Refinance from SIDBI is More Profitable for Banks than Mobilising Deposits
SIDBI's Efforts to Help Small Industries
Slump in industrial production
Small Industries Development Bank of India or shortly called SIDBI has increased its credit to MSME (Micro, Small & Medium Enterprises) sector by 22% to Rs.46331 crore for the financial year 2010-11. In 2011-12, SIDBI wants to grow by around 35%. Sushil Muhnot is the Chairman & Managing Director of SIDBI. But questions are raised as to whether SIDBI is able to achieve the planned growth rate of 35% during the current year in light of high interest that is ruling in the Indian economy. Reserve Bank of India is raising interest rates periodically in the name of attacking inflation. This has affected the growth in the economy. For the first time, there is a slump in the industrial production. Many sectors like automobiles, construction, real estate and home loan segment have been affected because of high interest regime in the economy.
SIDBI is confidant
But inspite of all the constraints, SIDBI is confidant of achieving its goal in the current year. SIDBI, besides lending directly to the MSME sector, also intends to participate in the equity financing of the MSME. SIDBI’s cumulative disbursements at the end of March 2011 stood at over Rupees two lakh crores. Recently 13th Annual General Meeting of SIDBI was held. MSME has many routes to raise debt and availing credit from SIDBI is only one of them. There are thousands of small enterprises functioning profitably without having any connection with SIDBI at all. But when it comes to the question of equity, the MSME sector finds it difficult to raise funds.
SIDBI’s net profit increases
For providing small and medium enterprises easy access to stock markets, SIDBI intends to start an SME Exchange in the National Stock Exchange premises. SEBI has already approved SIDBI to set up the exchange. SIDBI is profitably functioning at the moment. It reported a net profit of Rs.514 crore in 2010-11 which was 22% higher than the net profit of Rs.421 crore in 2009-10. As on 31st March 2011, SIDBI achieved another milestone when its total assets crossed the coveted mark of Rs.50000 crore. Net worth of SIDBI rose to Rs.5979 crore. SIDBI declared a dividend of 25% for the year 2010-11. SIDBI also plans to launch a venture capital fund with a total corpus of Rs.1000 crore. Already SIDBI has received commitment for Rs.500 crore.
CMD has rich experience
The CMD post in SIDBI was vacant since July 2010. At last, after a lot of delay, the government of India appointed Sushil Munhot as the CMD in April 2011. He was earlier working as Executive Director in IDBI Bank. Sushil Munhot is a textile engineer with an MBA degree. He served in the IDBI Bank for 28 years. He carries a rich experience with him in diverse areas like treasury, project finance, capital markets, retail banking, risk management and agriculture among others.
Tie-up with Japanese agency
SIDBI and Japan International Corporation Agency have entered into a tie-up for financing power saving projects undertaken by Indian MSME sector. As per this agreement, SIDBI will receive a loan of 30 billion yen (Rs.5300 crore). The agreement was signed in Tokyo in June. The main purpose of this agreement is to promote energy saving projects by MSME sector in India through financing by SIDBI. SIDBI will also provide refinance assistance to other commercial banks for the loan they extend to MSME sector. This is Phase-2 of the agreement that is being implemented by SIDBI with the Japanese agency. Already Phase-I agreement has been implemented in 2008-10.
Banks will find it profitable to avail SIDBI refinance
SIDBI wants to widen its refinance window. Banks are finding an opportunity to reduce their cost of funds particularly at a time when interest rates are ruling high. In the current year, banks are expected to avail a refinance amounting to Rs.30000 crore. Last year in 2010-11 the banks availed a refinance of Rs.22000 crore. As the deposit rates are rising in the banking industry, it is comparatively profitable for the banks to avail refinancing from SIDBI. SIDBI is headquartered in Lucknow. SIDBI normally gives refinance for term loans extended by commercial banks to small and medium industries for the purpose of setting up industrial projects. SIDBI also gives refinance for expansion, modernisation and diversification projects. There is another advantage also for the banks in availing refinance from SIDBI. Apart from cost of funds that is shooting up, the deposits received by the banks have to be taken into account for the purpose of computing SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio). But refinancing from SIDBI is exempt from all these provisions. Banks need to invest 24% of their deposits in government bonds. Banks are required to maintain 6% of their deposits as liquid cash with RBI on a fortnightly basis. Besides all these things, raising multiple deposits from different sources increases cost of handling for the banks whereas refinance is availed from a single source, which does not involve any cost of mobilisation.
Increase in refinance assistance by SIDBI
The government of India has provided Rs.5000 crore budgetary support to SIDBI in the current year. SIDBI will also raise debt amounting to Rs.15000 crore through various instruments. It will avail loan of around Rs.4000 crore from multilateral credit institutions to augment its funds base. In 2010-11, SIDBI increased its refinance assistance to banks by 35% to Rs.22900 crore from Rs.17000 crore in the previous year. SIDBI has planned to introduce two new products. One is Growth Capital and Equity Assistance for MSMEs (GEMs). This will provide equity/quasi equity to MSMEs. The other one is called Flexible Assistance for Capital Expenditure (FACE) which involves multiple repayment schedules. The two products were launched in September. The two products have been tailor made to address to the needs of the MSME sector.
Venture capital subsidiary
SIDBI has a subsidiary called SIDBI Venture Capital Ltd. This subsidiary provides equity assistance to the corporatized entities in the MSME sector. SIDBI also proposes to launch three other venture capital funds worth Rs.850 crore this fiscal year. SIDBI feels that the domestic market for the MSME sector is buoyant. The venture capital funds will support this growth tale. MSME sector grew by over ten per cent last year. This year also it is expected to post a double digit growth rate though the economy is not doing well.
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