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Economy

RBI Refinances SMEs With 5,000 cr. (through SIDBI)

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RBI has decided to help SMEs, as part of its five pillar approach. In a notification, it has decided to provide refinancing to SIDBI, which is the Small Industrial Bank of India. (SIDBI Lends, and RBI gives SIDBI money against that loan) The refinancing is limited to Rs. 5,000 cr.

SIDBI has a number of interesting financing schemes that can be used by small and medium enterprises, even the services sector. They even have debt for technology companies!

The interest rate (to SIDBI) will be the prevailing 14-day term repo rate, and given for a fixed term of 90 days beyond which it can be rolled over for another 90 days at the then prevailing term-repo rate and so on.

RBI will provide this where SIDBI has financed receivables. Essentially, the problem is that large companies haven’t been paying small companies who supply them goods or services, because of the slowdown or lack of approvals. Many of these large organizations are PSUs, power projects and government departments. This puts small companies in a fix. This refinancing will help SIDBI give them finance at a lower cost.

How much lower? Term repo rates are 8.4% currently, lower than any other mechanism available for financing. SIDBI will pass the benefit on to the SME, who will then have more elbow room.

In the same notification, the RBI has added additional credit to “Medium” enterprises to the priority sector till November 2014. This ensures that any “incremental” lending to what are classified as medium enterprises (2-5cr. investment in machinery) will be within bank credit requirements. Banks are required to lend 40% of their loans to the priority sector.

(Medium enterprises can’t just pay back their loans and get new ones cheaper – incremental means that their additional borrowings beyond what they have outstanding on November 13 will be in the priority sector)

Impact: Good for many SMEs who have financed from SIDBI, who will hopefully pass on the benefit soon. Also good for medium entreprises and service companies.

It’s not clear what happens in case of a default – of course RBI won’t take the hit, SIDBI will. But SIDBI doesn’t have very “loose” lending procedures, and it’s quite likely this will stimulate SMEs. What small businesses must do is to get more debt, especially when they provide goods or services to large companies – it’s times like this when having the breathing room gives you an advantage.