Shot in the arm for SIDBI

N.K. Maini, Deputy Managing Director of the Small Industries Development Bank of India (SIDBI), a major re-financing institution for micro, small and medium enterprises (MSMEs), is happy. "There is a clear-cut emphasis on MSMEs and financial inclusion," he says. He is referring to the 100 per cent increase in the allocation to SIDBI, from Rs 5,000 crore to Rs 10, 000 crore, which will now empower the organization to reach out to more SMEs through commercial banks.

Finance Minister P. Chidambaram also announced a Rs 500-crore Credit Guarantee Fund for factoring to be operated by SIDBI. This is expected to give a fillip to factoring or receivables financing, which has failed to pick up substantially after the Factoring Act was passed in 2011. "This will be a game changer in boosting factoring services," says Maini. "Elsewhere in the world, most of the working capital financing to MSMEs happens through factoring." Maini says he believes SIDBI has enough experience to run the Credit Guarantee Fund, as it has been running the Credit Guarantee Trust for Micro and Small Enterprises, along with commercial banks as member lending institutions, to give collateral-free loans up to Rs 1 crore to micro and small units.  

The allocation to the India Microfinance Equity Fund, operated by SIDBI, has been increased by Rs 100 crore. This fund lends in the form of equity and quasi-equity to microfinance institutions in underserved areas.

Maini is also pleased about the proposal to give non-tax benefits to MSMEs which receive incentives such as getting bank loans under the 'priority sector'.  Chidambaram said: "Small companies want to remain small to avoid paying taxes." Among other benefits, micro, small and medium enterprises (classified according to their investment in plant and machinery) are treated as 'priority sector' by banks for loans . They will continue to get these benefits for the next three years after they graduate to the next level. For example, a manufacturing business with under Rs 5 crore of investment in plant and machinery, classified as small, would continue to retain the benefits for three years after it becomes a medium enterprise. "It is a great boost," says Maini.