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THE World Bank inked an agreement with India to lend $400 million to Small Industries Development Bank of India (Sidbi), which provides low-cost finance to small and medium enterprises (SMEs).

The finance ministry, which represented the government, said the loan would go to a project implemented by Sidbi aimed at fostering growth and competitiveness in small and medium enterprises, besides creating jobs.

This is part of the extra funds that the government had sought from the World Bank even as the international body enhanced its loan disbursements by $20 billion in the financial year ending June and by another $100 billion from the year starting July.

The Sidbi project on SME financing and development had earlier received a $120-million loan from the International Bank for Reconstruction and Development (IBRD)—one of the five arms of the World Bank. India now borrows about $1.5-2 billion from the IBRD, which is to be repaid with interest.

The additional IBRD loan is being taken by Sidbi directly from the World Bank with a guarantee from the Government of India, the ministry said in an official release.

The loan amount was doubled to $400 million from the original Sidbi demand owing to the enhanced credit requirements of SMEs in the economic downturn.

The finance ministry is in talks with the World Bank for more funds for other financial institutions too. That might take some more time as they are first-time loans, a senior official, who asked not to be named, said.

The World Bank is disbursing an extra $100 billion to various countries over three years from July onwards. India also avails loans under the World Bank’s International Development Assistance. It is an interest-free loan, which has to be repaid along with a processing fee. Now India borrows about $1.6 billion a year under this window, which is likely to be doubled.

This will help scale up the fully disbursed original project, which had been approved by the World Bank on November 30, 2004, the bank had said in a statement when the loan was approved on April 30. World Bank country director for India Roberto Zagha had then said the project is part of a larger programme of support in response to India’s request for funding in light of the financial crisis.

“It is targeted particularly at SMEs, to help address the credit slowdown that has resulted from the financial crisis,” he said. “Achieving and sustaining growth and employment will require a sharp step-up in industrial and services growth. This needs to be spurred by SMEs which have the greatest potential to provide employment,” he said.

The credit facility supported by the project will channel long-term and working capital loans for SMEs—who contribute about 45% of India’s manufacturing output—in geographical areas beyond those that were covered in the original project. This includes expanding to new geographical areas, possibly to India’s low growth states, thereby promoting inclusive growth.

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