Promoting Competition and Entrepreneurship Role of National Development Banks

1
Promoting Competition and Entrepreneurship Role
of National Development Banks
Dr. Sailendra Narain
Chairman Centre for SME Growth and Development
Finance (Mumbai, India)
United Nations New York 1 2 December 2005
2
Entrepreneurship Competitiveness

• Entrepreneurship
• nAch (need for achievement)
• Risk taking ability
• Innovative attitude
• Open to changes

• Competitiveness
• First among equals
• Face challenges and fluctuations
• Sustain development
• RD
• Mindset
• Technology
• Integration into Regional /Global value chain

3
Entrepreneurship Competitiveness

• Competitiveness grows out of Entrepreneurship
• Entrepreneurship can be created
• Entrepreneurship vital for economic development,
  particularly industry/SMEs
• SMEs backbone of all developing economies

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Entrepreneurship Competitiveness

• Entrepreneurship Competitiveness can be
  achieved through

• Business Development Services (BDS)
• HRD
• Capacity Building
• EDPs
• Cluster Development
• Technology Upgrading
• Market Development
• Infomatics

• Innovative Finance
• Equity
• Venture Capital
• Risk Capital
• RD support
• Micro-finance

5
Development Finance Matrix India
AII-India Dev. Banks (IDBI, IFCI,ICICI,IIBI,IDFC,S
IDBI) 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)
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Institutional Network Finance and Credit in India
Long-term -All India Financial Institutions (AIFIs) -Regional DFIs Short-term Medium-term Commercial Banks -Regional Rural Banks ( RRBs) Agriculture Credit Cooperative Banks NABARD
Non-banking Finance Companies (NBFCs) Government owned Institutions/ Corporations Non-Govt. Organisations (NGOs) Micro Finance Institutions (MFIs)
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All India Financial Institutions Financial
Assistance
(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
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Source Report on Development Banking in India
2003-04
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Long Term Loans by Commercial Banks
10
Long Term Loans by AIFIs
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Comparative Chart in Rs cr
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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, elicited
  response from 248 companies with a wide
  geographical and sectoral spread
• The companies which participated in the survey
  ranged from Rs. 1 million to 5000 million
• The Survey represents a wide array of activities
  and includes sectors such as paper, cement,
  automobiles and auto ancillary, consumer
  electronics, electrical machinery, textile, wires
  and cables, petrochemicals, iron and steel, real
  estate and pharmaceuticals.

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PLANS FOR FRESH INVESTMENTS IN NEAR FUTURE
Source FICCI Study March 04
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SOURCE OF FINANCE PROPORTION OF RESPONDENTS
EQUITY CAPITAL 22
DEBENTURES AND BONDS 08
TERM LOANS FROM FIs 46
TERM LOANS FROM BANKS 59
ANY OTHER (MAINLY INTERNAL) ACCRUALS ECBs 33
( 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
Source FICCI Study March 04
17
DFIs NOT ACTIVE IN THE LAST FIVE YEARS
Source FICCI Study March 04
18
ARE DFIs USEFUL FOR RAISING LOW COST LONG TERM
DEBT FUNDS
Source FICCI Study March 04
19
EMERGENCE OF ALTERNATE FUNDING STRUCTURES IN THE
LAST FIVE YEARS
Source FICCI Study March 04
20
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
21
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
22
ARE UNIVERSAL BANKS OF ADEQUATE HELP IN RAISING
LONG-TERM PROJECT FINANCE?
Source FICCI Study March 04
23
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
HIGHLIGHTS

• The economy today stands at the beginning of an
  investment cycle
• A whopping 80 of the respondents are of the
  opinion that revival and strengthening of DFIs is
  extremely important
• Corporate Indias heavy dependence of debt
  financing for fresh investments continues
• Respondents have voiced concerns about the low
  levels of activity of the DFIs

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Cont

• The Industry is divided in its opinion on the
  emergence of alternative structures for raising
  debt finance
• An important finding in the above context is the
  skewness, in terms of turnover, that emerges
• The participants in the present survey have
  expressed apprehensions about the role Universal
  Banks can pay
• Revival and Strengthening of DFIs would go a long
  way in ensuring that fresh investments in the
  economy are not hampered

