources to MSMEs.

Lessons

The landed cost of the WB (IBRD) credit line can be uncompetitive for AAA-rated institutions like SIDBI in India due to the government guarantee fee and foreign exchange rate movements, which can be further compounded by the introduction of domestic concessional funding sources.

Recommendations

At project appraisal, the WB should consider and factor the risk that the cost-competitiveness of IBRD loans to AAA-rated state-owned entities (SOEs) (which require a government guarantee) in markets like India can change during the course of a project. This is particularly the case when these SOEs have access to liquid domestic capital market as well as potential government concessional funding.



The Strategy and Blueprint to revive lending towards the startup sector provided under this project pointed out that the development of the venture debt market requires a vibrant ecosystem of venture equity investment.

Lessons Strong synergy exists between the development of the venture debt market and a vibrant ecosystem of equity investment.

Recommendations Future WB interventions to foster startups should follow a more holistic approach supporting the ecosystem of both venture equity and venture debt to leverage the synergy between the two markets.

74 Reforms include for example the Insolvency and Bankruptcy Code (2016). See India – Financial Sector Assessment (2017) and Financial Sector Stability Assessment (2017) for detailed discussion.


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The PDO results indicators focused narrowly on SIDBI’s direct lending business and did not fully capture the project’s impact in crowding in private sector financing and improving the MSME financing ecosystem.

Lessons Focusing the results indicators too much on a development of financial institutions’ direct lending business is not appropriate when designing a project with an intended impact to crowd in private sector financing.

Recommendations The results framework should include indicators that capture the mobilizing finance for development (MFD) impact if the project has an MFD aspect in its design.



The project targeted a wide range of MSMEs in both manufacturing and service sectors from early to growth stage and effectively leveraged complementarities in serving the MSMEs across different sectors using common lending methods including fintech and digital lending platforms.

Lessons

MSMEs in different sectors can suffer from common types of market failures, common lending methods including fintech solutions and improvement in data analytics can be adopted to reduce transaction costs and to overcome information asymmetries in order to improve access to finance for MSMEs across different sectors.

Recommendations The WB team should consider advocating lending methods including fintech and data analytics applicable to MSMEs across different sectors based on common market failures/gaps.

.


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ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS

A. RESULTS INDICATORS A.1 PDO Indicators

Objective/Outcome: Improving access to finance of MSMEs in manufacturing and service sectors from early to growth stage

Indicator Name Unit of Measure Baseline Original Target Formally Revised

Target

Actual Achieved at Completion

Total number of MSMEs beneficiaries under the credit line

Number 0.00 1320.00 1061.00

31-Mar-2014 31-Mar-2019 31-Mar-2019

Comments (achievements against targets):

This indicator achieved 80 percent of the closing date target. The increasing cost of the foreign exchange borrowing by SIDBI including the IBRD loan led to slow disbursement since Year 3 of Project implementation.


Target


Outstanding MSME loan Amount(USD) 136.00 260.00 61.53


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portfolio in risk capital financing including startups in million USD

31-Mar-2014 31-Mar-2019 31-Mar-2019


The closing date (March 2019) target is 260. This indicator achieved 24 percent of the target. This indicator only captures SIDBI's direct lending towards the early stage / startup sector and does not include funding disbursed under the Fund of Funds for Startups (FFS, disbursed US$ 258 million to startups by June 2019), for which the funding came from the GoI. The indicator fell below the target as the indicator captures SIDBI's direct lending towards early stage and risk capital financing, which was suspended by SIDBI management amid an internal business review and subsequent decision to focus more on supporting the early stage and risk capital financing ecosystem mainly through the FFS. SIDBI's transition towards supporting the ecosystem through FFS was also informed by the Strategy and Blueprint to revive lending towards startup sector produced under this Project.


Target


Outstanding MSME loan portfolio in the service sector in million USD

Amount(USD) 346.00 900.00 173.59

31-Mar-2014 31-Mar-2019 31-Mar-2019


This indicator achieved 19 percent of the closing date target. This indicator only captures SIDBI's direct lending towards the service sector and does not include SIDBI's indirect lending business as well as the private sector financing crowded-in through the digital lending platforms. The indicator fell below the target because 1) SIDBI's direct lending increasingly focus on the manufacturing sector given the concessional funding for the SIDBI Make in India Loan for Enterprise (SMILE) scheme, which provided the majority funding for SIDBI's direct lending business and in line with the GoI's Make in India vision, and 2) new lending tools were being developed in the early years of Project implementation. As these


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new lending tools materialized and market conditions changed, the World Bank funding became costly and the undisbursed balance was cancelled, reducing the capacity for the Project team to quickly expand lending using these innovative tools through World Bank financing.


