The ADB Board of Directors today approved a sovereign loan of $50 million and a partial credit guarantee of up to $250 million for the Micro, Small and Medium Enterprise (MSME) Development Project.

The $50 million loan will go to the state-owned Small Industries Development Bank of India (SIDBI) to fund enterprises that have become too large to tap traditional microfinance but are unable to access conventional bank funds - the so called 'missing middle sector' of MSMEs. The partial credit guarantee (PCG) facility will allow participating public sector commercial banks to source medium- to long-term funds from international capital markets for onlending to existing MSME clients. The program supports the Government of India's own efforts to build up the sector to boost inclusive growth and cut poverty.

“The objective of the project is to remove key bottlenecks to MSME financing and development, thus helping pave the way for sector growth, competiveness and employment creation,” said Peter Marro, Senior Investment Specialist in ADB's South Asia Department.

MSMEs provide livelihoods for an estimated 65 million people in India, many of them women living in slums and other poor and isolated communities. However, the sector's development has been hamstrung by the inability of these enterprises to tap adequate, competitively priced-long term funds. The global economic crisis, which squeezed credit further, and caused job and wage cuts, has made it even tougher for MSMEs, especially female-dominated microenterprises.

Around 30,000 MSMEs are expected to benefit from the project, which has the potential to create at least 7,500 jobs. Along with tailoring the program to reach MSMEs at all levels, the partial credit guarantee facility will help foster the development of domestic capital markets by exposing India's public sector banks to international markets. The financing arrangement also helps offset the potential for 'crowding out' in domestic credit markets, as the government borrows additional funds for its economic stimulus measures in the wake of the global crisis.

The project has been designed to avoid duplicating or countering support for MSMEs provided by other donor agencies. The loan has also been structured to ensure women get ample assistance, with 30% of the funds provided through SIDBI's direct lending operations to go to qualified female MSME entrepreneurs.

The loan, from ADB's ordinary capital resources, has a 15-year term, with a grace period of 3 years and an interest rate determined in accordance with ADB's LIBOR-based lending facility. It includes a government guarantee to ADB.

The PCG, which comes without government counterindemnity, is from ordinary capital resources, and will be made available to one, or several participating public sector banks under the program. Each guarantee will cover a portion (less than 100%) of the principal and interest payments on the debt instruments to be issued by the banks and sold to investors. The guaranteed debt instrument is expected to be a US dollar-denominated loan or bond with a tenor of five years, although there is flexibility to issue instruments of up to 10 years and denominated in yen or euros.

SIDBI will be the borrower and executing agency for the loan, which will be implemented over 5 years. The PCG facility will be available for 3 years following approval from ADB's Board of Directors.