The development bank tasked with making finance more available to the tiny village and cottage industries that form a significant slice of India's economy is forging ties with commercial banks in order to expand its reach and range of products.

Small Industries Development Bank of India (SIDBI) cannot, for example, provide letters of credit (L/Cs). Therefore it is partnering with commercial banks that can provide them.

Private banks

The development bank's most recently announced partnership is with Federal Bank, India's largest private bank.

This is SIDBI's second tie-up with a private sector bank after it agreed to work with Yes Bank in July 2005.

Reach

One of SIDBI's constraints is that its geographical reach is limited. "We have a limited delivery channel as we do not have as many branches as banks," says SIDBI's chairman, N Balasubramanian.

The partnership with Federal Bank is expected to extend SIDBI's reach, particularly in Kerala in southern India.

Range

The range of products it can offer also limits SIDBI. It can only provide term loans and refinancing, and cannot provide working capital to its small business clients.

Foreign exchange services and L/Cs also fall outside SIDBI's permitted product range, thus its tie up with commercial banks is very important for its task of helping very small exporters.

Size matters

"The top end of the SME [small- and medium-sized enterprise] segment is serviced by banks, but the small industries with turnover of less than five crore rupees [around US$100,000] are left out," says Balasubramanian.

SIDBI has also entered into alliances similar to those made with the two private banks with 10 public sector banks.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.