96 Institutional Finance to Small Industries
Institutional finance — finance from banks, development financial institutions, NBFCs, micro-finance bodies, equity funds and government schemes — is the lifeblood of small enterprise. Small units typically face a finance gap arising from low collateral, opaque accounts, and high transaction cost relative to loan size. Institutional finance is therefore engineered with guarantees, refinance, subsidy and equity-like instruments to bridge the gap. Standard textbooks for UGC-NET preparation include Vasant Desai Dynamics of Entrepreneurial Development, Khanka Small Scale Industries, the RBI Master Directions on Lending to Priority Sector and the MSME Annual Reports.
| Term | Working definition |
|---|---|
| Institutional finance | Funds extended by formal financial institutions — commercial banks, RRBs, cooperative banks, DFIs, SFCs, NBFCs, MFIs, venture capital — for productive purposes. |
| Term loan | Long-tenor loan for capital expenditure, repayable over 3–10 years. |
| Working-capital finance | Short-term finance (cash credit, overdraft, bill discounting) for day-to-day operations. |
| Priority Sector Lending (PSL) | RBI mandate that 40 % of bank credit (44 % SCBs by 2024 norms; 75 % for RRBs) flow to priority sectors, including MSMEs. |
96.1 Sources of Finance for Small Industries
| Source | Type | Examples |
|---|---|---|
| Owners / promoters | Internal | Personal savings, family funds, retained earnings |
| Friends and family | Informal | “FFF” — friends, family, fools |
| Trade credit | Informal | Suppliers, advance from customers |
| Banks | Institutional | SBI, HDFC, ICICI, RRBs, Cooperative banks |
| Development financial institutions (DFIs) | Institutional | SIDBI, NABARD, EXIM Bank |
| State Financial Corporations (SFCs) | Institutional | KFC, MFC, GFC, etc. |
| NBFCs / NBFC-MFIs | Institutional | Bajaj Finance, MAS, Bandhan |
| Government schemes | Institutional | MUDRA, PMEGP, Stand-Up India |
| Angel investors / VC / PE | Equity | Indian Angel Network, Sequoia, Accel |
| Crowdfunding | Equity / debt | Ketto, Wishberry, Tyke |
| TReDS, factoring | Receivables | RXIL, M1xchange, Invoicemart |
96.2 Apex Development Banks
| Institution | Year | Role |
|---|---|---|
| SIDBI — Small Industries Development Bank of India | 1990 | Apex refinance and direct lending body for MSMEs; Headquarters Lucknow |
| NABARD — National Bank for Agriculture and Rural Development | 1982 | Apex for rural / cooperative banking, RRBs, SHG-Bank Linkage |
| EXIM Bank — Export-Import Bank of India | 1982 | Project / buyer’s credit, foreign trade financing |
| NHB — National Housing Bank | 1988 | Refinance to housing finance companies |
| MUDRA — Micro Units Development & Refinance Agency | 2015 | Refinance to MFIs / banks under PMMY |
| NIIF — National Investment and Infrastructure Fund | 2015 | Sovereign-anchored fund for infrastructure |
SIDBI was established under the Small Industries Development Bank of India Act, 1989 and commenced operations on 2 April 1990, transferring the SSI portfolio of IDBI. SIDBI’s mandate covers refinance, direct lending, micro-finance, venture capital (through SVCL), CGTMSE administration (joint with GoI) and the Self-Reliant India Fund.
96.3 Commercial Banks and PSL
The RBI’s Priority Sector Lending norms (Master Directions, 2020) require 40 % of Adjusted Net Bank Credit (ANBC) to flow to the priority sector. Within PSL, MSME lending has no sub-target (since 2015), but small farmers, weaker sections and micro-enterprises have specific targets. Lead Bank Scheme (Gadgil Committee, 1969) co-ordinates institutional credit at the district level.
96.4 State Financial Corporations (SFCs)
Eighteen SFCs were created under the State Financial Corporations Act, 1951 — Punjab Financial Corporation (1953), Madras (1949 forerunner), Karnataka, Maharashtra and so on. SFCs lend up to ₹20 crore to corporates and ₹2 crore to proprietorships. Many SFCs are stressed; their portfolios have largely migrated to banks and SIDBI in recent years.
