Salient Features of Direct Finance Schemes

Pushkar Mishra Asst. Gen. Manager Credit, SIDBI, Mumbai

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SIDBI A brief Profile

Constitution
Set up in 1990 SIDBI Act Initially wholly owned subsidiary of IDBI Act amended in 2000 to broad based shareholding Shares held by 35 GoI owned/controlled Banks, Companies and FIs

Insurance

National Presence
6 Zonal offices 103 Branches across all the states

Mandate
Promotion, financing and development of SSIs (now MSMEs) and to co-ordinate the functions of institutions serving the sector.

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SIDBI : Sphere of Activities

Direct Finance: Assistance to MSMEs, Service sector entities, Resource
support to NBFCs/Other intermediaries, Infrastructure, etc.

Indirect Finance : Refinance/STL to Banks, SFCs, etc. Micro Credit : Pioneers in micro credit movement in the country.
Developed several leading MFIs. Assistance through MFIs

Promotion & Development : Organises and supports initiatives for

development of MSME sector (EDP, Skill up gradation, RIP, etc.).

Associate Institutions: SVCL, SMERA, ISTSL, CGTMSE & ISARC. Nodal Agency : For GoI schemes like CLCSS, TUFS, TUFFPI and IDLSS.

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What is MSME ?
AS PER MSMED ACT 2006 :

Enterprises

Manufacturing (Investment in P&M) Rs.25 lakh Upto Rs.500 lakh Upto Rs.1000 lakh

Services (Investment in Equipment) Rs.10 lakh Upto Rs.200 lakh Upto Rs.500 lakh

Micro Small Medium

Service sector definition adopted by SIDBI on selective basis Total project cost may not exceed Rs.250 crore and maximum exposure (loan assistance) should not be more than Rs.50 crore (like hotels, hospitals, etc.)

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An overview of Indian MSME

SIZE MSE Sector Contribution to Indian Economy
40% of industrial production 33% share in exports More than 8000 products

Second largest sector after agriculture

More than 26 million units Provides employment to over 59 million

Accelerates the growth of Economy

MSME Growth higher than GDP & industrial growth

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An Overview of Indian MSMEs

FEATURES
Very small in size (majority are MSE units) Majority of units are proprietorship / family owned concern Very limited professional management Obsolete technology/ production process Low capital investment & labour intensive High energy consumption in some sectors Lack of awareness about energy efficient production options / technology

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Direct Credit Products

SIDBI

Fund Based

Non Fund Based

Term Loan

WC Finance

Risk Capital

LCs

Guarantees

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Retail Credit Schemes Fund based

Schemes for Term Loan Assistance
Direct Credit Scheme Scheme for Energy Saving Projects in MSME sector Scheme for Cleaner Production Measurers in MSME sector / CETP Govt. Sponsored Scheme CLCSS, TUFS,TUFFPI, IDLSS, etc. Privileged Customer Scheme Green Loan Scheme Working Capital MSME Receivable Finance Scheme Bank Guarantee for MSEs LC facility Credit Delivery Arrangement with NBFCs Mumbai Taxi drivers Associations Faridabad Small Industries Asscociation Original Equipment Manufacturers (OEMs) Securitisation / Assignment

Schemes for Working Capital Assistance

Non Fund based Facilities

Structured Arrangement

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Retail Credit Schemes Term Loan

A Direct Credit Scheme
Purpose Nature of assistance Minimum Assistance Tenure New unit/ Expansion/ Modernisation/ Marketing/ R&D/Working Capital/ in manufacturing and services sector Term Loan Generally not less than Rs.10 lakh Need based. Generally, not more than moratorium 8 years including

Interest rate Based on Risk Rating. Present interest rate band is Fixed : 9.5% to 14.5% Floating : PLR +/- (present PLR is ..%) Rating Investment grade Generally not less than CR5. For some sectors CR4/ CR3.

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Retail Credit Schemes Term Loan

B Scheme for Energy Saving Project in MSME Sector
Parameter Purpose Minimum Assistance Overall DER Interest Rate Asset coverage Repayment period Eligible investments Any other incentive Norm Promote investment in energy saving capital equipments / production processes / facilities. Rs.10 lakh Maximum 2.5 : 1 Fixed : 9.5-10% p.a. Floating : PLR -1.25 to PLR -0.25% (present PLR 11%) Minimum 1.4 for new unit and 1.2 for existing unit Need based. Normally, should not exceed 7 years. List of equipments / technologies / processes is available on SIDBI website : www.sidbi.in CLCSS / TUFS or any other Government Scheme benefit shall be available, if eligible.

