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
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
R&D
Mindset
Technology
Integration into
Regional /Global
value chain
2
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
3
Entrepreneurship &
Competitiveness
Entrepreneurship & Competitiveness can be
achieved through:
Innovative Finance
Equity
Venture Capital
Risk Capital
R&D support
Micro-finance
Business
Development
Services (BDS)
HRD
Capacity Building
EDPs
Cluster
Development
Technology
Upgrading
Market
Development Finance Matrix: India
AII-India Dev. Banks
(IDBI, IFCI,ICICI,IIBI,IDFC,SIDBI)
Specialized Financial
Institutions
(Exim Bank, & NABARD)
State Level Institutions
-State Financial CorporationsSFCs- 18)
- State Industrial Development
Corporations- SIDCs- 28)
Investment Institutions
(LIC,GIC,NIC,NIA,OIC,UII,UTI)
-State Small Industries
Development CorporationsSSIDCs-17)
Others:
(NEDFi, NSIC, KVIC,TFCI,
ICICIVenture,IVCF)
-Technical Consultancy
Organisations TCOs-18)
Institutional Network: Finance and Credit in India
Long-term
-All India
Short-term & Agriculture
Medium-term Credit
Financial
Institutions
(AIFIs)
-Regional
DFIs
-Commercial
-Cooperative
Non-banking
Finance
Companies
(NBFCs)
Government
owned
Institutions/
Corporations
Non-Govt.
Organisations
(NGOs) &
Micro Finance
Institutions
Banks
--Regional
Rural Banks
( RRBs)
Banks
-NABARD
(MFIs)
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
ALL FINANCIAL INSTITUTIONS
1400000
1200000
RS IN MILLION
1000000
800000
Sanctions
Disbursements
600000
400000
200000
0
1999-2000
2000-2001
2001-2002
2002-2003
2003-2004
YEAR
Source : Report on Development Banking in India 2003-04
Long Term Loans by Commercial Banks
Long Term Loans by AIFIs
10
Comparative Chart in Rs cr
Rs in crores
180,000
160,000
Banks
AIFI
140,000
120,000
100,000
80,000
60,000
40,000
20,000
Mar-90
Source: RBI website
Mar-95
Mar-00
Mar-02
11
Comparative Chart - in %
90%
80%
Banks
AIFI
70%
60%
50%
40%
30%
20%
10%
0%
Mar-90
Mar-95
Mar-00
Mar-02
Source: RBI website
12
FICCI STUDY ON
LONG 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, electrical13
machinery, textile, wires and cables,
PLANS FOR FRESH INVESTMENTS IN NEAR FUT
Source : FICCI Study March 04
14
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)
15
PROPORTION OF PROJECT COST TO BE MET FROM DEBT FINA
Source : FICCI Study March 04
16
DFIs NOT ACTIVE IN THE LAST FIVE YEARS
Can't Say
19%
Yes
No
Can't Say
No
8%
Yes
73%
Source : FICCI Study March 04
17
E DFIs USEFUL FOR RAISING LOW COST LONG TERM DEBT FU
Can't say
25%
Yes
31%
No
44%
Yes
No
Can't say
Source : FICCI Study March 04
18
EMERGENCE OF ALTERNATE FUNDING STRUCTURES
IN THE LAST FIVE YEARS
No
48%
Yes
52%
Yes
Source : FICCI Study March 04
No
19
SIZE DISTRIBUTION OF RESPONDENTS WHO FEEL THAT
ALTERNATE FUNDING STRUCTURES FOR RAISING DEBT
FINANCE
HAVE NOT EMERGED IN THE LAST FIVE YEARS
14%
5%
7%
50%
10%
14%
less than 1000 Million
1000-2000 Million
2000-3000 Million
3000-4000 Million
Source : FICCI Study March 04
4000-5000 Million
5000 Million & above
20
SIZE DISTRIBUTION OF RESPONDENTS WHO FEEL THAT
ALTERNATE FUNDING STRUCTURES FOR RAISING DEBT
FINANCE
HAVE EMERGED IN THE LAST FIVE YEARS
25%
46%
13%
2%
less than 1000 Million
3000-4000 Million
8%
1000-2000 Million
4000-5000 Million
Source : FICCI Study March 04
6%
2000-3000 Million
5000 Million & above
21
RE UNIVERSAL BANKS OF ADEQUATE HELP IN RAISI
LONG-TERM PROJECT FINANCE?
Yes
20%
Cannot Evaluate
40%
No
40%
Yes
No
Cannot Evaluate
Source : FICCI Study March 04
22
SHOULD DFIs BE REVIVED
No
10%
Can't say
10%
Yes
80%
Yes
No
Can't say
Source : FICCI Study March 04
23
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
24
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
25
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
26
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
27
Challenges for SMEs in Latin
America
Archaic
policy created
obstacles
for inputs, products &
financing
Policy
pace
reforms at slow
World
Business
Economic Survey
lack of finance - the
leading obstacle to
growth for SMEs in
Latin America
Only
few banks have
links with SME
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
28
Reasons SMEs Did Not Apply or Get
Credit
Latin American Countries
Outstanding Debt REF
4%
Growing Competition
REF
5%
Falling Demand REF
6%
Others - DNA/REF
5%
High Interest Rates
(DNA)
31%
DNA: Did Not Apply
Financial
Restructuring REF
8%
Economic Risk REF
19%
REF: Refused Credit
Turned Down by
Bank REF
22%
Source: InfoAmericas
29
Percent
Sources for Start-Up Financing
for SMEs
Source: InfoAmericas
30
Financing Cash Flow After StartUp
100
90
80
Percent
70
60
50
40
30
20
10
0
Source: InfoAmericas
31
New Forms of BDS for Regional Integration and
Replication
Manageme
nt
Training &
Capacity
building
Financial
Market
intelligence
& forecasts
Institution
al
Regional
Centers of
excellence
Developing
Trainers
Technology
Regional
in financial
markets
management networking
Regional
Pub.Pvt.
Partnerships
Exchange
programmes
Indo-ASEAN
Fund for
BDS
Institutional/
Associations
level
networking
Credit
scoring
Marketing
Indo-ASEAN
Market Dev.
Fund
32
romoting Entrepreneurship and Competitivene
Industries Development Bank of Indias (SIDBI) Initia
Micro Finance
Marketing
Assistance
Cluster
Development
Womens
Empowerment
Rural
Industrialisation
Capacity
Building
Environmental
Initiatives
SIDBI
Information
Dissemination &
Credit Rating
Technology
Upgrading
Entrepreneurship
Promotion
33
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 lowcost 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
34
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?
35
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
36
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
37
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