Target


Outstanding MSME loan portfolio in the manufacturing sector in million USD

Amount(USD) 497.00 1033.00 946.15

31-Mar-2014 31-Mar-2019 31-Mar-2019


This indicator achieved 92 percent of the closing date target. This indicator only captures lending in SIDBI's direct lending business and does not include SIDBI's indirect lending as well as private sector financing crowded in through the digital lending platforms.


Target


Turnover of startups supported through the project in million USD

Amount(USD) 0.00 65.00 34.43

31-Mar-2014 31-Mar-2019 31-Mar-2019



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This indicator achieved 52 percent of the closing date target. This indicator was deemed to be not useful during Project implementation as it incentivizes lending to larger firms. A restructuring to change results indicators was discussed and agreed upon during Project midterm in April 2018 but eventually not implemented as SIDBI opted to cancel the remaining undisbursed balance of World Bank credit line due to changing market conditions.

A.2 Intermediate Results Indicators

Component: Spurring Early Stage and Risk Capital Finance


Target


Number of total MSMEs extended risk capital under the credit line

Number 0.00 260.00 82.00

31-Mar-2014 31-Mar-2019 31-Mar-2019


This indicator only captures the number of MSMEs supported under SIDBI's direct lending business and not the ones financed under the Fund of Funds for Startups (which has benefitted an additional 251 startups as of June 2019). The indicator fell below target because SIDBI's direct lending towards early stage and risk capital financing was suspended by SIDBI management amid an internal business review and subsequent decision to support the early stage and risk capital financing ecosystem mainly through the FFS, which was informed by a Strategy and Blueprint to revive lending towards the startup sector produced under this Project.


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Target


Average time for processing credit for startups

Months 6.00 1.00 2.89

31-Mar-2014 31-Mar-2019 31-Mar-2019


The average time for processing credit for startups in SIDBI's direct lending business was cut in half in the early years of the Project, but progress was interrupted as the lending towards early stage and risk capital financing was suspended by SIDBI management amid an internal business review and subsequent decision to focus more on indirect lending mainly through the Fund of Funds for Startups as informed by the Strategy and Blueprint.

Component: Supporting Service Sector Financing Models


Target


Number of total service sector MSMEs reached under the credit line

Number 0.00 400.00 175.00

31-Mar-2014 31-Mar-2019 31-Mar-2019


The indicator fell below target as the increasing cost of SIDBI's foreign exchange borrowing including the IBRD loan slowed disbursement since Year 3.


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Target


Strengthened credit appraisal methods for service sector loans

Text Sufficient Strong Strong

31-Mar-2014 31-Mar-2019 31-Mar-2019


Credit appraisal methods in the service sector has benefited from the training on cash flow-based lending for asset light business, end-to-end process enhancement and the digital lending platforms including the Udyami Mitra portal and the contactless lending.

Component: Supporting Finance to Manufacturing Sector


Target


Number of new schemes/products introduced and piloted for the manufacturing sector

Number 0.00 4.00 3.00

31-Mar-2014 31-Mar-2019 31-Mar-2019



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The schemes under manufacturing sector include SIDBI Loan for Purchase of Equipment for Enterprise (SPEED), SMILE Equipment Finance SPEED, and co-lending model with Small Finance Banks. Additional innovative products & services are listed in Tables 3 and 4 of the ICR and also target manufacturing MSMEs.


Target


Number of MSMEs benefitting from loan extension services under the credit line

Number 0.00 120.00 0.00

31-Mar-2014 31-Mar-2019 31-Mar-2019


The indicator only captures MSMEs benefiting from the loan extension services (LES) under the World Bank credit line. No disbursement took place under LES in the World Bank credit line partly due to the slow disbursement since year 3 and early cancellation of undisbursed balance. In addition, the TA funding for LES was not available from the Project start as the funding from IFC SME Global Facility was delayed due to administrative bottlenecks. SIDBI was conducting LES pilots with cheaper funding raised from domestic capital market. During Project midterm review it was agreed to revise the indicator to take into account LES done outside the World Bank credit line. However, the formal restructuring of the results framework was not processed as discussed in the ICR.

Component: Cross Component

Indicator Name Unit of Measure Baseline Original Target Formally Revised Actual Achieved at Completion


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Target

Number of new schemes introduced and dedicated for women-owned / managed MSMEs

Number 0.00 2.00 0.00

31-Mar-2014 31-Mar-2019 31-Mar-2019


While no formal scheme were introduced, 19 percent of the MSME end beneficiaries under the World Bank credit line were women-owned/managed MSMEs, 4 percentage points higher than the average in SIDBI's portfolio and twice larger than the 11 percent share of women-owned/managed MSMEs in India.


