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Dr. Sailendra Narain
ChairmanCentre for SME Growth and Development Finance (Mumbai, India)
United Nations – New York 1 – 2 December 2005
Promoting Competition and Promoting Competition and Entrepreneurship Entrepreneurship
Role of National Development BanksRole of National Development Banks
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Entrepreneurship & Entrepreneurship & CompetitivenessCompetitiveness
EntrepreneurshipEntrepreneurship nAch (need for nAch (need for
achievement)achievement) Risk taking abilityRisk taking ability Innovative attitudeInnovative attitude Open to changesOpen to changes
CompetitivenessCompetitiveness First among equalsFirst among equals Face challenges and Face challenges and
fluctuationsfluctuations Sustain developmentSustain development R&DR&D MindsetMindset TechnologyTechnology Integration into Integration into
Regional /Global Regional /Global value chainvalue chain
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Competitiveness grows out of Competitiveness grows out of EntrepreneurshipEntrepreneurship
Entrepreneurship can be createdEntrepreneurship can be created Entrepreneurship vital for economic Entrepreneurship vital for economic
development, particularly development, particularly industry/SMEsindustry/SMEs
SMEs – backbone of all developing SMEs – backbone of all developing economieseconomies
Entrepreneurship & Entrepreneurship & CompetitivenessCompetitiveness
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Entrepreneurship & Competitiveness can be Entrepreneurship & Competitiveness can be achieved through:achieved through:
Entrepreneurship & Entrepreneurship & CompetitivenessCompetitiveness
Innovative FinanceInnovative Finance EquityEquity Venture CapitalVenture Capital Risk CapitalRisk Capital R&D supportR&D support Micro-financeMicro-finance
Business Development Business Development Services (BDS)Services (BDS) HRDHRD Capacity BuildingCapacity Building EDPsEDPs Cluster DevelopmentCluster Development Technology UpgradingTechnology Upgrading Market DevelopmentMarket Development InfomaticsInfomatics
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AII-India Dev. Banks(IDBI, IFCI,ICICI,IIBI,IDFC,SIDBI)
Specialized Financial Institutions
(Exim Bank, & NABARD)
Investment Institutions(LIC,GIC,NIC,NIA,OIC,UII,UTI)
Others:(NEDFi, NSIC, KVIC,TFCI, ICICIVenture,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
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Long-termLong-term--All India All India Financial Financial InstitutionsInstitutions(AIFIs)(AIFIs)-Regional -Regional DFIsDFIs
Short-term & Short-term & Medium-termMedium-term-Commercial Commercial BanksBanks--Regional -Regional Rural Banks Rural Banks ( RRBs)( RRBs)
Agriculture Agriculture CreditCredit-Cooperative Cooperative BanksBanks-NABARDNABARD
Non-banking Non-banking Finance Finance CompaniesCompanies(NBFCs(NBFCs))
Government Government owned owned Institutions/Institutions/CorporationsCorporations
Non-Govt. Non-Govt. Organisations Organisations (NGOs) & (NGOs) & Micro Finance Micro Finance InstitutionsInstitutions(MFIs(MFIs))
Institutional Network: Finance and Credit in India
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0
50000
100000
150000
200000
250000
2003-2004 2004-2005
YEAR (April - September)
RS IN
MIL
LIO
N
Sanctions
Disbursements
(Data Relate to All India Development Banks and Investment Institutions only)Viz. IDBI, IFCI, SIDBI, IIBI, IDFC and LIC, GIC, National Insurance Co. Ltd, New India Ass. Co. Ltd , Oriental Insurance Co. Ltd., United India Insurance Co. Ltd.
