Small Industries Bank of India (SIDBI) is likely to lend to about 20 alternative investment funds (AIF) in the second half of the current financial year from the remaining Rs 1,000 crore under its Fund of Funds initiative, Sivasubramanian Ramann, Chairman and Managing Director told Moneycontrol in an exclusive interview on September 14.
AIF is a privately pooled investment vehicle established or incorporated in India that collects funds from investors, whether Indian or foreign, for investing in accordance with a defined investment policy. As part of the Startup India Action Plan, in June 2016, the Union Cabinet approved Fund of Funds for Startups (FFS) with a corpus of Rs 10,000 crore to be managed with SIDBI.
Of the total funds, Ramann said around Rs 9,000 crore has been committed and the bank is planning to utilise the remaining in the second half of this fiscal.
Further, the bank aims to increase its direct lending portfolio to 15 percent of the total loan book in the next two to three years, he during an interview at Global SME Finance Forum 2023.
Edited excerpts from the interview:
Your aim is to lend at half the rate at which microfinance institutions lend. What is the rationale behind this and will it help your bank?
The rationale is very simple. Right now, the microfinance industry is based on borrowing from the banking sector, and then lending to small informal entities. People do extremely small businesses, and therefore they are largely well below Goods and Services Tax (GST), and sometimes even below income tax, so they don't even have a bank account. Now, these people find it very difficult to get a loan from a bank because there is no information. So what we are really saying is that these people anyway have no physical collateral, we have to try and give them some data points.
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Could you elaborate further?
Now, it will take time for data to be built. They are using bank accounts, and sometimes they are even using QR codes, but the microfinance institutions, because of their high-cost structure, are serving them, but at a high rate. We have all accepted that it is credit availability, rather than the price of credit, which is more important because you need the credit, you are willing to pay 25- 26 percent. Small borrowers who are looking at building slightly larger businesses want Rs 1 lakh as a loan; MFIs cannot give it to them. That is where we are stepping in -- what is being called the missing middle. We are specifically targeting the missing middle so that we can come in with bank finance, which typically may be at 14-15 percent. So, it is at half the rate of what an MFI is giving.
We also have an intermediary cost because we need some partner on the ground, but because we are running it entirely digitally, there is a very low cost of credit delivery.
How much do you plan to raise through NCDs in the second half of this fiscal?
We do a lot of bond market borrowing. So, commercial paper and bonds, and then also we get bilateral lines from other banks. These are the three main instruments of our market borrowing. And then of course, we get some concessional funds, which is typically the RIDF (Rural Infrastructure Development Fund) money that comes from the Reserve Bank of India (RBI). This is really how we are structured. If I look at the liability side, about 60 percent is market borrowings and 40 percent is RIDF money.
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Is there any other company in the pipeline you are planning to partner with after Tata Power Solar?
It is a bold project where we want to cover every MSME with a rooftop solar. And that is the reason we have tied up with Tata Solar. With their network of EPC, or installation contractors, or ESCOs, as they are also known, we want to cover maximum ground across the country. We are offering this at a slightly lower percentage in the market so that it's attractive for them to come and do this. And that is what the MOU is entirely about. It is direct lending to the MSMEs and therefore, there is no limit to that. I can do Rs 6,000 crore or I can do Rs 26,000 crore; I'll be happy to do Rs 26,000 crore.
We are trying to look at other people also. Discussions are certainly happening; these will be similar companies that are in the business of providing panels; we would be tying up with them.
What is the share of direct lending currently and what are your plans to grow it?
Direct lending today is about 8 percent of the total book and ideally, we should be growing that to 15 percent. That is the aim in the next two to three years.
Solar panels are one of the largest EV markets and our support is very large because we will be lending to MSMEs that are either serving as aggregators of EV vehicles or they have fleet operations.
To increase our direct lending, we are focusing more on EVs or solar projects, or products in the renewable segment. But we are not forgetting our traditional machinery loans. It is one of the most fast-moving items. In fact, we have tied up with machinery suppliers, whom we pay directly.
Do startups or AIFs approach you for funds?
Absolutely, that is a continuous process. We have given money to 105 AIFs, and every week we are clearing fresh proposals. These 105 AIFs have invested in over 1,000 startups. So, we have already got some 15 to 18 unicorns. Those companies which we invested in five to six years ago have now grown and some of them have become unicorns. It has created a very good culture in the country of startups. This is really because of the leap of faith of the government to push Rs 10,000 crore through the SIDBI programme.
We have committed Rs 9,000 plus crore, out of Rs 10,000 crore. In that amount, what is actually drawn down by these AIFs will be much lower. Our aim is to complete the Rs 10,000 crore within this financial year.
So roughly, let me say about Rs 50 crore would be the average per AIF. This means, 20 odd AIFs can be lent in the second half of this fiscal.
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