BUSINESS OF THE SMALL INDUSTRIES BANKCentral
Section 19 of The Small Industries Development Bank of India Act, 1989
- (1)Notwithstanding anything contained in the Foreign Exchange Regulation Act, 1973 (46 of 1973), or in any other enactment for the time being in force relating to foreign exchange, the Small Industries Bank may, for the purposes of granting loans and advances under this Act, borrow, with the previous consent of the Central Government 1 ***, foreign currency from any bank or financial institution in any foreign country or otherwise.
- (2)The Central Government may, where necessary, guarantee any loan taken by the Small Industries Bank under sub-section (1) or any part thereof as to the repayment of principal and the payment of interest and other incidental charges.
- (3)All loans and advances granted by the Small Industries Bank out of foreign currency borrowed under sub-section (1) shall be expressed in terms of foreign currency as equivalent of Indian currency calculated in accordance with the rate of exchange prevailing at the time of grant thereof, and the amount due thereunder shall be repayable in equivalent Indian currency, calculated in accordance with the rate of exchange prevailing at the time of repayment of such loan or advance.
- (4)Unless otherwise provided by the Central Government, any loss or profit in connection with any borrowing of foreign currency under sub-section (1) for the purpose of granting loans and advances under this Act, or with its repayment to the concerned foreign lending agency, on account of any fluctuations in the exchange accruing--
- (a)during the period within which the loan or advance is repayable by the industrial concern in the small-scale sector or the period of actual repayment thereof by the concern, whichever is longer, shall be reimbursed by, or paid to, as the case may be, the recipient of such loans and advances;
- (b)after the expiry of the period specified in clause (a),--
- (i)shall be borne by the Small Industries Bank in respect of normal market fluctuations in the rate of foreign exchange;
- (ii)shall be reimbursed by, or paid to, as the case may be, the Central Government in respect of fluctuations other than the normal market fluctuations in foreign exchange. Explanation.--If any question arises as to whether any fluctuation as aforesaid is a normal market fluctuation or not, the same shall be decided by the Central Government whose decision thereon shall be final.
Summary
- The bank can borrow foreign currency from any foreign bank or institution to grant loans and advances, but it must get the previous consent of the Central Government.
- The Central Government can guarantee the repayment of the principal amount, interest, and other charges on these foreign loans.
- Loans given to a business from these foreign funds are calculated in equivalent Indian rupees using the exchange rate on the day the loan is granted, and the business must repay it using the exchange rate on the day of repayment.
- If the exchange rate changes during the agreed loan period, the business receiving the loan bears any loss or keeps any profit from those changes.
- If abnormal exchange rate fluctuations happen after the loan period has expired, the Central Government covers the loss, while the bank covers normal market fluctuations.
Practical examples
1The bank borrows dollars from a European fund to lend to a small tech firm in India. The firm gets the rupee equivalent of 50,000 dollars on the grant date in 2026 and must pay back whatever 50,000 dollars costs in rupees on the repayment date in 2030.
2A business repays its foreign-funded loan two years late. During those extra two years, a sudden global financial crisis causes the rupee to drop drastically. The Central Government covers this unusual exchange rate loss because it happened after the normal loan period and the government ruled it an abnormal fluctuation.
FAQ
1. Does the bank need permission to borrow foreign currency?
Yes, it must get the previous consent of the Central Government.
2. Can the government guarantee these foreign loans?
Yes, the Central Government can guarantee the repayment of the principal and the payment of interest and other charges.
3. Who decides if an exchange rate change is a normal market fluctuation or an abnormal one?
The Central Government makes the final decision on whether a fluctuation is normal or not.
Test yourself
Q1.Under Section 19 of The Small Industries Development Bank of India Act, 1989, whose permission is required before the bank can borrow foreign currency?
Q2.Under Section 19 of The Small Industries Development Bank of India Act, 1989, how is the repayment amount calculated for a business that receives a loan out of borrowed foreign currency?
Q3.Under Section 19 of The Small Industries Development Bank of India Act, 1989, who bears the loss from exchange rate fluctuations during the standard agreed period of the loan?
Q4.Under Section 19 of The Small Industries Development Bank of India Act, 1989, if an abnormal exchange rate fluctuation happens after the loan repayment period has expired, who covers the loss?