The government of India is in talks with foreign lenders to provide as much as 1 trillion rupees (US$14.5 billion) in credit to the millions of small businesses the country holds, two officials told Reuters news agency. This can be seen as a sign which indicates that India’s banking system is not robust enough to handle the job on its own.
The foreign lenders in question include the World Bank, Germany’s state-owned development bank KfW Group, and several Canadian institutions. These talks are intended to extend lines of credit to the small businesses and enterprises of India. Securing enough capital for these small businesses is seen as critical; as these business sectors are vital to job creation.
Government officials have confirmed that Indian banks were currently not in a position to provide the capital needed to support the millions of small enterprises that India holds.
“We are exploring, we are having discussions with various funding agencies if something can be done for small and medium firms,” said one of the officials. The officials did not provide full details of the discussions they are having with banks, or identify all those they are talking to, but said talks are at a very early stage.
The push for foreign loans comes hot on the heels of the Indian government’s announcement earlier in July that it plans to borrow around 700 billion rupees by issuing overseas sovereign bonds.
India has approximately 63 million firms in the SME sector, which is in turn responsible for more than a quarter of the country’s manufacturing and services output. As such, this sector must be reinvigorated if the government wants to kick-start the economy.
A recent study by the Reserve Bank of India revealed that there is an overall deficit in credit of about 20 – 25 trillion rupees for the SME sector. Lending to such firms can be risky as some lack proper financial information, such as historical cash flow data, which makes it challenging for banks to assess the credit risks.
In order to mitigate such risks for foreign banks, the loans would be given sovereign guarantees to be routed through Indian government agencies such as the Small Industries Development Bank of India, stated an official.