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Evaluation of DFIs in Select Asian Countries

• Findings based on research conducted by Japan
  Economic Development Institute in 1999
• Extracted from Development Banking in the New
  Millenium published by Development bank of Japan
  and presented at the World Bank in 1999
• DFIs selected in Japan, East Asia (Singapore,
  Korea, Malaysia, Thailand, Phillippines, and
  Indonesia), and China
• Study also included DFIs in Europe, namely KfW
  and European Investment Bank

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Evaluation of DFIs in Select Asian Countries
(Continued)

• Findings of this study
• Basic rule of DFIs
• Relation with private financial sector
• Priority sectors DFIs
• Sources of funds
• Economic liberalisation and deregulation
• Financial crisis in East Asia
• Expanded rule of DFIs in financial crisis
• Changing rules of DFIs
• The history of development banks teaches some
  important lessons. They need to be dynamic,
  financially viable, independent with respect to
  their management and resource mobilization,
  adaptable to changing business environment, and,
  above all highly professionally managed as a
  business entity. Khalid Siraj, The World Bank

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Challenges for SMEs in Latin America

• Archaic policy created obstacles
• for inputs, products financing
• Policy reforms at slow pace
• World Business Economic Survey
• lack of finance - the leading obstacle to
  growth for SMEs in Latin America
• Only few banks have links with SME community and
  low SME portfolio
• World Bank estimates 35bn.
• deficit in financing SMEs

• 30 of micro and 17 of SMEs use personal credit
  cards to finance their business
• Lack of services from large banks opening doors
  for new players
• Personal savings are still the SME mainstay
• IDB study,fewer than 10 of SMEs are able to
  secure bank financeand 70 are obliged to offer
  credit to their clients
• SMEs generally depend on three Fs
• Family, Friends and Fools

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Reasons SMEs Did Not Apply or Get Credit
Latin American Countries
DNA Did Not Apply REF Refused Credit
Source InfoAmericas
30
Sources for Start-Up Financing for SMEs
Percent
Source InfoAmericas
31
Financing Cash Flow After Start-Up
Percent
Source InfoAmericas
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New Forms of BDS for Regional Integration and
Replication
Management Financial Marketing Institutional
Training Capacity building Credit scoring Market intelligence forecasts Regional Centers of excellence
Developing Trainers Technology in financial management Regional markets networking Regional Pub.Pvt. Partnerships
Exchange programmes Indo-ASEAN Fund for BDS Indo-ASEAN Market Dev. Fund Institutional/ Associations level networking
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Promoting Entrepreneurship and Competitiveness
Small Industries Development Bank of Indias
(SIDBI) Initiatives
Environmental Initiatives
Marketing Assistance
Micro - Finance
Cluster Development
Womens Empowerment
SIDBI
Technology Upgrading
Rural Industrialisation
Information Dissemination Credit Rating
Entrepreneurship Promotion
Capacity Building
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Problems of DFIs

• 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

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DFIs New Agenda for Future

• 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?

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Suggested New Framework for DFIs

• Awareness about DFIs critical role for Financing
  for Development
• DFIs may be recapitalized
• DFIs be promoted as NBFCs, PPPs or JVs in the
  private sector
• Government should be facilitators and not owners
  of DFIs
• Central Banks should provide level playing
  field to DFIs for resources
• Multilateral, bilateral and international
  financial and investment institutions to become
  co-promoters of DFIs

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Issues for Discussion

• Relevance of DFIs in todays changing financial
  system
• Should it be Banks vs. DFIs or Banks and DFIs
• Are banks well equipped to play developmental
  roles
• If DFIs have to continue, what should be the new
  structure and Central Banking policy
• How to provide level playing field for raising
  resources by DFIs
• How to revitalize the existing weak DFIs role
  of national governments and international
  financial system
• What are the systemic, institutional and enabling
  environment changes necessary for providing DFIs
  a new look

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Thank You
Contact email snpn_at_vsnl.net