The Present and Future of Development Financial Institutions N.K. - PowerPoint PPT Presentation

The Present and Future of Development Financial Institutions N.K. Maini, Deputy Managing Director Small Industries Development Bank of India

Evolution of DFIs in India  Set up to cater to demand for long term finance  In India, first DFI set up in 1951  Thereafter, sector specific DFIs were established • Access to low cost funds from the central bank • Directed investments in instruments of DFIs • Operating under a protective environment We empower Micro, Small and Medium Enterprises

MSME Sector overview in India  MSME sector contributes to economic growth, entrepreneurship development, financial inclusion and employment creation. No. of MSMEs – > 45 million. I. o Second largest source of employment - > 100 million persons. o Contributes 40% of exports and 45% of manufacturing output. o Growth during last 5 years – faster than overall economy and industrial sector.

Balance of Payments Crisis 1991 – A Turning Point  India experienced a near BoP crisis in 1991; averted with significant policy response  This proved to be a turning point in the Indian economy with the liberalisation of the economy  Many economic and financial reforms initiated ;  Various controls dismantled,  Tariffs, duties and taxes progressively lowered,  State monopolies broken,  Banking reforms and deregulation of interest rates,  Globalisation embraced gradually. We empower Micro, Small and Medium Enterprises

SIDBI Takes Birth in challenging Times  SIDBI set up in April 1990 by an Act of Indian Parliament, just prior to the opening up of the economy.  Started primarily as a refinancing institution. Started making attempt towards direct financing of small scale industries in a limited way. We empower Micro, Small and Medium Enterprises

A Turning Point1991 – Financial Sector Reforms A Turning Point 1991 –  Narasimham Committee in 1998 – to review implementation of A Turning Point banking reforms since 1992. One major recommendation – DFIs to convert themselves into  banks over a period of time.  Central Bank withdrew long term financial assistance available to DFIs. Further, directed investments in instruments of DFIs phased out.  Banks entered arena of long term funding. This led to uneven playing field for DFIs.  DFIs forced to change their business strategy. Leading DFIs converted to commercial banks (e.g. ICICI and IDBI). Some perished. We empower Micro, Small and Medium Enterprises

SIDBI’s response to the changed scenario - Institution Building • To traverse the extra mile in their endeavour to attain international competitiveness, MSMEs also need diverse support mechanism – 1999 - SIDBI Venture Capital Ltd. – 1999 – SIDBI Foundation for Micro Credit – 2000 - Credit Guarantee Fund Trust for Micro and Small Enterprises (1.4 million guarantees for loan amount of over USD 11 billion) – 2005 - SMERA Ratings Ltd. (over 28,000 ratings) – 2005 - India SME Technology Services Ltd. – 2008 - India SME Asset Reconstruction Co. Ltd. (assets under management over USD 190 million) – Co-promoted Institutions - Canbank Factors, SBI Factors Helping Government of India set up NCGTC • SIDBI constantly endeavoured to emerge as an umbrella organisation to cater to diverse and emerging needs of MSME sector through specialised organisations and has set-up various subsidiaries / associates. We empower Micro, Small and Medium Enterprises

Global Crisis 2008 – The New Trigger Point For Repositioning Role of SIDBI  Sub-prime crisis – originated in USA but had contagion effect worldwide, including India.  Strategy for combating Volatility, Uncertainty, Complexity and Ambiguity ( VUCA ). “Market failure” issues – responded diligently and swiftly for better future shape.  Addressing Market Failure – Trade off only temporary.  SIDBI redefined its business model to fill in the financial and non- financial gaps in the MSME eco-system. Provided liquidity and handholding in times of distress – countercyclical measures. Converted Crisis VUCA into an Opportunity VUCA i.e. We empower Micro, Small and Medium Enterprises

Repositioning SIDBI – New Niche Financing Areas Risk / Venture Capital – directly and through Fund of Funds approach  Provide start-up assistance for new ventures with flexible subordinated debt, preference shares, equity, etc.  Assistance to ventures on a growth path.  Growth capital for financing intangibles of MSMEs. Sustainable Finance  Focused lending schemes to reduce energy consumption, enhanced energy efficiency, reduce CO 2 emissions, adoption of clean technology, leading to improved profitability of Indian MSMEs. We empower Micro, Small and Medium Enterprises

Repositioning SIDBI – New Niche Financing Areas (Contd..) Receivable Finance Scheme  Addresses the issue of delayed payments to MSME suppliers through the scheme.  SIDBI also launched NSE Trade Receivable Engine for E – discounting (NTREES) - Operates on real time basis instead of 3 -4 days cycle in paper form. Services Sector  Specific schemes for various segments of the services sector. Long repayment periods. Activities where tangible assets are minimal, Knowledge based industries. We empower Micro, Small and Medium Enterprises

Microfinance  Micro Finance- an inclusive vehicle to reach out to those excluded and at bottom-of-the- pyramid  Nurturing & Handholding of 140 plus MFIs  Total funding support USD 1.32 billion benefitting 32 million poor, mostly women  2010 – Microfinance crisis We empower Micro, Small and Medium Enterprises

SIDBI’s response to microfinance crisis - Responsible Microfinance  Propagating responsible Micro Finance in India • Transparency and reduction in interest rates • Created Lenders’ Forum to bring alignment of efforts • India Microfinance Platform (IMFP) • – Code of Conduct Assessment (COCA) adherence measurement. • Credit bureau to avoid multiple lending • Encouraging information sharing amongst MFIs • In response to various crisis experienced by the sector, set up India Microfinance Equity Fund (USD 16 million in FY 2011 and USD 32 million in FY 2013) We empower Micro, Small and Medium Enterprises

The Impact  During FY 2014, SIDBI has reached out to about 800,000 beneficiaries / units through refinance scheme.  Microfinance – total beneficiaries of about 600,000.  NBFCs - about 19,000 beneficiaries  Direct Finance – 1,200 new accounts  RFS/BDRS-about 11,700 beneficiaries  Credit Guarantee – 350,000 loans We empower Micro, Small and Medium Enterprises

Takeaways / Learnings  DFIs to evolve constantly with changing circumstances/environment.  Meet both credit & non-credit (developmental) needs.  Set up specialised organisations to meet diverse needs e.g. Venture Capital / Credit Guarantee / Rating.  Identify and fill in the financial and non-financial gaps in the eco-system rather than compete with commercial banks. We empower Micro, Small and Medium Enterprises

Takeaways / Learnings  Complement and supplement working of commercial banks to ensure adequate credit flow to the targeted sector.  Convert crisis to opportunities.  Response time to a crisis be minimised.  Counter cyclical role in times of crisis.  The dynamism of DFIs will be retained by the above measures.  Slow and inefficient DFIs will have to make way for new and efficient entities. We empower Micro, Small and Medium Enterprises

Long Live the DFIs • Famous French Quote Le roi est mort, vive le roi ! The King is Dead, Long Live the King ! • A paradox, whereby an older order gives way to the new order. • In the context of DFIs – old order has to constantly give way to the new order in today’s dynamic world. • It is upto us to constantly evolve and reinvent our roles. • Long Live the DFIs. We empower Micro, Small and Medium Enterprises