Rs 2,500 crore fund for SSIs

the corpus of Rs 2,500 crore fund would be built over a period of time, and every year the government would make a budgetary provision to the fund and SIDBI would also make contributions to the fund.

In the first year of operations the fund will have Rs 125 crore with the Government allocating Rs 100 crore in the budget and SIDBI providing Rs 25 crore, he said adding that the fund was expected to be fully operational by the Tenth Plan.

Since the fund would be used to provide guarantee to loans taken from commercial banks it was expected that the first disbursal would take place only after three years once some of the loans defaulted, he said.

The credit guarantee fund has been created to encourage commercial banks to extend credit to the small scale entrepreneurs who may not be able to offer collaterals, executive director of SIDBI G K Saxena said.

The upper limit for the loans would be Rs 10 lakhs and these would be provided without collaterals, Saxena said adding loans would be primarily extended to small scale units in the manufacturing sector and those associated with information technology.

Explaining the role of SIDBI, he said the company would stand guarantee for up to 75 per cent of the loan extended to a small scale unit by a commercial bank.

"Despite the risk for SIDBI in case of defaults it is expected that commercial banks would extend more loans to the small scale unit as their risk would be to the extent of only 25 per cent," he said.

Under the proposal the scheme would be operated for a period of five years on a pilot basis and there should be a lock-in period of 24 months from the date of disbursement, sources said.

Lenders under the scheme shall pay a guarantee fee of two per cent of the loan upfront and annual service fee of 0.5 per cent of the loan outstanding at the end of each year. The rate of interest charged by the banks shall not be more than three per cent over the prime lending rate (PLR), sources said.

Sources said the borrowers would also have to open a fixed deposit (FD) account with SIDBI equivalent to five per cent of the loan.

These fixed deposits would earn an annual interest of 10 per cent and have a maturity period of five years. In case of default of the loan and claim being settled by the fund, these FDs would be forfeited, sources added.