Even before the 2007 global financial crisis, micro, small, and medium enterprises (MSMEs) in India had already been burdened by numerous systemic constraints, including limited institutional credit, high-cost borrowing, weak marketing facilities, poor infrastructure, technological obsolescence, and a perception that they are high-risk enterprises. The credit reduction, demand stagnation, exports decline, and overall crisis of confidence that followed the financial crisis had exacerbated these constraints, in response to which, the government called on the state-owned Small Industries Development Bank of India (SIDBI) and commercial banks to increase their lending to MSMEs and mobilized additional external funding.
Against this backdrop, the Asian Development Bank (ADB) approved in February 2010 a $50 million sovereign loan and $250 million partial credit guarantee (PCG) for the Micro, Small, and Medium Enterprise Development Project (MSMEDP). The project aimed to enhance the growth, competitiveness, and employment contribution of MSME by improving their access to commercial financing and providing them with capacity building and market opportunities. It targeted the sovereign loan to the “missing middle” borrower segment of smaller MSMEs in 10 states while larger MSMEs were expected to benefit from the long-term funds offered by commercial public sector banks under the PCG facility. A stand-alone $3 million grant from the ADB-administered Japan Fund for Poverty Reduction was also provided to support the capacity development of MSMEs targeting women microenterprises in relatively poor states.
By completion, the project utilized $35.71 million of the sovereign loan, $0.71 million or less than 5% of its $15 million-target for direct lending operations and $35 million or 100% of its target for indirect lending. The huge shortfall in its direct lending accomplishment was occasioned by SIDBI’s decision to halt this subcomponent following the microfinance crisis in Andhra Pradesh in 2011 and the introduction of a new regulatory framework that aimed to protect but raised the transaction costs of microfinance institutions registered with the Reserve Bank of India.
A total of 9,007 subprojects were supported, 84 under direct financing and 8,923 in indirect financing, with 5 participating financial institutions (PFIs) acting as channels. With an average subloan size of about $3,500, the sovereign loan operation was able to reach the “missing middle” segment of the MSMEs. By financing 5,371 women-led enterprises, or 60% of the total 9,007 enterprises, the project also exceeded its target of 30% ratio in women subloans. However, due to pricing differences between ADB and the International Development Bank of India, the selected PFI for the PCG, and the stabilization of the international capital market that improved the access of Indian banks to long-term credit, the PCG component was not implemented.
Nonrealization of the PCG, the eventual cancellation of the unutilized sovereign loan allocation for SIDBI direct lending, and safeguards compliance issues at startup made implementation un-optimal and the project less than effective in achieving its outcome targets. Furthermore, even if the number of MSMEs receiving term-financing increased by an annual average of 10.3% in 2010–2015 and the PFIs’ overall MSME portfolios likewise substantially grew, project contribution to these outcomes appeared marginal due to the very small sum of loan that was extended, as compared to SIDBI’s $8.7 billion loan portfolio in 2015.
Nevertheless, the project’s record of channeling 60% of subloans to women enterprises was deemed significant and demonstrative, given that the estimated percentage of women enterprises in the MSME subsector was only 7.4% in 2007. The project also demonstrated effectiveness in targeting the “missing middle” segment of MSMEs with financial prudence as well as with the required due diligence in ensuring safeguards compliance, notwithstanding the delayed establishment of SIDBI’s Environmental and Social Safeguards Framework.
ADB’s South Asia Department rated the project less than successful. SIDBI was the project executing agency and financial intermediary for the sovereign loan.
