Around 30,000 small units are expected to benefit from the project.
The board of the Asian Development Bank (ADB) has sanctioned a loan of $300 million (around Rs 1,380 crore) to develop and expand India’s micro, small, and medium enterprises (MSMEs), the second largest source of employment in the country after agriculture.
The bank’s board of directors approved a sovereign loan of $50 million (around Rs 230 crore) and a partial credit guarantee of up to $250 million (around Rs 1,150 crore) for the Micro, Small and Medium Enterprise (MSME) Development Project.
The $50 million loan will go to the state-owned Small Industries Development Bank of India (SIDBI) to fund enterprises that have become too large to tap traditional microfinance, but are unable to access conventional bank funds — the so-called ‘missing middle sector’ of MSMEs.
The partial credit guarantee (PCG) facility will allow participating public sector commercial banks to source medium- to long-term funds from international capital markets for onlending to existing MSME clients.
“The objective of the project is to remove key bottlenecks to MSME financing and development, thus helping pave the way for sector growth, competiveness and employment creation,” said Peter Marro, Senior Investment Specialist in ADB’s South Asia department.
“The sector’s development has been hamstrung by the inability of these enterprises to tap adequate, competitively priced-long term funds,” Marro said. Around 30,000 MSMEs are expected to benefit from the project.
The partial credit guarantee facility will help foster the development of domestic capital markets by exposing India’s public sector banks to international markets. The financing arrangement will also help to offset the potential for “crowding out” in domestic credit markets, as the government has borrowed additional funds for its economic stimulus measures in the wake of the global crisis.
The loan has also been structured to ensure that women get ample assistance, with 30 per cent of the funds provided through SIDBI’s direct lending operations to be directed to qualified female MSME entrepreneurs.
The loan, from ADB’s ordinary capital resources, has a 15-year term, with a grace period of three years and an interest rate determined in accordance with ADB’s LIBOR-based lending facility. It includes a government guarantee to ADB.
The PCG comes without government counter-indemnity, is from ordinary capital resources, and will be made available to one or several participating public sector banks under the programme.