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Retail Credit Schemes Term Loan

C Scheme for Clean Production Measurers
Parameter Purpose in MSME Sector / CETP Norm
Promoting investment in clean production options in the select high polluting sectors. Common Effluent Treatment Plants (CETP)/Waste Recycling Plants benefiting MSMEs in industrial zones and clusters shall also be eligible for financing.

Minimum Assistance Rs.10 lakh Overall DER Interest Rate Asset coverage Repayment period Eligible investments Any other incentive
Maximum 2.5 : 1 Fixed : 9.5-10% p.a. /Floating : PLR -1.25 to PLR -0.25% (present PLR 11%) Minimum 1.4 for new unit and 1.2 for existing unit Need based. Normally, should not exceed 7 years. Eligible sectors and potential Clean Production options in these sectors may be obtained from SIDBI Branch. CLCSS / TUFS or any other Government Scheme benefit shall be available, if eligible.

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Retail Credit Schemes Term Loan

D. Assistance under Govt. of India Schemes Credit Linked Capital Subsidy Scheme (CLCSS):
To facilitate technology upgradation Capital subsidy for induction of proven technologies in 49 sectors. Subsidy will be limited to 15% of the purchase price of P & M with a ceiling of Rs.15 lakh per unit. The Scheme is operational till XIth Plan (March 2012)

Technology Upgradation Fund Scheme (TUFS):

For modernisation/technology upgradation of textile & jute industry. Provides interest/exchange fluctuation subsidy of 5%(spinning 4%) or 20% Margin Money Subsidy for powerlooms (Max. Rs.20 lakh) or 15% Margin Money Subsidy for other SSI textile / jute units. The Scheme is operational till XIth Plan (March 2012).

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Retail Credit Schemes Term Loans

Assistance under Govt. of India Schemes Technology Upgradation for Food Processing Industry (TUFPI) :
For setting up, modernising food processing units. Capital subsidy of 25% of the cost of eligible P & M and technical civil work subject to maximum of Rs.50 lakh in general areas and 33% upto Rs.75 lakh in difficult areas.

Integrated Development of Leather Sector Scheme (IDLSS) :

For modernisation/technology upgradation of leather /leather products The financial assistance will be investment grant to the extent of 30% of cost of eligible P & M for MSE and 20% for non MSE units subject to a ceiling of Rs. 50 lakh.

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Retail Credit Schemes Term Loan

E. Privileged Customer Scheme (for existing customers only) Objective To offer pre sanctioned loan limit to existing good
customers of SIDBI for meeting their emergent bonafide business expenditure.

Eligibility
Existing customers with satisfactory repayment track record for atleast 2 years (with atleast one year principal repayment track record) . Existing rating of CR3 and above of not more than 6 months old. The borrower should not have slipped into stress category during last 1 year. Maximum Loan : Linked to turnover(15%/35%) of the borrower and previous assistance subject to maximum loan of Rs.75 lakh per annum. Process : Simplified parameterised sanction and loan documentation. Repeat Assistance : Fresh limit can be considered on an annual basis, provided overall exposure under the Scheme should not exceed Rs.150 lakh.

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Retail Credit Schemes Term Loan

F Green Loan Scheme
Parameter Purpose
(for existing customers only)

Norm
To meet capital expenditure, non operational and intangible expenditure for improving energy efficiency/adopting cleaner production measures/waste recycling, waste treatment &disposal, ISO certification, green rating, etc. Banks existing customers having at least one years satisfactory principal repayment track record and minimum internal rating of CR3 and above. 50% of the average net cash accruals for the last two years, subject to a maximum of Rs.25 lakh per financial year. It should not be more than previous highest assistance. Maximum 2.5 : 1 Fixed : PLR -1% p.a. (i.e. at present 10% p.a.)

Eligible Customers Maximum Assistance Overall DER Interest Rate Asset coverage Repayment period Any other incentive

Minimum 1.4 for new unit and 1.2 for existing unit Not more than 36 months including moratorium. Government Scheme benefit shall be available, if eligible.

