Daily News: March 2, 2015

World Bank Approves $500MM Project to Improve Access to Finance

The World Bank approved a $500 million loan for the MSME Growth Innovation and Inclusive Finance Project to improve access to finance for Micro, Small and Medium Enterprises (MSMEs) working in the manufacturing and services sector, including startups and early stage ventures.

In India, MSMEs account for more than 80% of total industrial enterprises, produce over 8000 value-added products and employ an estimated 60 million people. It contributes around 45% to manufacturing output and about 40% to exports, both directly and indirectly. In addition, over 50% of MSMEs are rural enterprises and widely distributed across low-income states making them an important sector for promoting economic growth and poverty reduction.

However, lack of adequate finance is one of the biggest challenges facing the MSME sector. Financial institutions have limited their exposure to the sector due to a higher risk perception, information asymmetry, high transaction costs and the lack of collateral. The MSME census of 2006-07 estimated that about 87% of MSMEs did not have any access to finance and were self-financed. Credit towards micro and small enterprises represent only around 13% -15% of formal financial institutions portfolio.

The project will support MSMEs through direct financing by the Small Industries Development Bank of India or SIDBI, an apex financial institution for promotion, financing and development of MSMEs in India, as also through Participating Financial Institutions (PFIs) across three components. These include support to startup debt financing and risk capital as well as support to service and manufacturing sector financing models.

“With eight million people entering the labor force every year, MSMEs have the potential to create many new, innovative jobs. However, for these ideas to take shape, MSMEs will need easier access to finance. This project will develop innovative products that address such constraints and help them achieve their true potential,” said Onno Ruhl, World Bank Country director in India.

The project’s first component will support SIDBI in developing, innovating and scaling up its startup debt financing program as well as support entry of potential participating financing institutions (PFIs). The India’s startup ecosystem is currently one of the fastest growing in the world and the third largest startup base with 3,100 startups (after the United States with 41,500 start-ups and the United Kingdom with 4,000).

The loan, from the International Bank for Reconstruction and Development (IBRD), has a five-year grace period, and a maturity of 10 years.