The Small Industries Development Bank of India (Sidbi) has revealed that it will lend directly to SMEs, rather than through banks in a new change of direction.
A report earlier this week by Indian business daily Economic Times said the move could benefit almost 50 million small businesses with loans with an interest rate of three percentage points lower than those banks lend out.
Sidbi chairman and managing director Mohammad Mustafa told Economic Times that the state agency had received regulatory approval to lend directly to small firms at 8.1% (Sidbi gets them at 5%) through its 80 branches or on the internet via loans of up to five years.
The report says the funds are drawn from the Reserve Bank and form part of the penalty that state and commercial banks are forced to make if they don't meet SME lending targets (under the Reserve Bank's priority sector policy). The shortfall has to be paid over has a penalty by banks (see this earlier post for more).
The state agency does currently do some direct lending, but on a small scale, and only in niche financing support such as risk capital and receivable finance. In the 2016/17 year (the most recent for which figures are available, almost 85% of its total loan amount were via financial intermediaries.
There are risks for the state lending directly - as the state, unlike the private sector can't afford to retain the services of highly skilled bankers necessary to ensure write-offs are kept low. The choice of loan recipients is also more likely to be politically influenced.
Yet something has to be done - over four in five rupees lent out by banks to businesses, go to large firms.
Loans to small and micro businesses made up just 17.4% of total credit extended by banks as of November last year, according to the Finance Ministry's Economic Survey of 2017-18,
On top of this loans to small business fell 0.4% to 3,683 billion rupees between end of March and December 22 last year, according to latest Reserve Bank data.
Measures to boost SME finance
Meanwhile Finance minister Arun Jaitley (pictured above) outlined several measures yesterday in his budget speech to boost SME lending.
The government hopes that these measures might go some way in driving lending to small businesses.
This might be wiser, than to fiddle the system by changing the definition of non-performing assets that banks report for small businesses, from loans not paid after 90 days, to those not honoured after 180 days, as a report last year suggested the state was considering.
Timm is a South African who writes on small business. Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a