Target


Number of SIDBI and PFI officials trained (cumulative and by gender)

Number 0.00 150.00 342.00

31-Mar-2014 31-Mar-2019 31-Mar-2019


This indicator exceeded the target. Trainings include sessions on early stage and risk capital financing and cash flow-based financing for asset light business in service sector.

Indicator Name Unit of Measure Baseline Original Target Formally Revised Actual Achieved at


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Target Completion

Number of women-owned / managed MSME beneficiaries under the credit line

Number 0.00 325.00 205.00

31-Mar-2014 31-Mar-2019 31-Mar-2019


The indicator fell below target as the increasing cost of SIDBI's foreign exchange borrowing including the IBRD loan slowed disbursement since Year 3 of Project implementation.


Target


Number of MSMEs (other than early stage) in Low Income States benefitting from the line of credit

Number 0.00 320.00 201.00

31-Mar-2014 31-Mar-2019 31-Mar-2019


The indicator fell below target as the increasing cost of SIDBI's foreign exchange borrowing including the IBRD loan slowed disbursement since Year 3 of Project implementation.

Indicator Name Unit of Measure Baseline Original Target Formally Revised Actual Achieved at


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Target Completion

Improved collaboration for information sharing with external partners

Text Sufficient Strong Strong

31-Mar-2014 31-Mar-2019 31-Mar-2019


This indicator achieved the closing date target. New partnerships including the co-lending scheme with Small Finance Banks and partnerships with Original Equipment Manufacturers were established, and enhancement to digital lending platforms including the Udyami Mitra portal and the contactless lending platform were undertaken with Project support to facilitate information sharing between SIDBI and external partners.


Target


Total number PFIs supported under the credit line

Number 0.00 8.00 0.00

31-Mar-2014 31-Mar-2019 31-Mar-2019


The World Bank credit line was disbursed through SIDBI's direct lending business. SIDBI preferred to use the IBRD funding for direct lending and use alternative sources raised from capital market and other government funds to fund its indirect lending activities. In addition to the increasing cost of the IBRD loan (making it unattractive when domestic market has ample liquidity), one key reason is the better match of maturity profile of World Bank financing with assets in SIDBI's direct lending business.


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Target


Non-performing loans (NPLs) of PFIs’ MSME portfolio

Text TBD less than 8% TBC

31-Mar-2014 31-Mar-2019 31-Mar-2019


The World Bank credit line was disbursed through SIDBI's direct lending business. SIDBI preferred to use the World Bank credit line for its direct lending business, while using funding raised from the capital market and other government funds to fund its indirect lending business. In addition to the increasing cost of IBRD loan (making it unattractive when domestic market has ample liquidity), one key reason is the better match of maturity profile of World Bank financing with assets in SIDBI's direct lending business.


Target


Volume of loans extended to MSMEs using innovative methods including franchising finance under the credit line

Amount(USD) 0.00 40.00 0.00

31-Mar-2014 31-Mar-2019 31-Mar-2019


Innovative lending methods were still being developed in the early years of Project implementation. As these new lending methods materialized and market conditions changed, the World Bank funding became too costly, disbursement slowed and the undisbursed balance was cancelled, reducing the capacity for the Project team to quickly expand lending using these innovative tools through World Bank


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financing. Importantly, SIDBI used cheaper funds it raised from alternative sources and also crowded in private sector financing to serve underserved MSMEs, relying on the innovative tools, skills and frameworks developed in the Project, with potential for further scale up (Tables 3 & 4 of the ICR).


Target


Volume of Bank Support: Lines of Credit - SME in million USD

Amount(USD) 0.00 425.00 265.37

31-Mar-2014 31-Mar-2019 31-Mar-2019


Disbursement ratio is at 53 percent. The March 2019 (Year 4) target is US$425 million, or 85 percent of the US$500 million IBRD loan. Disbursement was fast in the first two years of the Project, as the Project was the fastest disbursing project in the World Bank India portfolio. However, volatile foreign exchange rate market, ample domestic liquidity, and increasing concessional funding sources from the GoI to SIDBI made the cost of the FX commercial borrowing including the IBRD financing unattractive. Disbursement slowed since Year 3 and the undisbursed balance was eventually cancelled after SIDBI and the World Bank review different options. This is discussed in more detail in the ICR.