Source : Reserve Bank of India
All India Financial InstitutionsFinancial Assistance
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ALL FINANCIAL INSTITUTIONS
0
200000
400000
600000
800000
1000000
1200000
1400000
1999-2000 2000-2001 2001-2002 2002-2003 2003-2004
YEAR
RS IN
MIL
LIO
N
Sanctions
Disbursements
Source : Report on Development Banking in India 2003-04
9
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Mar-90 Mar-95 Mar-00 Mar-02
Year
Amt (in Crs)
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%% of Tot. Credit
Amt(Crs) % of Tot. CreditSource : RBI Website
Long Term Loans by Commercial Banks
10
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Mar-90 Mar-95 Mar-00 Mar-020.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
LT Credit % to totalcreditSource: RBI website
Long Term Loans by AIFIs
11
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Mar-90 Mar-95 Mar-00 Mar-02
Banks AIFI
Rs in crores
Source: RBI website
Comparative Chart – in Rs cr
12
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Mar-90 Mar-95 Mar-00 Mar-02
Banks AIFI
Source: RBI website
Comparative Chart - in %
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FICCI STUDY ONLONG TERM FINANCING NEEDS OF THE INDIAN
INDUSTRY AND THE ROLE OF DEVELOPMENT FINANCIAL INSTITUTIONS
Survey conducted Feb – March 2004, Survey conducted Feb – March 2004, elicited response from 248 companies elicited response from 248 companies with a wide geographical and sectoral with a wide geographical and sectoral spreadspread
The companies which participated in the The companies which participated in the survey ranged from Rs. 1 million to 5000 survey ranged from Rs. 1 million to 5000 millionmillion
The Survey represents a wide array of The Survey represents a wide array of activities and includes sectors such as activities and includes sectors such as paper, cement, automobiles and auto paper, cement, automobiles and auto ancillary, consumer electronics, electrical ancillary, consumer electronics, electrical machinery, textile, wires and cables, machinery, textile, wires and cables, petrochemicals, iron and steel, real estate petrochemicals, iron and steel, real estate and pharmaceuticals.and pharmaceuticals.
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SOURCE OF FINANCESOURCE OF FINANCE PROPORTION OF PROPORTION OF RESPONDENTS*RESPONDENTS*
EQUITY CAPITALEQUITY CAPITAL 2222
DEBENTURES AND BONDSDEBENTURES AND BONDS 0808
TERM LOANS FROM FIsTERM LOANS FROM FIs 4646
TERM LOANS FROM BANKSTERM LOANS FROM BANKS 5959
ANY OTHER (MAINLY INTERNAL) ANY OTHER (MAINLY INTERNAL) ACCRUALS & ECBsACCRUALS & ECBs
3333
(* Figures will not add up to 100 as multiple responses were allowed)
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PROPORTION OF PROJECT COST TO BE MET FROM DEBT FINANCE
1
10
7
2022
24
79
0
5
10
15
20
25
30
less than20
20-40 40-50 50-60 60-70 70-80 80-90 90-100
PROPORTION OF DEBT FINANCE
PRO
POR
TIO
N O
F R
ESPO
ND
ENTS
Source : FICCI Study – March 04
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Yes73%
No8%
Can't Say19%
YesNoCan't Say
DFIs NOT ACTIVE IN THE LAST FIVE YEARS
Source : FICCI Study – March 04
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ARE DFIs USEFUL FOR RAISING LOW COST LONG TERM DEBT FUNDS
Yes31%
No44%
Can't say25%
Yes No Can't say
Source : FICCI Study – March 04
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EMERGENCE OF ALTERNATE FUNDING STRUCTURES EMERGENCE OF ALTERNATE FUNDING STRUCTURES IN THE LAST FIVE YEARSIN THE LAST FIVE YEARS
Yes52%
No48%
Yes No
Source : FICCI Study – March 04
20
50%
14%
10%
7%
5%
14%
less than 1000 Million 1000-2000 Million 2000-3000 Million 3000-4000 Million 4000-5000 Million 5000 Million & above
SIZE DISTRIBUTION OF RESPONDENTS WHO FEEL THAT ALTERNATE FUNDING STRUCTURES FOR RAISING DEBT
FINANCE HAVE NOT EMERGED IN THE LAST FIVE YEARS
Source : FICCI Study – March 04
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25%
13%
6%8%2%
46%
less than 1000 Million 1000-2000 Million 2000-3000 Million3000-4000 Million 4000-5000 Million 5000 Million & above
SIZE DISTRIBUTION OF RESPONDENTS WHO FEEL THAT ALTERNATE FUNDING STRUCTURES FOR RAISING DEBT
FINANCE HAVE EMERGED IN THE LAST FIVE YEARS
Source : FICCI Study – March 04
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Yes20%
No40%
Cannot Evaluate40%
Yes No Cannot Evaluate
ARE UNIVERSAL BANKS OF ADEQUATE HELP IN RAISING LONG-TERM PROJECT FINANCE?
