The Small Industries Development Bank of India (SIDBI) is planning to both lend to and invest in smaller, lower rated/ unrated non-banking finance companies (NBFCs), so that they grow to a scale to support micro and small enterprises (MSEs) across the country.

By doing so, the development finance institution (DFI) will be replicating the success it has achieved by providing loans, equity and institution-building support, among others, to micro-finance institutions (MFIs) to facilitate their development into financially sustainable entities. This has ensured that MFI credit has reached the poor and under-served, mainly women.

SIDBI will support NBFCs in the way it has been supporting the MFI sector, with both loans and equity, according to Sudatta Mandal, Deputy Managing Director (DMD).

“We are in the process of identifying small, unrated NBFCs, which have the potential to grow.

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“Just like we seeded entities in the MFI sector, we want to do the same in the NBFC sector,” he said.

SIDBI’s stakeholding in NBFCs will depend on the quality of the latter’s portfolio, their growth potential and funding requirement.

Referring to the risk appetite of Indian banks, Mandal said they generally don’t lend to NBFCs with a rating below ‘A’. So, such NBFCs either have to tap the debt capital market, or get money from the larger NBFCs.

“So, we now want to start lending/ providing credit to the smaller and unrated NBFCs. We will also take an equity stake in them,” Mandal said.

Consultant to devise risk assessment framework

SIDBI has engaged a consultant to help it devise a robust risk assessment/ mitigation framework for the NBFC sector. This will encourage the DFI to start giving loans and make investments in small and unrated NBFCs. In the process, these lenders are expected to become larger.

“It is a recognised fact that credit to the nano, micro and small enterprises is provided by MFIs and NBFCs. Banks don’t have the reach that NBFCs have.

“So, we need to have larger NBFCs so that more credit is available to these enterprises. We want to handhold NBFCs, both in terms of credit and investments. Our endeavour will be to enable NBFCs to grow to a scale to make a difference to MSEs,” the SIDBI DMD said.

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SIDBI has started co-lending with NBFCs in the MSME space in a small way.

“We have tied-up with a couple of MSMEs, which lend to micro, small and medium enterprises, under a pilot project. It is being developed,” Mandal said.

However, systems integration is a challenge because SIDBI’s system, including loan origination, monitoring and collection, is based on an architecture/ set of parameters, that is different from NBFCs.

“We need to see the due diligence the NBFC partner carries out for on-boarding customers. We are relying on them (for sourcing customers) … When collections happen, our share has to come to our account.

“Being a DFI, we have an issue with geographical reach. So, we have an engagement with various partners for last mile connectivity with MSMEs,” he said.

As of March-end 2023, SIDBI’s loans and advances stood at Rs 3,56,439 crore, posting 76 per cent year-on-year growth. Within this, refinance to banks accounted for 84 per cent of outstanding loans and advances, followed by refinance to NBFCs (9 per cent), direct credit (5 per cent), among others.