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B. KEY OUTPUTS BY COMPONENT

Objective/Outcome 1: Improving Access to Finance of MSMEs in manufacturing and service sectors from early to growth stage

Outcome Indicators

1. Total number of MSMEs beneficiaries under the credit line 2. Outstanding MSME loan portfolio in early stage and risk capital financing. 3. Outstanding MSME loan portfolio in the manufacturing sector. 4. Outstanding MSME loan portfolio in the service sector. 5. Turnover of startups supported through the project

Intermediate Results Indicators

1. Averaging time for processing credit for startups. 2. Number of total MSMEs beneficiaries extended risk capital under the credit line. 3. Number of service sector MSMEs reached under the credit line. 4. Strengthened credit appraisal methods for service sector loans. 5. Number of women-owned / managed MSME beneficiaries under the credit line. 6. Number of MSMEs in Low Income States benefitting from the line of credit. 7. Volume of loans extended to MSMEs using innovative methods including franchising finance under the credit line 8. Volume of World Bank support (line of credit)

Key Outputs by Component (linked to the achievement of the Objective/Outcome 1)

1. Credit delivered to previously underserved MSMEs in early stage, service and manufacturing sector through SIDBI’s direct lending business. 2. Innovative lending products developed, piloted and launched by SIDBI, with potential for scale-up. 3. SIDBI’s credit appraisal methods improved, and turnaround time reduced in its direct lending business.


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Objective/Outcome 2: Private sector financing for MSMEs crowded-in using innovative financial products, partnerships and tools including fintech.

Outcome Indicators The PDO indicators mainly capture the first outcome.

Intermediate Results Indicators

1. Number of new schemes / products introduced and piloted for the manufacturing sector 2. Number of new schemes introduced and dedicated for women-owned / managed MSMEs. 3. Number of SIDBI and PFI officials trained. 4. Improved collaboration for information sharing with external partners. 5. Total number of PFIs supported under the credit line 6. Non-performing loans of PFIs’ MSME portfolio. 7. Volume of loans extended to MSMEs using innovative methods including franchising finance under the credit line 8. Number of MSMEs benefitting from loan extension services under the credit line

Key Outputs by Component (linked to the achievement of the Objective/Outcome 2)

1. Private sector financing to startups crowded in by the Fund of Funds for Startups (FFS). 2. Private sector financing to service and manufacturing sector MSMEs crowded in by SIDBI’s digital lending platforms, with significant reduction in turnaround time.


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ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION

A. TASK TEAM MEMBERS

Name Role

Preparation

Niraj Verma, Rosanna Chan, Mihasonirina Andrianaivo Task Team Leader(s)

Shanker Lal Procurement Specialist(s)

Papia Bhatachaarji Financial Management Specialist

Anuradha Ray Team Member

Neeti Katoch Team Member

Ashutosh Tandon Team Member

Swati Sawhney Team Member

Varun Singh Social Specialist

Jorge Luis Alva-Luperdi Counsel

Shiny Jaison Team Member

Aza A. Rashid Team Member

Sangeeta Kumari Social Specialist

Sita Ramakrishna Addepalli Social Specialist

Junxue Chu Team Member

Sumriti Singh Team Member

Supervision/ICR

Mihasonirina Andrianaivo Task Team Leader(s)

Shanker Lal Procurement Specialist(s)

Arvind Prasad Mantha Financial Management Specialist


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I. U. B. Reddy Social Specialist

Mehnaz S. Safavian Team Member

Radha Raju Team Member

Sita Ramakrishna Addepalli Environmental Specialist

Aza A. Rashid Team Member

Renske Van der Kooi Team Member

Shiny Jaison Team Member

Vanda Melecky Team Member

Sakshi Varma Team Member

Ashutosh Tandon Team Member

Vidya Venugopal Counsel

Yunfan Gu Team Member

B. STAFF TIME AND COST

Stage of Project Cycle Staff Time and Cost

No. of staff weeks US$ (including travel and consultant costs)

Preparation

FY15 62.796 331,920.29

FY16 0 263.59

Total 62.80 332,183.88

Supervision/ICR

FY15 4.850 3,682.20

FY16 54.003 236,245.05

FY17 41.401 292,008.61

FY18 41.412 507,323.64

FY19 51.475 594,857.99

FY20 9.333 137,908.76


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Total 202.47 1,772,026.25


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ANNEX 3. PROJECT COST BY COMPONENT

Components Amount at Approval

(US$M) Actual at Project

Closing (US$M) Percentage of Approval

(US$M)

Spurring Early Stage and Risk Capital Finance

165 27.55 17%

Supporting Service Sector Financing Models

220 109.97 50%

Supporting Finance to Manufacturing Sector

165 154.40 94%

Total 550.00 291.91 53%


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ANNEX 4. EFFICIENCY ANALYSIS

