Capital, commitment and MSME; SIDBI's ambitious ascent
Authored by Mohit Ralhan, CEO, TIW Capital
The MSME industry plays a crucial role in the development of the Indian economy. They contribute nearly a third of India's GDP, accounting for almost half of the country's exports and providing employment to over 12 crore people. However, a significant credit gap looms over this sector, with only a fraction of MSMEs availing credit from formal sources. This is where the Small Industries Development Bank of India (SIDBI) has been playing a crucial role in bridging this gap.
SIDBI's commitment to the MSME sector is evident in its grand vision of expanding its balance sheet to INR 5 trillion over the next two years. At present, the bank's share of total lending to MSMEs stands at 14 per cent, but it is targeting to command a 25 per cent share within the next three years. This underscores SIDBI's unwavering commitment to propel growth and offer unwavering support to the engine of the Indian economy.
Access to capital is the lifeline of growth and innovation for MSMEs, yet many face daunting challenges in securing financing in the current financial landscape. Traditional banks often demand stringent collateral, along with a lengthy credit history, rendering financing out of reach for numerous small enterprises. In response to this, SIDBI has devised innovative solutions that cater to the unique needs of MSMEs.
One such innovation is the "GST Sahay" app, which facilitates collateral-free lending based on cash flow assessment. This digital platform provides "on-tap" invoice-based collateral-free financing. Furthermore, SIDBI's "Udyam Assist Platform" serves as a bridge to formalize informal micro-entities (IMEs) by issuing Udyam Certificates, thereby enabling access to markets, financial services, and government schemes.
SIDBI has launched a venture debt program as well to help startup founders who don’t want to dilute equity in the early stages. This alternative to traditional bank loans offers far more flexibility for start-ups to invest in growth. Through strategic partnerships with various funds, SIDBI has played a pivotal role in stimulating early-stage debt investments. There is a growing demand for venture debt, as seen in a three-fold jump in the AUM of such funds over the last three years. SIDBI’s foray into the space will further develop the eco-system.
In an era where environmental sustainability holds paramount importance, SIDBI has extended its commitment beyond traditional financing. The bank has introduced several schemes to promote green finance among MSMEs. This endeavour has borne fruit, with SIDBI's green finance portfolio witnessing a remarkable sixteen-fold increase in FY 2023.
SIDBI's Cluster Development Fund also gained momentum by providing financial assistance to State Governments for the development of MSME infrastructure. These initiatives not only foster growth within the MSME sector but also contribute to regional development and job creation.
Industry experts have also noted the bank's pivotal role in stimulating innovation and fostering growth within the sector. In particular, the Venture Capital industry views SIDBI's initiatives as catalysts for nurturing a thriving ecosystem of start-ups and small businesses. Through the Fund of Funds for Startups (FFS) Scheme, SIDBI has sanctioned approximately Rs 9,500 crore to Alternative Investment Funds (AIFs), which, in turn, invest in promising start-ups.
In India, there are approximately 63 million MSME corporations, but only 25 million have accessed credit through formal channels. It is anticipated that the total number of MSME corporations will reach 75 million by the fiscal year 2025. Major demand for financing will come from 50 million entities which will be new to credit. With the swift advancement of information and technology, the credit underwriting process for MSMEs will evolve to become more reliant on information. It will become quicker and more reliable. Financial institutions will have to skillfully leverage the potential of data to identify eligible new-to-credit MSMEs and extend credit to them.
SIDBI’s ambitious ascent in MSME financing is a testament to its unwavering commitment to fuelling economic growth and innovation. By addressing the capital needs of MSMEs, reshaping the financing landscape, and promoting sustainability, SIDBI emerges not just as a bank but as a driving force behind the nation's economic transformation. As SIDBI continues to evolve and expand its reach, its ambitious goals are poised to create a brighter and more prosperous future for India's Micro, Small, and Medium Enterprises.
Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.