promoting competition and entrepreneurship

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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


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Entrepreneurship & Competitiveness can be Entrepreneurship & Competitiveness can be achieved through:achieved through:


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

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-

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

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-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000


Banks AIFI

Rs in crores

Source: RBI website

Comparative Chart – in Rs cr

12

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


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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Yes89%

No11%

Yes No

PLANS FOR FRESH INVESTMENTS IN NEAR FUTURE

Source : FICCI Study – March 04

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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


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Yes73%

No8%

Can't Say19%

YesNoCan't Say

DFIs NOT ACTIVE IN THE LAST FIVE YEARS


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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


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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


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


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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


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Yes20%

No40%

Cannot Evaluate40%

Yes No Cannot Evaluate

ARE UNIVERSAL BANKS OF ADEQUATE HELP IN RAISING LONG-TERM PROJECT FINANCE?


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Yes80%

No10%

Can't say10%

Yes No Can't say

SHOULD DFIs BE REVIVED


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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


Perc

ent

31

Financing Cash Flow After Start-Financing Cash Flow After Start-UpUp

0102030405060708090

100


Perc

ent

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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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promoting competition and entrepreneurship

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