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Working Capital Scheme

SIDBI has arrangement with IDBI Bank for providing working capital facilities to SIDBI customers on IDBI Banks banking platform.
Purpose Tp provide working capital facility to existing / new customers of SIDBI who avails term loan for capital expenditure. Initial limit shall not be more than Rs.5 crore. Limit is sanctioned for one year which may be renewed annually. Based on Risk Rating Current Ratio : 1.33 Min interest coverage : 1.5 Asset Coverage 1.3 for existing units and 1.4 for new units TOL/TNW : 4:1

Max. Assistance Tenure Interest rate Financial norms

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Receivable Finance Scheme

SELLER

Draws

BILL OF EXCHANGE

Accepts

PURCHASOR

Pays discounted value to seller

Discounts BANK

Pays on due date to bank

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MSME Receivable Finance Scheme

Purpose To provide finance to MSME vendors / service providers in respect of their sales / services, against bills of exchange / invoices arising out of such sales Manufacturing units/ Transporters/ IT vendors Service providers/

Eligible MSME vendors Form of assistance Advantage to seller Eligible purchasers

Discounting of Bills of Exchange / invoices accepted by purchasers Immediate payment against receivables. Improves cash flow cycle Turnover : Minimum Rs 30 crore or Networth : Rs 6 crore.

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NON FUND BASED - Guarantee Scheme

Parameter Purpose Types Eligibility Guarantee Commission Margin Asset coverage Tenure of Guarantee Norm To issue guarantee on behalf of Banks customer for its normal trade / business. Financial, deferred and performance guarantee Existing well performing MSE customers of SIDBI New customers with fund based facility Financial Guarantee : 1.5 to 3 % p.a. Performance Guarantee :1 to 2 % p.a. Normally 25% of guarantee amount Minimum 1.4 for new unit and 1.3 for existing unit Guarantees would be issued for a definite period, normally not running beyond a year.

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NON FUND BASED - LC Scheme

Parameter Purpose Norm To issue Letter of Credit ( foreign / inland) for purchase of machinery / equipment and raw material generally against sanctioned Term Loan / Working Capital facility. Existing well performing MSE customers of SIDBI New customers with fund based facility 0.20 - 0.30% of LC value for usance period. No margin is required against sanctioned loan. No separate security is required if facility is against sanctioned fund based facility.

Eligibility Usance charges Margin Security

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Risk Capital Products

Due to difficulties in offering Equity to MSMEs, Risk capital in form of MEZZANINE PRODUCTS is offered as GROWTH CAPITAL Participative/ Convertible Debt Subordinated debt (with/ without conversion options treated as quasi equity) The benefits to a Unit are very close to that in Equity viz Long term no immediate repayments (moratorium 3-5 years) No additional promoters contribution required Risk based returns (fixed + upside from equity kickers/ royalties etc) Flexible structuring depending on the cash flows. Collaterals not insisted As no Asset Cover to secure the assistance, hence Risk capital priced higher (about 2-3% p.a.) than a typical banks secured assistance. Much cheaper to Equity where IRR expectation is generally =>25% p.a..

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Participative Debt
Target Customers

Growing profitable cos.

Fixed coupon debt + Participation mechanism for sharing upside

1. Options to convert into equity pre-decided methodology on a trigger event 2. Royalty on sales etc

Track record with banks Good governance Financial discipline Assisted by VC funds Positive industry prospects Rated companies New economy businesses Acquisitions

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Subordinate debt
SIDBI has come out with Sub-ordinated debt for MSMEs in India. Subordinated in Repayments and Security to senior lenders. With or without conversion option - can be given to partnerships/ prop. concerns Maximum amt - 1/3rd of networth of the unit. Moratorium Min 3 years. Max 5 years. Total tenure 7-8 years No collaterals insisted. Only residual charge on the business assets is obtained and hence improves credit rating of secured loans. Subordinated in repayments - Cure period concept - SIDBI allows the unit 6 months time in the event of temporary liquidity problems by postponing the repayments under Sub-debt by 6 months. Accepted as Quasi-equity by SIDBI for DER purposes. Could be used effectively to bridge the gap in the means of finance. SIDBI considers project funding at a lower promoters contribution (10%) (instead of usual 25-30%) alongwith Subdebt

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r2

Sub debt with SIDBI Secured Loans

(improving leverage)
Project head Land & Bldg P&M Marketing expenses WC Margin Total Euro (000) 70 70 20 30 DCS Term loan Total 130 Means of finance Equity capital Euro (000) 60 Means of finance Equity capital Euro (000) 60

Sub debt
DCS Term loan Total 190

20 110 130
190

190

DER : 2.2:1

DER : 1.8:1

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Slide 24 r2
ravityagi, 07/09/2009

Start Up Assistance : Structuring

For start-ups and early stage enterprises with focus on innovation/ technology businesses. By way of Optionally Convertible Debt (similar to Venture debt) at 1314% p.a. Notional equity (1-2%) as a potential kicker. Moratorium upto 3 years, Total tenure upto 7 years. No collaterals. CGTMSE cover Structuring very flexible Stabilisation fund - 12 to 18 months interest funding to ensure success of venture especially in stabilisation stage Conversion of OCD only in case of future VC/ PE investment. 15 cases approved in past 1 year.

