The Small Industries Development Bank of India is set to operationalise the Rs 10,000 crore (Rs 100 billion) fund for providing concessional credit to small and medium scale industrial units from Thursday. The money is to be disbursed within two years.

While the lending institution is expected to chip in with around Rs 4,000 crore (Rs 40 billion) through internal generation and borrowings, it will collect around Rs 1,200 crore (Rs 12 billion) from foreign banks that have not met their priority sector lending targets.

The rest of the amount will be raised from various sources, including the issue of priority sector and capital gains bonds, external commercial borrowings and multilateral assistance.

"Funds are not a problem. We will decide on the cheapest route for meeting the Rs 10,000 crore (Rs 100 billion) financing needs. Loans will be made available at 9.5 per cent, which is 2 per cent below Sidbi's prime lending rate of 11.5 per cent," Sidbi chairman and managing director V K Chopra said.

He added that it was unlikely that the small scale sector would get commercial loans at such competitive rates elsewhere.

Chopra said the Sidbi board had also approved working capital and non-fund facilities so as to provide integrated banking services under one roof.

The board is in the process of acquiring necessary approvals from the ministry of small scale industries and the Reserve Bank of India.

Sidbi executives said the institution's spreads could come under pressure in the immediate term since the average cost of funds was around 6 per cent.

"Over a slightly longer period we will not face any problems since the borrowing cost is coming down and we will negotiate cheaper rates for our future borrowings," a source said.

Chopra said loans would be made available through the bank's 44 branches, branches of state finance corporations and commercial banks spread across the country.

The bank will first service the small scale sector and move on to the medium scale sector once it is defined by the government, he added.

Chopra said the aim of the bank was to double the quantum of direct lending every year from the Rs 2,387 crore registered last year.