96.5 Term Loan and Working Capital
A small enterprise typically needs both term loans (for fixed assets) and working capital (for current assets). The classical arithmetic for the working-capital limit under the Tandon Committee Method-II is:
Working Capital Limit = 0.75 × Working Capital Gap
where Working Capital Gap = Current Assets – Current Liabilities (excluding bank borrowings). The Nayak Committee simplified this for small industries: limit = 20 % of projected annual turnover.
| Method | Formula | Borrower contribution |
|---|---|---|
| Tandon Method I | 0.75 × (CA – Other CL) | 25 % of WC gap |
| Tandon Method II | (CA – 25 % CA) – Other CL | 25 % of CA |
| Tandon Method III | (CA – 25 % core CA) – 0.25 × non-core CA – Other CL | Higher contribution |
| Nayak Committee turnover method | Limit = 20 % of projected turnover | 5 % of turnover from borrower |
96.6 NBFCs, MFIs and Microfinance
Non-Banking Financial Companies (NBFCs) — regulated under Chapter IIIB of the RBI Act, 1934 — fill the credit gap for under-served small businesses through vehicle finance, gold loans, business loans, factoring. MFIs (NBFC-MFIs after the Malegam Committee 2011) lend small ticket size loans to JLGs / SHGs. The Code for Responsible Lending caps interest spread and indebtedness for borrowers earning up to ₹3 lakh.
96.7 Venture Capital and Angel Investing
Equity-side institutional finance came late to India. Key milestones: TDICI (1988) under ICICI; SEBI (Venture Capital Funds) Regulations, 1996; merger into SEBI (Alternative Investment Funds) Regulations, 2012 (Categories I, II and III). India’s start-up ecosystem is supported by Indian Angel Network, Mumbai Angels, AIF Cat I (Venture Capital Funds), the Fund of Funds for Start-ups (FFS) of ₹10 000 cr managed by SIDBI under Startup India, and the SRI Fund (₹50 000 cr).
96.8 Government Schemes for MSME Finance
| Scheme | Year | Salient feature |
|---|---|---|
| PMMY — Pradhan Mantri MUDRA Yojana | 2015 | Loans up to ₹10 lakh (₹20 lakh in 2024) under Shishu / Kishore / Tarun |
| Stand-Up India | 2016 | Loans ₹10 lakh – ₹1 crore for SC/ST/women |
| CGTMSE | 2000 | Collateral-free loan guarantee up to ₹500 lakh |
| PMEGP | 2008 | Margin money subsidy for micro-enterprises via KVIC |
| CLCSS — Credit-Linked Capital Subsidy Scheme | 2000 | 15 % capital subsidy on plant & machinery |
| TUFS — Technology Upgradation Fund Scheme | 1999 | Sectoral subsidy for textiles |
| Stressed Asset Fund (CGSSD) | 2020 | Sub-debt up to ₹75 lakh for promoters of stressed MSMEs |
| ECLGS | 2020 | Government-guaranteed emergency credit |
| RAMP | 2022 | World Bank-supported reform programme |
96.9 Practice Questions
Q 01 SIDBI Easy
The Small Industries Development Bank of India (SIDBI) was set up in:
View solution
Q 02 Nayak Committee Medium
Under the Nayak Committee turnover method, the working capital limit for small industries is fixed at:
View solution
Q 03 PSL Easy
The Priority Sector Lending target for scheduled commercial banks is fixed at:
View solution
Q 04 CGTMSE Medium
CGTMSE provides credit guarantees for collateral-free loans up to a maximum of:
View solution
Q 05 SFCs Act Medium
State Financial Corporations are established under the:
View solution
Q 06 MUDRA categories Easy
Under PMMY, the “Tarun” loan category covers loans:
View solution
Q 07 CLCSS Medium
The Credit-Linked Capital Subsidy Scheme (CLCSS) provides upfront subsidy of:
View solution
Q 08 Match the following Hard
Match the institution / scheme with its function:
| (P) SIDBI | (1) Refinance for MFIs / banks |
| (Q) NABARD | (2) Apex MSME refinance and lending |
| (R) EXIM Bank | (3) Foreign trade financing |
| (S) MUDRA | (4) Apex for rural / cooperative banking |
View solution
- SIDBI (1990, Lucknow); NABARD (1982); EXIM Bank (1982); MUDRA (2015).
- PSL: 40 % for SCBs, 75 % for RRBs; Lead Bank Scheme (Gadgil 1969).
- WC norms: Tandon (3 methods); Nayak — 20 % of projected turnover for SSIs.
- PMMY: Shishu / Kishore / Tarun (Tarun-plus up to ₹20 lakh from FY24).
- CGTMSE up to ₹500 lakh; CLCSS 15 % capital subsidy; ECLGS, CGSSD, RAMP, SRI Fund are post-2020 instruments.