This section performs the efficiency analysis in line with the economic and financial analysis in the PAD and calculates the internal rate of return (IRR) for the project financing using the model documented in the PAD. The internal rate of return (IRR) for the WB financing is calculated to be 20 percent based on the actual disbursement figures, lower than the estimated IRR of 26 percent in the PAD but still higher than the 13 percent counterfactual figure.75 While the fast disbursement in the first two years of the project helped boost the IRR (the project being the fastest disbursing project in the entire India portfolio in the first two years), the slower disbursement in the third and fourth year of the project reduced the efficiency of the WB financing, leading to a lower IRR than estimated in the PAD. Below I provided the details of the efficiency and economic analysis in line with the PAD. The economic model as designed in the PAD focuses mainly on evaluating the efficiency of the project financing and does not take into account the impact of SIDBI’s effort to crowd in private sector financing including through the digital platforms, which were strongly supported under the project and already discussed in the Efficacy section of this ICR. MSMEs play a pivotal role in economic development by contributing to major shares of industrial production and exports, providing the vehicles for entrepreneurial spirit and innovation, and generating employment. In India, MSMEs account for more than 80% of total industrial enterprises, produce over 8000 value-added products and employ an estimated 60 million people. In addition, over 50% of MSMEs are rural enterprises and widely distributed across low-income states making them potentially conduits for promoting equitable development and poverty reduction. However, the growth of the MSME sector has been constrained by lack of access to finance. Lack of adequate finance is one of the biggest challenges inhibiting MSME growth. Financial institutions have limited their exposure to the sector due to a higher risk perception, information asymmetry, high transaction costs and the lack of collateral. The IFC-Intellecap study shows that demand-supply shortfall in finance to MSMEs is substantial. Credit towards micro and small enterprises represent only around 13-15 percent of formal financial institutions portfolio. In addition, poor investment climate, lack of infrastructure and market linkages, and gaps in financial market infrastructure and legal framework are additional constraints. While these are all important areas, these are the subject of parallel initiatives that seek to address them, and hence are not a focus of this project, which instead aims to complement such other efforts. Significant economic benefit was derived from the project, both direct and indirectly. Directly, the project improved the value of beneficiaries MSMEs through the credit line supporting their operations. It improved MSME credit market efficiency, through the parallel TA and project financing experience with innovative lending methods which help develop SIDBI’s ability to appraise and manage MSME loans. The project also helped build up the knowledge and capacity of intermediaries with respect to MSME lending, thus help catalyze a sustainable MSME lending market. Enhanced capacity built upon SIDBI’s demonstrated performance in new lending tools, SIDBI’s indirect lending including through Fund of Funds for Startups, and newly-launched digital platforms including UM portal and contactless lending, helped crowd in other banks, institutions and NBFCs. Indirectly, the project supported the structural shifts occurring in the Indian economy towards service-oriented activities while enhanced the competitiveness

75 Key modeling assumptions are maintained to ensure comparability between the numbers.


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of manufacturing and supporting the growth of innovation, startups and early stage firms, a key to deepening sustainable access to finance for MSMEs. The project implemented through SIDBI, an apex level financial institution for MSME finance in India, and effectively leveraged SIDBI’s position to create demonstration effect and crowd in private sector financing for MSME financing. The economic analysis looks at early stage and risk capital financing, services and manufacturing separately and generates IRRs for each of the components as well as also for the entire project financing. This is as the project targeted a variety of firm types, with different cost structures, employment intensities and potential for value addition. For early stage and risk capital financing, firms typically register high growth rates for successful operations but also have high failure rates. Access to finance is effective at releasing constraints to growth for early stage and risk capital which is reflected in the high returns even under not so robust conditions for turnover growth. The benefits for manufacturing are clearly driven by improved profitability through supporting project interventions. It is expected that this would occur through improved competitiveness. The service sector has the potential to contribute the most through higher number of jobs though early stage firms contribute the most to creation of higher skilled jobs. Methodology: The economic analysis is undertaken by comparing the projected value addition to MSMEs under the project to the counterfactual firm performance without the project. The economic model estimates the direct benefits of project financing through increased turnover and value added82 of MSMEs and compares it to the case where limited access to finance constraints firm growth. The counterfactual case makes different assumptions across different segments as to the extent firms that are financially constrained, leading to sub optimality in capital efficiency and performance metrics. For firms under early stage and risk capital financing, greater access to funding enables them to register higher average growth rates, improved failure rates and significantly improved profitability at the margin (early stage are typically at the borderline of profitability). For growth enterprises and service sector firms, while credit constraints are relatively less severe than early stage firms, they nevertheless operate at sub optimal levels relative to growth potential. The project targets this niche through appropriate and innovative access to finance such that promising firms with strong business models can grow into vibrant enterprises where jobs can be created on a large scale. For manufacturing firms, the project seeks to address key issues of competitiveness and scale, through additionality in financing. Notice that the assumptions in the PAD are maintained to ensure direct comparison between the IRR and the IRR calculated in the PAD.76 The detailed assumptions and corresponding results are tabulated in the Table A1 below. As documented in the PAD, the sensitivity analyses under different scenarios show that results are robust to changes in key assumptions. The key results of the efficiency analysis are also tabulated in Table A1. The IRR for the early stage and risk capital financing is low at 7 percent. This is largely caused by the slow disbursement in this component, with disbursement ratio at only 25 percent. The IRR for services sector financing is at 23 percent, as disbursement was fast in early years of the project, allowing firms to grow quickly early on. The IRR for manufacturing sector is highest at 32 percent, as more than 90 percent of the allocated funds were disbursed in the first two years of the project. Taking together the IRR for the three components, the

