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This chapter covers the trends in bank lending to small and medium enterprises (SMEs) and highlights the various initiatives taken by banks and financial institutions to promote SMEs.

Flow of Credit to SSI/SME Sector

The small scale industries (SSIs), who are also referred to as micro and small enterprises, play a very important role in the Indian economy as they contribute significantly towards exports, employment generation, rural industrialisation and promotion of entrepreneurship; due to these reasons, India’s industrial policy evidently gives great importance to the development of SSIs. India’s banking system has been an important source of credit for the industry in general and for SMEs in particular.

According to the RBI, advances to micro and small enterprises (MSEs) as defined under MSMED Act 2006, are a part of the priority sector advances. The total outstanding credit disbursed by public sector banks to MSEs as on the last reporting Friday of Mar 2009 was Rs 1,909.68 bn, which constituted 26.5% of total priority sector advances.

The total credit disbursed by private sector banks to the small enterprises sector as on the last reporting Friday of Mar 2009 was Rs 479.16 bn, which constituted 11.8% of adjusted net bank credit (ANBC) and 25.2% of their total priority sector advances.

The share of loans in the total bank credit provided by the public sector banks to MSEs has declined since 2002; however, according to the latest trend, up to Mar 2009, a turnaround is in sight. Public sector banks were advised to make operational at least one specialised SME branch in every district and centre that had a SME cluster; consequently, by the end of Mar 2009, banks made operational 869 specialised SME bank branches.

As on the last reporting Friday of Mar 2009, different categories of banks as a group had achieved an overall target for priority sector lending. 3 out of 27 public sector banks and 5 out of 22 private sector banks failed to achieve the overall priority sector lending target of 40%. Similarly, 4 out of 27 foreign banks were not able to achieve the overall priority sector lending target of 32%.

Banks SME Initiatives

Banks are turning their focus towards SMEs that have tremendous growth potential, with the decline in retail and corporate businesses. Banks are now offering to SMEs, various products from working capital loans to term loans. Some of the initiatives are discussed in subsequent sections.

SIDBI – SME Overview

Established in 1990, SIDBI is the principal financial institution that is engaged in promotion, financing and development of SMEs. It also coordinates functions of other institutions engaged in SME lending. SIDBI provides financial assistance to small scale sector under various categories, namely refinance assistance to primary lending institutions (PLIs), indirect equity assistance, direct assistance, and promotional and developmental assistance.

The range of products and services offered by SIDBI for SMEs are direct finance, bills finance, refinance, international finance, micro finance and fixed deposit schemes. It also provides government subsidy schemes to the SMEs in textile, leather and food processing industries.

Further, SIDBI also acts as a nodal agency for implementing the government’s various schemes like Technology Upgradation Fund Scheme for the textile industry (TUFS), Scheme of Technology Upgradation/Setting up / Modernisation/Expansion of food processing industries, Integrated Development of Leather Sector Scheme (IDLSS) etc.

Special Project

SME Financing and Development Project (SMEFDP)

SIDBI is an implementing agency of the SME Financing and Development Project (SMEFDP), which is a World Bank-led multi-agency/ multi-activity project for financing and developing SMEs. The project was introduced with an objective to attend to demand and supply-side issues of MSMEs through financial and non-financial services. The Department of Financial Services, Ministry of Finance, is the nodal agency and World Bank, DFID, UK; KfW, Germany, and GTZ, Germany are the international partners for the project.

Key Highlights

Apart from this, SIDBI has set up various institutions for development and financing of SMEs, namely

NABARD - SME Initiatives

NABARD is an apex development bank established for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts.

In FY06, NABARD decided to develop 5 clusters on its own and 50 additional clusters partnered with other government agencies to promote rural industrialisation, raise the income levels and living standards of artisans. Further, during FY09, the cluster development programme was extended to 39 clusters, that is, 37 clusters under participatory mode, 1 under intensive mode and 1 under eco-tourism mode, which took the total number of clusters adopted under this programme to 101 (90 participatory, 6 intensive, 3 rural/ agri tourism, 1 NPRI and 1rural tourism cum handicrafts) as at end March 2009.

Realising the growth potential of SMEs, many banks have started offering products and services to this segment as highlighted in this chapter. Moreover, the SMEs have to offer more growth opportunities due to globalisation; however, this growth strongly depends on the SMEs’ ability to scale-up their capacity and embrace new technology, which is a major hurdle in present times. The banks can help them overcome such hurdles and cater to them through innovative products and services.