Presented by Dr. Sailendra NarainPresentation Transcript
Presented by Dr. Sailendra Narain SINGNIFICANCE OF LOCAL DEVEOPMENT FINANCIAL INSTITUTIONS IN DEVELOPING COUNTRIES Relevance, Role & Suggested Framework World Economic Forum – Financing for Development Workshop - Hong Kong
Financing for Development (FfD) : Which Way To Go
Over the year, Development Financial Institutions (DFIs) have played significant role in economic growth.
DFIs are however, now converting themselves into Universal Banks mainly affected by ‘Cost of Resources’
The World Bank had in late 1980s observed :
‘ DFIs have no future ’
‘ DFIs to Universal Banks’ ….. Is it the only alternative to sustain FfD…..???
Restructure existing Development Financial Network with more local / regional flavour without government’s intervention
Setup Local DFIs with new face as Public-Private Partnerships (PPPs) or Joint-Venture Companies (JVCs) without government ownership.
The proposal is either to The cardinal principles for both the forms being
Less or no reliance on government’s support, donors’ grants and concessional funding; and
Self-reliance mainly on local resources, domestic and later international capital markets, in due course
- OR -
Local DFIs will :
Stimulate sustained flow of FfD particularly for SMEs and other important segments;
Ensure adequate private finance and investments, crucial to economic growth; and
Help attaining Millennium Development Goals
Who needs to do what ??
For mobilising private finance and investments, Government must create an enabling environment for
Private Sector Development
Regional integration for competitiveness
Improving aid effectiveness for capacity building
Capacity building through technical, financial assistance and business development services (BDS)
Improving synergies between international investment funds and private finance
Becoming strategic partners by investing in equities, promoting suitable capital market and new financial instruments for mitigating investment risks, such as co-financing and joint venture funds, export and risk guarantees, etc.
Who needs to do what ?? (B) Donors, Bilateral and Multilateral Agencies
Suggested Framework for Local DFIs
How to restructure Regional DFIs ….. ??
How to setup Local DFIs with new face so as to better leverage multilateral agencies, fund banks, bilateral donors, national governments and aid agencies ……??
Central theme of this presentation is :
Awareness must emerge that: “FfD” is different from commercial banking and for which Local DFIs are the most suitable institution.
National governments should take necessary steps to recapitalize/restructure ailing DFIs, [like State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs) in India], which are nearer the ground and have wider reach.
The Local DFIs should be promoted as NBFCs, PPPs or JVCs in the private sector on commercial lines.
Government should only be facilitators and not the administrators/owners
Governments and Central Banks to ensure that Local DFIs have "level playing field" for raising resources including Open Market Borrowings.
Multilateral and Bilateral donor agencies might become co-promoters and also extend financial support to the Local DFIs. Assistance towards Business Development Services (BDS) by DFIs should come as technical support.
Restructuring / recapitalisation of Regional DFIs should be assisted by Multilateral agencies. Multilateral agencies should increasingly become co-promoters of such ventures and withdraw in phased manner.
SMEs the backbone of any developing country, should be encouraged to corporatise. This will help them to play effectively in Local Capital markets and have less reliance on institutional borrowings. Efforts should be to promote second tier Stock Markets for the SMEs.
New and innovative financial instruments should be promoted and active equity markets be developed rather than heavy reliance on debts only.
Special Development Funds like Technology Development and Innovation Funds, Modernization Fund, Risk Capital and General Fund, Small Equity Fund etc., to be co-promoted or jointly set up by the government and multilateral agencies, which might go a long way in promoting economic development.
Subsidized formal finance has failed. Connect informal lending agencies i.e. – Micro Finance with Local DFIs
Despite its popularity and potential, informal finance has many drawbacks
Difficulties may be overcome through links between informal and formal Local DFIs, but much remains to be learned about these linkages. (World Development Report 1990)
Obstacles & Limitations
Development finance with longer gestation period, have significantly contributed to various development programmes. However, of late, DFIs role is fast changing.
DFIs are at cross - roads
“ Project investments may see big fall in FY04: RBI : The Reserve Bank of India (RBI) has said that fixed capital investments by corporates could be much lower in ’03-04, with no large projects sanctioned in the last two years. Accordingly to a recent RBI study, aggregate capital expenditure on projects in the current year in unlikely to be anywhere close to the previous years figure of Rs. 37.154 crore”.
Obstacles & Limitations
Under-capitalised DFIs like in Latin America- Mexico.
Private debt averages less than 15% of GDP.
Large banks apathy encouraging small players to come in like BBVA-Bancomer and Serfin-Santander in Mexico.
Large banks in search of alternative channels for small loans / development finance.
Innovative instruments like equity, promoters’ contribution, start-up loans, venture capital, R&D and innovation finance, technology up-gradation, etc. are beyond reach and capacity of commercial banks system.
Banks borrowing Short can not lend Long (Asian Crisis)
Bank finance to SMEs in Latin America (Argentina, Brazil, Chile, Colombia, Mexico & Peru) during 1998-2002 indicates that large banks have neglected SMEs & development finance.
AII-India Dev. Banks ( IDBI, IFCI,ICICI,IIBI,IDFC,SIDBI) Specialized Financial Institu ( Exim Bank, & NABARD) Investment Institutions (LIC,GIC,NIC,NIA,OIC,UII,UTI) Others: ( NEDFi, NSIC, KVIC,TFCI, ICICI Venture, IVCF) State level Institutions -State Financial Corporations- SFCs- 18) - State Industrial Development Corporations - SIDCs- 28) -State Small Industries Development Corporations- SSIDCs-17) -Technical Consultancy Organisations –TCOs-18) Development Finance Matrix - INDIA -
Long term loans by commercial banks Long term loans by AIFIs Comparative Chart – in Rs cr Comparative Chart - in % - INDIA -
-INDIA- Trend in Growth Rate of Banks & AIFIs Term Loan & IIP
Liberalised economic policy regime led to blurring of DFIs and commercial banks roles Commercial banks now lend long term loans Unhealthy competition to win the limited clients Limited access to low-cost retail deposit Difficulty in pricing lending products at competitive rates Paucity and higher cost of resources made sustainability of viability difficult Virtually term-loan dominated DFIs portfolio did not keep pace with the market changes & new demands Common Problems of DFIs
Specialised development financing channel for any developing economy is a Must
Whether “DFIs to Universal Banks” …. necessary?
International experiences have shown that suitable restructuring can give DFIs a Strong foot-hold
Major factor in survival of DFIs is the ‘Cost of Resources’ as compared to commercial banks :
Is Government / Central Bank ready to address this issue in favour of DFIs.or leave it to market forces..??
Answer is : Retain Local DFIs with ‘Levels playing field’
New Agenda for ‘FfD’
Email: [email_address] Web: www.cesmed.org Thanks from Chairman : Centre for SME Growth and Development Finance (Mumbai, India) Regional Adviser : SDC-CESMED South Asia-South East Asia Multilateral Economic Co-operation Program. Dr. Sailendra Narain (Views expressed in this presentation are entirely personal)