In India, availability of finance for India’s micro, small and medium enterprises (MSME) gravely fall behind the actual need and demand – with direct implications on employment and income for a large part of the population as well as for the productivity of the Indian economy as a whole. Within the framework of Indo-German Development Cooperation, this gap is being addressed by way of cooperation with SIDBI, the Small Industries Development Bank of India. Through a series of programmes dating back to the 1990s, KfW – as Germany’s leading promotional bank for small and medium enterprises (SME) - has shared its standards and experiences in promoting SME with SIDBI, thus contributing to the mitigation of existing market failures in India.
Access to finance for India’s MSME – a major source of employment, productivity and exports – remains limited and expensive. Just 60% of the incremental working capital needs of small and medium enterprises are met by banks. The supply of financing for investments (e.g. equipment and machinery) also falls awfully short to demand. This environment forces enterprises to bridge this gap by way of, e.g. internal accruals and informal arrangements or - in absence of these options – to scale down business activities accordingly. Worst hit by this gap is the so-called “missing middle,” the segment not covered by existing initiatives targeted at microenterprises and more mature SME. The limited product and service offerings from banks also constrain access, especially for first generation entrepreneurs and start ups, which tend to require more specialized products which meet their financing needs.
Within the framework of Indo-German Development Cooperation, these gaps are being addressed by way of cooperation with SIDBI, the Small Industries Development Bank of India. Established in April 1990 under an Act of Parliament, SIDBI is the principal financial institution for promoting, financing, and developing the MSME sector, and acts as a nodal agency for governmental programmes in this area. SIDBI provides indirect assistance to the MSME sector through refinance to primary lending institutions such as commercial banks, state finance corporations and state industrial corporations. It also provides direct financial and technical assistance to its target group.
In a way, the extensive and longstanding cooperation between KfW and SIDBI is a natural outcome of their respective mandates. SIDBI is India’s national bank for the promotion of MSME. KfW is Germany’s leading promotional bank for SME. Through a series of credit lines with a history dating back to the 1990s, KfW has shared its standards and experiences in promoting SME with SIDBI, thus helping address critical financing gaps.
With assistance from KfW, SIDBI has launched specialized promotional programmes for energy efficiency and cleaner production investments. Capacity building assistance in these specialized focus areas has had multiplier effects, as SIDBI has evolved into a knowledge provider for smaller banks that receive refinance from SIDBI, e.g. in the area of “green finance”. More recently, further support to SIDBI for developing new risk capital products to finance innovative activities in SME, with a special focus on products and services in the area of energy efficiency and environment, has been initiated.
On behalf of the German Government, KfW has committed close to EUR 390 million in interest reduced loans and grant assistance to SIDBI for both, ongoing and planned programmes.