SIDBI plans to raise Rs 10,000 crore from rights issue next fiscal to expand equity

Small Industries Development Bank of India (SIDBI), which refinances SME loans, is eyeing to float a Rs 10,000-crore rights issue next fiscal to expand its equity capital as it expects to grow assets to Rs 5 lakh crore by March 2024 from about Rs 4 lakh crore in March 2023, a top official has said.

The government currently holds a 20.8 per cent stake in SIDBI, with the State Bank of India (SBI) and the Life Insurance Corporation (LIC) holding 15.65 per cent and 13.33 per cent, respectively. The remaining equity is divided among other public financial institutions and banks, all of which are expected to subscribe to the proposed rights issue.

Surging demand for direct financing

SIDBI's optimism regarding loan growth arises from the surging demand for direct financing. What was once a mere 7 per cent of its loan portfolio two years ago has now doubled (14 per cent), reflecting the growing need for such financing solutions.

Sivasubramanian Ramann, the Chairman and Managing Director of SIDBI, disclosed that the rights issue will be executed in two tranches of Rs 5,000 crore each during the upcoming fiscal year. This capital infusion, totalling Rs 10,000 crore, is intended to reinforce the institution's capital base and accommodate the anticipated expansion of its balance sheet by 25 per cent.

Ramann noted that SIDBI had recently approached the Department of Financial Services (DFS) to raise capital, and subsequently, the Standing Committee of Parliament recommended a capital infusion of Rs 10,000 crore for the next fiscal year. This financial support is intended to facilitate increased lending to SMEs, in line with the institution's mission.

Asset base 

While SIDBI's Capital Adequacy Ratio (CAR) decreased from 24.28 per cent in FY22 to 19.29 per cent in FY23, it remains within a comfortable range, according to rating agency ICRA. This is due in part to lower risk weights assigned to its refinance book.

SIDBI's asset base has seen remarkable growth, surging by 63 per cent from Rs 2,47,379 crore in FY22 to Rs 4,02,383 crore in FY23. Meanwhile, its income surged by a substantial 102 per cent during the year, reaching Rs 18,485 crore, ultimately resulting in a net income of Rs 3,344 crore—an impressive 71 per cent increase compared to the previous year.

As per ICRA, the institution's leverage ratio increased from 9.22 times as of March 2022 to 14.36 times as of March 2023, largely due to heightened refinancing requirements in response to tighter liquidity conditions. Nevertheless, this leverage remains within the permissible regulatory limit of 18 times, and ICRA anticipates that borrowings will continue to rise, while leverage should stay within the regulatory limit through March 2024.

Regarding the growing direct lending activity, Ramann mentioned that while refinancing currently accounts for approximately 86 per cent of SIDBI's operations, direct lending constitutes the remaining 14 per cent. He envisions the share of direct lending expanding to 25 per cent over the next three years.

As of March 2023, the SME loan book of commercial banks in India amounted to Rs 25 lakh crore, according to data from the Reserve Bank of India, while the total credit market stood at just over Rs 145 lakh crore.