76 The average loan size has been smaller than envisaged during the project preparation, so there is a case to increase some parameters which lead to higher IRR for the project.


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overall IRR is hence calculated as 20 percent. The project also contributed to jobs through creation of skilled formal sector employment including high end knowledge capital. As early stage and growth ventures are human capital intensive, these firms are expected to generate greater demand for higher end jobs while services and manufacturing absorb greater amount of labor. In addition to measured benefits captured in the economic model, the project also spurs, increased SME activity that contributes to GDP growth through increased output, value addition and profits. The project would directly contribute to formal job creation (as noted above) and indirectly through ancillary development and tertiary employment. The number of jobs supported by the WB financing is also reported in Table A1.

Table A1: Key Assumptions and Results from the Economic Modeling.

Summary of Assumptions Risk

Capital Services Manufacturing Total

Loan Component (US$ million) 150 200 150 500 Compounded annual turnover growth - counterfactual 9% 8% 5% Compounded annual turnover growth - post project 15% 17.5% 10%

Employment intensity (per million turnover) 0.3 0.3 0.3

Employment elasticity (change in turnover) 1.02 1.02 1

Average wage per worker (INR million) 0.4 0.3 0.2

Value-added* % counterfactual 13% 12% 6%

Value-added* % post project 25% 22% 8%

Results Risk

Capital Services Manufacturing Total

Counterfactual IRR 3% 11% 19% 13%

Project IRR 7% 23% 32% 20%

Employment in terminal year - counterfactual 1221 6810 22320 30352

Employment in terminal year - post project 1464 8423 24773 34660

Table A.2. Value Addition over time & IRR

IRR - Counterfactual

in INR million Disbursed Undisbursed Year 1 Year 2 Year 3 Year 4 IRR

Total 16,085 13,915 2,301 6,658 7,069

7,507 13%

Risk Capital 1,625 7,375 367 451 488

527 3%

Services 6,000 6,000 1,021 2,158 2,330

2,517 11%


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Manufacturing 8,460 540 913 4,049 4,251

4,464 19%

IRR - With Project

in INR million Disbursed Undisbursed Year 1 Year 2 Year 3 Year 4 IRR

Total 16,085 13,915 3,745 10,445 11,842 13,440 20%

Risk Capital 1,625 7,375 656 852 980

1,127 7%

Services 6,000 6,000 1,872 4,133 4,857

5,707 23%

Manufacturing 8,460 540 1,217 5,460 6,005

6,606 32%


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ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS

Verbatim comments from SIDBI (email)

MSME Growth Innovation and Inclusive Finance Project

- Overviews on Implementation completion and results report

This is with reference to your letter dated August 29, 2019 on the captioned subject, forwarding the draft ICR report to SIDBI for its comments.

We have studied the report and would like to put forth certain facts (attached as Annexure) which would help you in strengthening your observations. You may observe therefrom that many initiatives were undertaken by the Bank during the project period which, even though not strictly covered under the project, were closely linked with components of the project. Success of these initiatives should also be partially attributed to the Project. Further, many other initiatives which were kick started during the period may start yielding measurable impact in days to come.

It is, therefore, requested that observations of SIDBI may be given due consideration and the rating assigned to the project may be suitably enhanced by couple of notches.

Please acknowledge receipt.

Verbatim comments from SIDBI (attached as Annexure in SIDBI’s email response)

Annexure

Comments of SIDBI

Comments pertaining to Direct Lending

• There has been a slew of initiatives that started under the Project but could not find a place in the report as these are still underway. Additionally, many initiatives were undertaken by the Bank during the project period which, even though not strictly covered under the project, were closely linked with components of the project. Success of these initiatives could also be partially attributed to the Project.

• PDO Results indicators – The report indicates achievement of target under Risk capital and service sector as Negligible as against actual achievement of 24% and 19% respectively of the closing date target. Similarly, the turnover of startups as indicated in the report is “Partially achieved” as against actual achievement of 52%. However, if the same is compared to the baseline figures (March 2014), the actual achievement under Risk capital and service sector are 42% & 46% respectively which may be considered satisfactory. Further, the performance would appear even better when considered in view of the fact that actual utilization of fund was only 53%.


