This chapter covers the trends in bank lending to small and medium enterprises (SMEs) and highlights the various initiatives taken by the banks and other 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 micro and small enterprises as on the last reporting Friday of Mar 2008 was Rs 1,486.51 bn, which constituted 10.9% of adjusted net bank credit (ANBC) and 24.4% 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 2008 was Rs 460.69 bn, which constituted 13.4% of ANBC and 28.2% of their total priority sector advances.

The share of loans in the total bank credit provided by the public sector banks to medium and small enterprises (MSE) has declined since 2002; however, according to the latest trend, up to Mar 2008, 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 2007, banks made operational 636 specialised SME bank branches.

As on the last reporting Friday of Mar 2008, the public sector banks achieved an overall target for priority sector lending. Private sector banks also achieved the overall target for priority sector lending as a group but two out of 23 private sector banks failed to achieve the overall priority sector lending target of 40%. Similarly, foreign banks achieved the overall target for priority sector lending as a group but four out of 28 foreign banks were not able to achieve the overall priority sector lending target of 32%.

IDBI Bank SME Initiatives – Overview

In the past IDBI Bank Ltd has played an important role in developing the industrial landscape of India. The bank has accomplished a pivotal role in creating, developing and improving infrastructure sectors like power, airports, roads, and telecommunication. The bank has since reinvented itself as a universal bank by providing a full range of banking products and services for both corporate and retail borrowers, including the agriculture and MSME segments.

IDBI Bank has re-organised its businesses around two groups – corporate banking and retail banking. The corporate banking group has three customer-focused verticals namely infrastructure corporate group (ICG), large corporate group (LCG) and mid corporate group (MCG). Within the retail banking group, the personal banking vertical focuses on the banking needs of individuals, and agriculture business vertical takes care of rural / agriculture banking. The SME vertical has been created to ensure that the bank provides special focus to the banking needs of Micro, Small and Medium Enterprises (MSMEs) and also taps successfully the growth opportunities offered by this segment.

As a part of the bank’s SME business strategy, it has developed a special business model to serve the SMEs in India. The bank has plans to set up 40 city SME centres (CSC), out of which 17 CSCs have already been launched. These CSCs are the bank’s hubs to serve SME clusters. The bank also has dedicated SME desks in several branches across the country. CSCs provide support in terms of loan processing and undertake back office-related activities to strengthen the credit delivery mechanism, while SME cells at the branches serve as front offices for sales and customer service. The bank has developed the capability to process loan applications rapidly through a dedicated team of credit officers in each CSC. These credit officers are empowered to take quick decisions, thereby allowing the bank to achieve fast turnaround on loan applications. In the branches, the dedicated relationship managers (RM) are the single points of contact for the customer.

In order to serve and support the SME sector, the bank is in the process of developing and building an efficient SME sales and service network and an effective customer management system, besides client friendly, easy to understand and competitive products. A dedicated streamlined credit decision process, which obviates unnecessary information, has been put in place to facilitate hassle-free credit delivery.

The bank plans to adopt the following strategies to serve SME clients:

• Focus on 40 major cities (cluster-based approach) where almost 90% of the SME opportunity lies
• Offer tailor-made products for different customer segments
• Leverage the technology platform to provide world-class banking services at reasonable cost
• Provide adequate and timely credit facilities to SMEs, and
• Ensure faster turnaround-time (TAT) through specially constituted CSCs across the country.

The bank has been continuously upgrading its state-of-the-art technology platform. All branches of the bank are 100% corebanking networked and thus enable the customers to seamlessly transact from any branch. Moreover, customers can use various channels to transact business like telephone, mobile and internet, besides doorstep banking.

IDBI Bank has been introducing various client-friendly products for SMEs. In addition to the normal products comprising term loans, working capital facilities, the bank also offers products for dedicated target groups.

Brief particulars of some SME products provided by the bank are as under:

IDBI Sulabh Vyapar Loan: This product has been exclusively designed for all kinds of traders and service enterprises to provide them complete business solutions.

Vendor Finance Programme: This programme meets pre-sale and post-sale funding requirements of vendors of small and large companies.

Dealer Finance programme: This programme is an one-stop solution for dealers of large companies for their working capital and other requirements.

Working capital finance to IT and ITeS companies: The bank provides short-term working capital and meets the forexrelated requirements of the IT and ITeS provider companies.

Loans to professionals and self-employed: The bank provides a complete business package for professional and selfemployed persons.

Loans to small road and water transport operators: Under this scheme, the bank meets the business requirements of all kinds of road and water transport operators in the SME segment.

Loans to medical practitioners: The bank caters to the needs of medical practitioners who aspire to set up their own clinic, hospital or for any of their business requirement.

Entrepreneur Development Fund: The Fund aims to provide assistance by way of equity/ soft loan for meeting the financial gap for establishing the business.

SME Hosiery Current Account: This current account product is tailor-made keeping in view the specific requirements of the SME Textile Hosiery units across the country

Loans under CGTSME: Collateral free loans up to Rs 1 crore are provided by the bank for new and aspiring SME entrepreneurs willing to set up a new unit or to start a new business, and also for those entrepreneurs who wish to access bank funding for their business but are not able to provide any collateral.

Trade finance and forex: The bank has a robust and flexible system to take care of different trade finance related needs of its customers. It has dedicated offices for handling different activities related to trade finance like offering bank guarantees, issuing letter of credits, for both local and foreign trade. All activities related to foreign exchange (remittances, capital account transactions, forward contracts, inland bills) are duly taken care of by the bank.

The bank also offers specialised structured products to SMEs who have a relationship with its corporate clients. SMEs who are a part of the a company’s value chain can avail structured products at competitive terms and conditions, which improves their cash flow substantially. Further, specially-designed current accounts that provide various benefits to SME clients based on the average outstanding balance are available for all banking needs.

IDBI Bank has effectively implemented the government’s MSME package. Various measures that the bank has initiated under the package include grant of need-based ad hoc working capital demand loan, increase in working capital limits, reduction/relaxation in margin, extension of moratorium period, and re-scheduling /re-phasing of term loan etc.

As on Mar 31 2009, the total priority sector advances provided by IDBI Bank was Rs 227.38 bn which constituted 27.52% of ANBC. IDBI Bank’s priority sector advances budget for end- Mar 2009 was Rs 223.10 bn. For FY09, the bank has set an incremental budget of Rs 70.77 bn for priority sector lending.

Other 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

   •   The entire credit allocation was utilized to benefit 927 MSMEs
   •   The BDS market was developed by strengthening both the supply-side (BDS providers) and demand side (sensitisation and demand articulation of MSMEs)
   •   Extended capacity building support was provided to SMERA for scaling up exclusive rating of MSMEs and to CIBIL for setting up SME Commercial Bureau.

Apart from this, SIDBI has set up various institutions for development and financing of SMEs, namely
   •   Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE)
   •   SIDBI Venture Capital Ltd (SVCL)
   •   India SME Technology Services Ltd (ISTSL)
   •   SME Rating Agency of India Ltd (SMERA)
   •   India SME Asset Reconstruction Company Ltd (ISARC)

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.

NABARD had selected five cluster and 50 additional clusters for intensive development and has partnered with other government agencies to promote rural industrialisation, to strengthen existing clusters and to develop new clusters in FY06. Further, during FY08, the cluster development programme was extended to 19 clusters, that is, 17 clusters under participatory mode and 2 under intensive mode, which took the total number of clusters adopted under this programme to 61 (56 in partnership and 5 under intensive mode) as at end March 2008.

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.