Source : FICCI Study – March 04
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Yes80%
No10%
Can't say10%
Yes No Can't say
SHOULD DFIs BE REVIVED
Source : FICCI Study – March 04
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FICCI STUDY ON LONG TERM FINANCING NEEDS OF THE INDIAN INDUSTRY AND THE ROLE OF DEVELOPMENT
FINANCIAL INSTITUTIONS
The economy today stands at the beginning The economy today stands at the beginning of an investment cycleof an investment cycle
A whopping 80% of the respondents are of A whopping 80% of the respondents are of the opinion that revival and strengthening of the opinion that revival and strengthening of DFIs is extremely importantDFIs is extremely important
Corporate India’s heavy dependence of debt Corporate India’s heavy dependence of debt financing for fresh investments continuesfinancing for fresh investments continues
Respondents have voiced concerns about the Respondents have voiced concerns about the low levels of activity of the DFIslow levels of activity of the DFIs
HIGHLIGHTS
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The Industry is divided in its opinion on the The Industry is divided in its opinion on the emergence of alternative structures for raising debt emergence of alternative structures for raising debt financefinance
An important finding in the above context is the An important finding in the above context is the skewness, in terms of turnover, that emerges skewness, in terms of turnover, that emerges
The participants in the present survey have expressed The participants in the present survey have expressed apprehensions about the role Universal Banks can apprehensions about the role Universal Banks can paypay
Revival and Strengthening of DFIs would go a long Revival and Strengthening of DFIs would go a long way in ensuring that fresh investments in the way in ensuring that fresh investments in the economy are not hamperedeconomy are not hampered
Cont…
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Evaluation of DFIs in Select Evaluation of DFIs in Select Asian CountriesAsian Countries
Findings based on research conducted by Findings based on research conducted by Japan Economic Development Institute in Japan Economic Development Institute in 19991999
Extracted from “Development Banking in the Extracted from “Development Banking in the New Millenium” published by Development New Millenium” published by Development bank of Japan and presented at the World bank of Japan and presented at the World Bank in 1999Bank in 1999
DFIs selected in Japan, East Asia (Singapore, DFIs selected in Japan, East Asia (Singapore, Korea, Malaysia, Thailand, Phillippines, and Korea, Malaysia, Thailand, Phillippines, and Indonesia), and ChinaIndonesia), and China
Study also included DFIs in Europe, namely Study also included DFIs in Europe, namely KfW and European Investment Bank KfW and European Investment Bank
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Findings of this study:Findings of this study: Basic rule of DFIsBasic rule of DFIs
Relation with private financial sectorRelation with private financial sector Priority sectors & DFIsPriority sectors & DFIs Sources of fundsSources of funds Economic liberalisation and deregulationEconomic liberalisation and deregulation Financial crisis in East AsiaFinancial crisis in East Asia Expanded rule of DFIs in financial crisisExpanded rule of DFIs in financial crisis Changing rules of DFIsChanging rules of DFIs
““The history of development banks teaches some important lessons. They The history of development banks teaches some important lessons. They need to be dynamic, financially viable, independent with respect to need to be dynamic, financially viable, independent with respect to their management and resource mobilization, adaptable to changing their management and resource mobilization, adaptable to changing business environment, and, above all highly professionally managed business environment, and, above all highly professionally managed as a business entity.” – Khalid Siraj, The World Bankas a business entity.” – Khalid Siraj, The World Bank
Evaluation of DFIs in Select Evaluation of DFIs in Select Asian Countries Asian Countries
(Continued)(Continued)
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Challenges for SMEs in Latin Challenges for SMEs in Latin AmericaAmerica
Archaic policy created Archaic policy created obstacles obstacles
for inputs, products & for inputs, products & financingfinancing
Policy reforms at slow Policy reforms at slow pacepace
World Business World Business Economic SurveyEconomic Survey
“ “lack of finance - the lack of finance - the leading obstacle to leading obstacle to growth for SMEs in growth for SMEs in Latin America”Latin America”
Only few banks have Only few banks have links with SME links with SME community and low SME community and low SME portfolioportfolio
World Bank estimates $ World Bank estimates $ 35bn.35bn.
