Context: Union Cabinet, headed by Prime Minister Narendra Modi, has approved an equity support of Rs 5,000 crores for Small Industries Development Bank of India (SIDBI).

About the Equity Infusion in SIDBI

• The equity infusion of Rs 5000 crores in SIDBI will be done by Department of Financial Services under the  Ministry of Finance.
• The equity infusion will be done in three tranches:
  • Tranche 1: Rs 3,000 crores in FY 2025-26.
  • Tranche 2: Rs 1,000 crores in FY 2026-27.
  • Tranche 3: Rs 1,000 crores in FY 2027-28.

Significance of the capital infusion into SIDBI

• Increase in MSME beneficiaries: The capital of infusion of Rs 5000 crores will allow SIDBI to provide financial assistance to 102 lakhs MSME beneficiaries as compared to 76.26 lakhs MSMEs being provided financial assistance in FY 2024-25.
• Employment generation: As per estimate, employment generation per MSME is 4.37 persons. Thus, incremental financial support will result in employment generation 1.12 crore by the end of FY 2027-28.
• Healthy Capital to Risk Weighted Assets Ratio (CRAR): Increase in directed credit to MSME sector along with digital & digitally enabled collateral free credit products being developed by SIDI a over the next five years will increase the capital requirements of SIDBI. Infusion of additional share capital will enable SIDBI to maintain CRAR above 10.50% under high stress scenario and above 14.50% under Pillar 1 and Pillar 2 over next three years.
• Maintain a healthy credit rating: A healthy CRAR will allow to meet regulatory capital requirements and a health credit rating.
• Access to funding lower costs: A healthy CRAR and credit rating will allow SIDBI to access funding at fair interest rates, thereby, passing funding to MSMEs at competitive costs.

About Small Industries Development Bank of India (SIDBI)

• SIDBI was established in 1990 under an Small Industries Development Bank of India Act, 1989 enacted by the Parliament of India.
• Ownership & Shareholding: Before the equity infusion, Government of India is the largest shareholder with 20.85%, SBI with second largest shareholding 15.65% and LIC with 13.33% shareholding. Rest of the shareholding is major public sector banks and insurance.

Functions of SIDBI:

• Principal financial institution for the promotion, financing and development of industry in the MSME sector.
• Coordination of functions of the institutions engaged in the promotion, financing or developing industry in the MSME sector.

SIDBI provides financial support through the following mechanisms

• Indirect lending – based on multiplier effect/larger reach in financing the MSME sector and is undertaken through banks, SFBs, NBFCs, MFIs and New Age Fintechs.
• Direct lending – fill the existing credit gaps in MSME sector and is undertaken through demonstrative and innovative lending products, which can be further scaled up by credit delivery ecosystem.
• Fund of Funds – boosts entrepreneurship culture by supporting emerging startups through the Fund of Funds channel.
• Promotion & Development – promoting entrepreneurship and handholding budding entrepreneurs for holistic development of MSME sector through credit-plus initiatives.
• Facilitator – playing a facilitator through roles like Nodal Agency for the MSME oriented schemes of the Government.

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