Mumbai: The Small Industries Development Bank of India (Sidbi), which has so far confined itself to giving loans to small businesses, is restructuring its operations to stay relevant in a changing market.
As part of the restructuring, Sidbi will focus more on taking equity exposure of up to 20% in start-up firms and growth-stage firms across the sector. Sidbi will also act as a so-called fund of funds to invest in small firms.
Sidbi will make the investments with money drawn from the Rs5,000 crore India opportunities venture fund allocated by the government, said N.K. Maini, deputy managing director of Sidbi.
The lender has already made select equity investments of about Rs700 crore, Maini said.
“We did a lot of introspection in-house and were in dialogue with different market participants as part of changing the business model. We felt a need to reposition ourselves and try to fill in the gaps of funding in the space for small companies,” Maini said.
Started in 1990, Sidbi has been acting as the principal financial institution for the promotion,?financing?and development of the micro, small and medium enterprise (MSME) sector. Typically, it lends to small firms at 11.75%-13.5%, slightly lower than the rate that commercial banks charge.
The SIDBI (Amendment) Bill, 2012, introduced in the lower house of Parliament in May, is expected to empower Sidbi to take quick action against defaulters and enable the speedy disposal of such cases.
The National Bank for Agriculture and Rural Development (Nabard), which, too, has been funding small firms until recently, is also realigning its funding model.
Last year, Nabard began lending directly to infrastructure projects at commercial rates as part of its transformation, pitting it against the traditional lenders to the sector besides expanding its role in financing state-government sponsored projects, among other things.
Sidbi decided to take exposure by way of pure equity or long-term debt up to 20% in small start-ups and growth-stage companies, given the scarcity of adequate risk capital for such firms, Maini said.
“A start-up firm or a company at the growth stage...typically struggles to get equity capital as investor interest in such firms is relatively poor. Our equity investments will focus on such companies to help them grow,” Maini said.
Experts warned that before taking equity exposure in companies, Sidbi needs to ensure that it has the expertise to evaluate the quality of such investments.
“Equity is risk capital. Though one should not generalize that investing in small companies are riskier, Sidbi needs to have the necessary expertise to identify the eligibility of these companies and must do the due diligence,” Naresh Makhijani, a partner at KPMG, said.
Santosh Singh, an analyst at Espirito Santo Securities, too, said the risk on Sidbi’s investments might increase as it shifts focus to equity investments. “Sidbi’s mandate has been to finance small companies. By changing from debt to equity, they are increasing the risk of their portfolio.”
Sidbi has invested Rs180 crore in venture capital funds and may invest Rs300 crore more in a few funds, Maini said. While there is an estimated Rs2.5 trillion requirement of risk capital for small companies, the availability from formal sources is just around Rs3,000 crore, according to Maini.
Sidbi is engaged in providing refinance to select regional rural banks and commercial banks to be lent to small companies. For the fiscal ended March 2012, Sidbi’s outstanding credit to the MSME sector rose to Rs53,785 crore while its cumulative disbursement stood at Rs2.45 trillion among 32.5 million borrowers. Its net profit rose to Rs567 crore in fiscal 2012 from Rs514 crore in the previous year. Its net worth stood at Rs6,399 crore.
Sidbi plans to increase its funding to companies in the services sector, which typically find it difficult to secure loans from the commercial banks, due to a perception that they are riskier to fund, Maini said. According to Maini, banks are willing to lend to firms in manufacturing sector as these possess underlying assets.
The lender, which has so far lent around Rs1,200 crore to services sector firms, wants to grow at 30-35% in the current fiscal.
The lender is also in talks with consultants to strengthen its presence in the loan syndication business. Sidbi will act as a facilitator to provide loan assistance through syndicates, or groups of banks, to MSMEs.
The consultants will prepare project reports about firms seeking investment and take the proposal ahead, Maini said.