The Small Industries Development Bank of India will soon ink a strategic tie-up agreement with a commercial bank for extending direct credit facilities to the small-scale sector.

"We are in negotiations with a commercial bank, including Punjab National Bank, for a strategic tie-up for extending direct credit to small-scale industries," Sidbi Managing Director V K Chopra said in New Delhi on Monday at a seminar 'Finance and Credit Needs of SSIs,' organised by All India Manufacturers' Organisation.

He said the agreement would be signed very shortly. So far, Sidbi had been extending credit mostly indirectly through state financing entities and commercial banks, he added.

Initially, it would start covering certain sectors and depending on the success, it would be extended to other segments and parts across the country.

Highlighting that the SSI sector had a pivotal role to play, considering the vast employment potential and share in the country's GDP, Chopra, who was earlier with Oriental Bank of Commerce, said Sidbi board had decided to extend direct credit to the segment.

He said the board had also decided to cover credit up to Rs 500,000 by the commercial banks to SSI sector under its Credit Guarantee Fund, if banks did not insist on collateral.

"The new scheme (of providing coverage for credit lines up to Rs 500,000 without collateral) will be effective from September 1," Chopra said.

Though he expressed apprehension over the mounting bad loans to SSI sector, Chopra said there was a need to fix the upper limit on interest rate to SSIs rather than linking it to prime lending rates, which varied across the banks.

He said gross non-performing asset ratio stood at 21 per cent of net advances in the SSI sector as compared to overall ratio of only 11-12 per cent in the banking system.

On the interest rate to be charged for the SSI sector, he said it was necessary to fix an upper limit to it rather than linking it to the PLR, since some banks had 10.5 per cent, while others charged even 12 per cent.

It would create differences in the competitive position among the competitors, he said.

"We will be taking up it (the issue of fixing an upper limit) with Reserve Bank of India and also the government," the Sidbi official said.

Punjab National Bank chairman S S Kohli asked All India Manufacturers' Organisation to come up with a Risk Management model if the banks wanted to review the interest rates to the SSI sector and cited the risks involved in extending credit to the SSI sector were high considering the post WTO era.

He said the sector definitely played a major role since SSIs constituted 95 per cent of the production units and comprised 34 per cent of the exports of the country.