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• As indicated in the report, the project pushed the frontiers of MSME financing through the development of innovative lending methods that reduced turnaround time, reached more underserved MSMEs and crowded in more private sector financing.

• The project supported the launch of new SIDBI lending products targeting underserved MSMEs, which are being scaled up by SIDBI. Innovative lending methods were developed under the project.

• The project did cover a total 1061 MSMEs including 82 MSMEs in Early stage and risk capital financing, 175 service sector MSMEs and 804 MSMEs in the manufacturing sector.

• SIDBI in its endeavor to reach out to MSMEs, initiated several steps such as launch of new products viz. SIDBI Loan for Purchase of Equipment for Enterprise’s Development [SPEED], Equipment Finance Scheme [SEF], Retail loan scheme for Trade Finance, Top up loans for immediate purpose [TULIP], SIDBI Term Loan Assistance for Rooftop Solar Plants [STAR] etc.

• Under SPEED, as on date, 322 cases have been sanctioned amounting to INR 147 crore so far out of which 214 cases have been disbursed amounting to INR 85 crore and the aggregate outstanding under the scheme is INR 84.71 crore.

• Some of these new products were designed and implemented under the support of the Project Implementation Unit [PIU].

• To enlarge the MSME customer outreach, SIDBI has entered into MoU arrangements with various OEMs. The purpose of such arrangements is to provide a steady source of business leads to SIDBI and also to provide a quicker credit delivery mechanism to MSMEs for purchasing machines from the identified OEMs. Partnership with OEMs has a lot of potential for scaling up the business and coverage of wide numbers of MSME customers. As on date, SIDBI has entered into MOU with the 20 OEMs and another 4-5 are in pipeline.

• The co-lending model with Small Finance Banks (SFBs) was launched with a view to finance primarily micro and small enterprises (MSEs) so as to provide term loans to MSEs jointly by SIDBI and SFB at those places where SIDBI has no reach. Co-lending with NBFCs was also under discussion at SIDBI for which PIU/ data support team had worked on and provided a list of rated NBFC's which can be explored for business. The thrust areas indicated in the manufacturing and Service sector study reports are being explored by SIDBI and other new initiatives/ products are at various stages of study/ discussion/ sign off from other verticals etc. The study reports may also be shared with the field offices viz. Branches for reference if required.

• Training programs were also conducted for SIDBI officers to build their capacity & skills on exploiting lending opportunities in service sector which gave an insight to SIDBI officers regarding approach towards proposals covered under service sector and improvement in Turn around time.

• In alignment with the Bank’s renewed focus on improved credit delivery to MSME sector, the SIDBI Multifunctional Appraisal and Rating Tool (SMART) application has been recently launched by SIDBI in September 05, 2019.

• As part of SIDBI Vision 2.0, to bring more digitization in the credit delivery mechanism to reach more and more MSMEs, it was decided to accept all loan applications (irrespective of loan amount) mandatorily through electronic form only. In this connection, an online loan application portal has also been developed. The digital loan applications have been integrated with psb loans portal and all loan application are accepted through Bank specific URL of contactless loan platform (www.psbloansin59minutes.com/oursidbi). Further, detailed project report (DPR) requirement has been dispensed with for loan application upto INR 300 lakh.

http://www.psbloansin59minutes.com/oursidbi


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• Towards simplification of Credit Delivery process, the Bank has tied up with "TransUnion CIBIL-Commercial" to provide various alerts on SIDBI's existing MSME customers. The CIBIL Commercial alerts to help field offices to keep a track on change of accounts status and also to provide various alerts on SIDBI's existing MSME customers. In order to strengthen the due diligence process, SIDBI has also subscribed to “CIBIL MSME Rank” which is a credit default predictor model for MSMEs.

Comments pertaining to utilisation

• Out of the sanctioned WB Line IV assistance of USD 500 mio, SIDBI had utilized around USD 265 mio and balance assistance of USD 235 mio was requested for cancellation from WB on account of:

• the annualized weighted average cost of swapped drawn funds, including guarantee fee @1.20% was much higher vis-à-vis the domestic borrowings foe similar tenor.

• the variable spread on the WB Lines of Credit had been increasing over a period of time (from 33 bps in June 2015 to 47 bps as in July 2018). Also, the applicable LIBOR for the said Line has also gone up from 1.30% at the time of contracting the LoC to 2.51% during July 2018.

• The change in PIU was necessitated by the business consideration of the Bank and was a natural outcome of the staff rotation policy. However, the functioning of PIU was not hampered due to change in individuals.