deficit in financing deficit in financing SMEsSMEs
30% of micro and 17% 30% of micro and 17% of SMEs use personal of SMEs use personal credit cards to finance credit cards to finance their businesstheir business
Lack of services from Lack of services from large banks opening large banks opening doors for new playersdoors for new players
Personal savings are still Personal savings are still the SME mainstaythe SME mainstay
IDB study,”fewer than IDB study,”fewer than 10% of SMEs are able to 10% of SMEs are able to secure bank finance”and secure bank finance”and “70% are obliged to offer “70% are obliged to offer credit to their clients”credit to their clients”
SMEs generally depend SMEs generally depend on three “Fs”:on three “Fs”:
Family, Friends and Family, Friends and FoolsFools
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Reasons SMEs Did Not Apply or Get Reasons SMEs Did Not Apply or Get CreditCredit
Economic Risk REF19% Turned Down by
Bank REF22%
High Interest Rates (DNA)31%
Growing Competition REF5%
Falling Demand REF6%
Financial Restructuring REF
8%
Outstanding Debt REF4%
Others - DNA/REF5%
DNA: Did Not Apply
REF: Refused Credit
Source: InfoAmericas
Latin American Countries
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Sources for Start-Up Financing Sources for Start-Up Financing for SMEsfor SMEs
0102030405060708090
100
Source: InfoAmericas
Perc
ent
31
Financing Cash Flow After Start-Financing Cash Flow After Start-UpUp
0102030405060708090
100
Source: InfoAmericas
Perc
ent
32
New Forms of BDS for Regional Integration and New Forms of BDS for Regional Integration and ReplicationReplication
ManagemeManagementnt
FinancialFinancial MarketingMarketing InstitutionInstitutionalal
Training & Training & Capacity Capacity buildingbuilding
Credit Credit scoringscoring
Market Market intelligence intelligence & forecasts& forecasts
Regional Regional Centers of Centers of excellenceexcellence
Developing Developing TrainersTrainers
Technology Technology in financial in financial managementmanagement
Regional Regional markets markets networkingnetworking
Regional Regional Pub.Pvt. Pub.Pvt. PartnershipsPartnerships
Exchange Exchange programmesprogrammes
Indo-ASEAN Indo-ASEAN Fund for Fund for BDSBDS
Indo-ASEAN Indo-ASEAN Market Dev. Market Dev. Fund Fund
Institutional/ Institutional/ Associations Associations level level networkingnetworking
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Promoting Entrepreneurship and Competitiveness Small Industries Development Bank of India’s (SIDBI) Initiatives
SIDBI
Environmental Initiatives
Cluster Development
Technology Upgrading
Entrepreneurship Promotion
Information Dissemination &
Credit Rating
Marketing Assistance
Women’s Empowerment
Rural Industrialisation
Capacity Building
Micro -Finance
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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
Problems of DFIs
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Specialised development financing channel for any developing economy is a Must
Is conversion into Universal Bank for DFIs survival a Must?
International experiences have shown that suitable restructuring can give DFIs a Strong foot-hold
Major factor in survival of DFIs in India is the Cost of Resources as compared to commercial banks
Is Government / RBI ready to address this issue in favour of DFIs or leave it to market forces?
DFIs New Agenda for Future
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Suggested New Framework Suggested New Framework for DFIsfor DFIs
Awareness about DFIs critical role for “Financing Awareness about DFIs critical role for “Financing for Development”for Development”
DFIs may be recapitalizedDFIs may be recapitalized DFIs be promoted as NBFCs, PPPs or JVs in the DFIs be promoted as NBFCs, PPPs or JVs in the
private sectorprivate sector Government should be facilitators and not owners Government should be facilitators and not owners
of DFIsof DFIs Central Banks should provide “level playing field” Central Banks should provide “level playing field”
to DFIs for resourcesto DFIs for resources Multilateral, bilateral and international financial Multilateral, bilateral and international financial
and investment institutions to become co-promoters and investment institutions to become co-promoters of DFIsof DFIs
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Issues for DiscussionIssues for Discussion Relevance of DFIs in today’s changing financial systemRelevance of DFIs in today’s changing financial system Should it be “Banks vs. DFIs” or “Banks Should it be “Banks vs. DFIs” or “Banks andand DFIs” DFIs” Are banks well equipped to play developmental rolesAre banks well equipped to play developmental roles If DFIs have to continue, what should be the new If DFIs have to continue, what should be the new
structure and Central Banking policystructure and Central Banking policy How to provide “level playing field” for raising resources How to provide “level playing field” for raising resources
by DFIsby DFIs How to revitalize the existing weak DFIs – role of How to revitalize the existing weak DFIs – role of
national governments and international financial systemnational governments and international financial system What are the systemic, institutional and enabling What are the systemic, institutional and enabling
environment changes necessary for providing DFIs a environment changes necessary for providing DFIs a new looknew look
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