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India Turns To Foreign Lenders To Meet SMB Capital Need

India is looking toward overseas lenders to connect domestic small businesses with financing, according to Reuters reports Friday (July 19).

The publication cited unnamed sources that revealed India’s government is discussing a deal with foreign lenders to open up about $14.5 billion in credit to the nation’s small businesses, a possible sign that India’s current financial services sector is unable to meet the demand for small and medium-sized business (SMB) financing.

Two government officials told the news outlet that India is in talks with Germany state-owned bank KfW Group, various institutions in Canada, as well as the World Bank. KfW’s India operations confirmed discussions with the government, saying the discussions were in their early stages and currently center around providing credit lines to small businesses to promote solar power generation.

But one of the sources said the government’s shift toward overseas lenders is in response to the domestic market unable to meet the current demand for small business capital.

“We are exploring, we are having discussions with various funding agencies if something can be done [for small and medium firms],” the second official said, but declined to offer specific details on the types of discussions that are occurring, or which financial institutions are participating in the talks.

India’s finance ministry will make the final decision on which foreign banks with which to work, reports noted.

According to the publication, SMBs in India are essential to job creation and account for more than one-quarter of India’s manufacturing and services output. The 63 million micro, small and medium enterprises (MSMEs) in the country today make up an estimated 45 percent of total exports.

India is working to strengthen SMBs’ access to capital while cracking down on shadow lenders that threaten the viability of lenders, while state-owned banks are weighed down by $145 billion in bad loans, reports said. The current market climate has resulted in expensive financing for small businesses, with some loans linked to 17 percent APRs. Shadow banks’ annual interest rates can be as high as 20 percent, reports said.

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