Comments pertaining to Udyami Mitra Vertical The Section at pages 17-18 is relevant to UMV. It is suggested that the relevant paragraph may be rephrased as under: The Project supported SIDBI’s pioneering Udyami Mitra (UM) digital portal, and the learnings from the UM portal informed the launch of the contactless lending platform which has crowded in US$1.9 billion of private sector financing for MSMEs with reduction in turnaround time and credit cost. The Udyami Mitra (UM) portal, a digital MSME lending aggregator and matchmaking platform was launched by SIDBI in 2017.56 By June 2019, 151 eligible lenders including commercial banks, small finance banks (SFBs), NBFCs and Fintech companies as well as more than 250,000 MSMEs were onboard the platform together with certified credit counsellors, credit bureau and MSME hand-holding agencies. Adoption of Fintech solutions by SIDBI has made a significant contribution to MSME lending market as the contactless lending platform based on the UM portal has become the largest online lending market place in India in a short span of time. It is changing the dynamics of access to credit and today contactless initiative is being used for all type of retail (housing, consumer etc.) besides MSMEs thus meeting the vision of universal credit access portal. The Project supported the UM portal by providing key recommendations in a white paper for UM portal’s enhancement and a study on fintech solutions for SIDBI. Qualitative improvements in existing UM portal based on recommendations of the white paper have been implemented viz; an interactive user interface, improved dash boards with data analytics etc. and further improvements are underway. A contactless lending platform was built upon the learnings and foundations from SIDBI’s UM portal and was launched in November 2018. By June 2019, 45,265 new loans, worth INR 127 billion (US$1.9 billion) have been sanctioned on the contactless lending platform, making it the largest online lender in India.59 The contactless lending platform enabled more efficient matching between lenders and MSME borrowers and significantly reduced turnaround time and credit cost, leveraging Fintech solutions and data analytics tools. An in-principle approval is issued to approved borrowers within 59 minutes of


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the online loan application, and MSMEs can choose the most cost-effective loan from a list of financial institutions that provided in-principle approvals. The loan is to be sanctioned/disbursed in 5-7 working days post in-principle approval. Comments pertaining to Venture Capital operations

• While the project helped, through the Advisor, in bringing in new ideas and helping formulate a two-stage rating module, the TA component further strengthened the FOF (Fund of Funds) operations of the Bank. The initiative helped in revisiting the appraisal tools and the monitoring process under Venture Capital Operations of the Bank.

• Besides the Advisor, a technical Advisor has also been appointed who is helping the Bank in digitization of the operational processes of FoF viz. online modules for application processing, drawdown and monitoring including MIS, mobile app for investors’ day and an exclusive website for Fund of Funds Operations at SIDBI etc.

• The Project support from World Bank helped in accelerating the pace of commitments under FFS. The outstanding disbursements grew to 48 AIFs at US$480 million by June 2019, up from 26 AIFs and around US$200 million one year earlier.

• The multiplier effect in helping crowd funding managed to raise about 7x of the Funds committed under FFS. It also helped in direct creation of additional jobs in Start-ups and indirectly in the entire support system.

• Industry stakeholders have recognized the strong crowding-in effect of the FFS, with many private investors taking comfort with FFS as the “anchor” investor and only followed FFS to invest in the AIFs

• To cater to the demand side of the VC industry, the Project helped in organizing the first ever Investors’ Day in April 2019 where selected Start-ups were provided a platform to pitch their ideas before the Fund Managers. These Fund Managers expressed their interest in taking the investment process to the next level. It is felt that such initiatives shall help strengthen the Start-up ecosystem in the country. The second edition of the Investors Day is planned for October 2019.

• A resource was also provided under the TA component as a Consultant for branding and communication with startup related work. This is likely to create awareness about FFS in the ecosystem.

• SIDBI has also come out with a State of the Sector report under the project and the same is to be made public soon.


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ANNEX 6. SUPPORTING DOCUMENTS

1. Project Appraisal Document (February 2015) 2. Loan Agreement (March 2015) 3. Project Restructuring Paper (March 2019) 4. ISR and Aide Memoire (June 2015) 5. ISR and Aide Memoire (August 2015) 6. ISR and Aide Memoire (February 2016) 7. ISR and Aide Memoire (March 2016) 8. ISR and Aide Memoire (September 2016) 9. ISR and Aide Memoire (January 2017) 10. ISR and Aide Memoire (June 2017) 11. ISR and Aide Memoire (October 2017) 12. ISR and Aide Memoire (April 2018) 13. ISR and Aide Memoire (May 2018) 14. ISR and Aide Memoire (Jan 2019) 15. ISR and Aide Memoire (August 2019)

implementation completion and results report (icr)...

Documents