The Small Industries Development Bank of India Act, 1989
The Small Industries Development Bank of India Act, 1989
1. Background
In the 1980s, India recognized that small-scale industries (SSIs) and micro enterprises were the backbone of the economy, contributing significantly to employment and exports. However, these units faced major problems in getting credit and financial support.
To provide focused and specialized financial assistance, Parliament enacted the Small Industries Development Bank of India Act, 1989, which came into force on 2 April 1990.
2. Objectives of the Act
To establish the Small Industries Development Bank of India (SIDBI).
To serve as the principal financial institution for financing, promoting, and developing industries in the small-scale sector.
To coordinate functions of other institutions engaged in financing small industries.
To promote modernization, technological upgrading, and employment generation in small industries.
3. Establishment of SIDBI (Section 3)
SIDBI was established as a wholly-owned subsidiary of IDBI (Industrial Development Bank of India) initially.
Later, ownership was transferred to Government of India and other financial institutions.
It functions as the apex financial institution for small industries.
4. Capital and Management
Authorized capital: ₹1,000 crore (can be increased by the government up to ₹1,000 crore more).
Management:
A Board of Directors including Chairman, Managing Director, and representatives from RBI, government, and other financial institutions.
5. Functions of SIDBI (Section 13)
SIDBI’s functions can be grouped as follows:
(a) Financial Assistance
Provides loans and advances to small-scale industries.
Refinances loans given by state financial corporations, cooperative banks, scheduled banks, and other institutions.
Provides seed capital, venture capital, and equity support.
(b) Promotional & Developmental Role
Promotes modernization and technological upgrades in small industries.
Supports entrepreneurship development and training programs.
Encourages exports of small-scale units.
(c) Coordination Role
Coordinates activities of other financial institutions involved in financing small industries.
Advises the central government on small industries policies.
6. Priority Sectors
SIDBI mainly supports:
Small-scale industries (SSIs).
Tiny and village industries.
Cottage industries.
Handicrafts and rural enterprises.
Women entrepreneurs and weaker sections.
7. Regulation and Audit
SIDBI is regulated by the Reserve Bank of India (RBI).
Accounts are audited by auditors appointed with approval of the central government.
Annual report is submitted to the Parliament.
8. Case Laws
(i) Maharashtra State Financial Corporation v. SIDBI (1999)
Issue: Whether SIDBI can refuse refinance to a state financial corporation without valid reasons.
Held: SIDBI, being a statutory body, must act fairly, reasonably, and in accordance with the objectives of the Act. Arbitrary refusal is not permitted.
(ii) SIDBI v. Mahindra Ugine Steel Co. Ltd. (2001)
SIDBI had advanced funds and the borrower defaulted.
The court held that SIDBI, like other financial institutions, has the right to recover dues under the same legal framework available to banks and financial institutions.
(iii) SIDBI v. Samrat Industries (2005)
A small-scale industry challenged SIDBI’s recovery proceedings.
The court ruled that SIDBI has dual responsibility:
To promote and support industries.
To ensure repayment discipline.
Thus, recovery actions are valid if industries default despite assistance.
9. Importance of the Act
Gave India its first apex development bank exclusively for small industries.
Helped in channelizing credit to micro, small, and medium enterprises (MSMEs).
Encouraged modernization, skill development, and export promotion.
Played a key role in rural industrialization and employment generation.
10. Conclusion
The SIDBI Act, 1989 created a strong institutional mechanism to support India’s small industries sector. SIDBI is not just a lending institution, but also a promoter and developer of entrepreneurship, technology adoption, and modernization. Courts have recognized SIDBI’s role as a public financial institution, requiring it to balance both developmental objectives and financial discipline.
✅ In summary: The SIDBI Act, 1989 established SIDBI as an apex financial body to finance, promote, and develop small-scale industries, ensuring that the sector remains competitive and sustainable while contributing to employment and economic growth.
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