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Resource Support to NBFCs

Objective : To provide term loans to NBFCs for on lending to MSMEs. Eligibility : The NBFCs Should be registered with RBI. should have been in leasing / HP / loans business for a minimum period of 5 years and have made net profit in the last 3 years of operation. Minimum net owned fund of Rs.5 cr. Gross NPAs should not exceed 5% of the outstanding portfolio. Business of at least Rs.10 crore in preceding financial year. Recovery performance of not less than 90%. NBFC should be enjoying investment grade rating from SEBI approved Credit Rating Agencies for fixed deposits / debentures / bonds, etc. Credit proposal should have a minimum internal rating of CR3. Assistance : Maximum assistance should be linked to total borrowing of the NBFCs and should not be more than 6 times the NoF of the NBFC.

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Structured Arrangement
Credit Delivery Arrangement with NBFCs (Channel Partner)
Uses NBFCs as CP for credit delivery to MSMEs Advantage of niche market knowledge and expertise of CP Exposure with a CP is based on its financials and its systems & procedures. Business generation, appraisal, documentation, disbursement, collection of dues, monitoring and recovery outsourced to CP Sanction, security creation and disbursement are done by SIDBI Customer is in the books of SIDBI CP gives First Loss Guarantee (FLG) as % of exposure on pool basis CP is paid fee as a % of interest income for services and FLG. Two Arrangements at present - SREI at KBO and Electronica at PNBO. Approx. 850 MSMEs were provided assistance with aggregate sanction of Rs.150 cr. All the accounts are standard and there is no default.

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Structured Arrangement
Mumbai Taxi drivers Associations (MTA)
MTA helps in credit delivery of micro loans to its member taxidrivers Recommends the taxi drivers for sanction of loan after due diligence. Helps in documentation, collection of dues, monitoring and recovery Sanction, security creation and disbursement are done by SIDBI

Al the assistance covered under CGTMSE Credit Guarantee Scheme MTA is paid fee as a % of collection for services rendered. Arrangement with two Associations at Mumbai. More than 950 taxi drivers were provided assistance with aggregate sanction of Rs.20 cr.

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Structured Arrangement
Faridabad Small Industries Association (FSIA)
Arrangement with FSIA to provide credit limits to its members FSIA helps its members in filling application , carries initial due diligence and recommends SIDBI for sanction of Credit limit. Credit limit upto Rs.50 lakh is sanctioned with validity of one year which the borrower can use for genuine business purpose. Helps in documentation, collection of dues, monitoring and recovery FSIA is paid fee as a % of collection for services rendered.

Original Equipment Manufacturers (OEMS)

Arrangement with select OEMS for providing assistance to MSMEs purchasing equipments from them as per pre defined parameters. OEMs helps in initial due diligence of customer, collection & recovery. Buy back arrangements with OEMs could also be structured. OEMs provide First Loss Guarantee as a % of exposure. Arrangement is with Sahjanand Laser Technologies, Jyoti CNC, LMW, ACE Design.

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Structured Arrangement
Securitisation / Assignment It is bundling of a class of assets and selling it in the market as securities to investors / purchasers The receivables are cash flows from underlying assets. Bank invests in PTCs issued by Trusts for a class of asset securitised by the originator. This appears as investments in our books. Bank also purchases receivables from a pool of MSME assets on direct assignment basis from originators. The pool purchased appear as loans. Only AAA rated MSME asset pools are purchased. Originator provides credit enhancement as specified by rating agency. Originator generally continues as servicer of the pool as collection agent.

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SIDBI : USP for MSMEs

Competitive rate of Interest : Market maker for MSME segment. Flexible approach for key aspects like security, based on unit standing. financial parameters,

Simple Business processes : Credit Appraisal & Rating Technique (CART). SIDBI appraisal techniques recognised across the banking sector. Quick Decision making : Effective integration of technology. Qualified & professional manpower. Tailor made and customised products services. Quick disbursement of GoI grants / subsidies.

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SIDBI Branches in Mumbai

Andheri Samrudhi Venture Park,Upper Ground floor, MIDC Road, MIDC Industrial Area, Marol, Andheri (East), Mumbai Phone : 022-28353062

Nariman Point - 11-13, Atlanta, 1st Floor, 209, V.K. Shah Marg,
Nariman Point, Mumbai Phone: 022-2812330 / 22844456

Thane -

1 & 2, Dhanalaxmi Residency Near Hotel Tip Top Plaza, L.B.S. Marg Thane (West) - 400 602 Phone: 022-25826614

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Thank You
Good things in life begin small
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