Session iii adapting to changes in financial systems policies and structures revised - dr iyer
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The document discusses adapting to changes in financial systems, policies, and structures. It summarizes challenges facing the Indian financial system like slowing credit growth and rising non-performing assets. Key policy developments are outlined, including plans to revamp public sector banks. The role of development finance institutions in providing long-term financing is described. Initiatives by Export-Import Bank of India to support exports, small and medium enterprises, and infrastructure projects through lines of credit and financing programs are highlighted. Challenges and the way forward for development finance institutions like focusing on sustainable financing are also addressed.
Session iii adapting to changes in financial systems policies and structures revised - dr iyer
- 1. ADAPTING TO CHANGES IN FINANCIAL SYSTEMS, POLICIES AND STRUCTURES PRAHALATHAN IYER Chief General Manager, Export-Import Bank of India Gaborone, Nov 3, 2016
- 2. Structure of the Presentation 1. Changing Global Dynamics 2. Challenges in the Indian Financial System and Policy Developments 3. Role of DFIs in Current Scenario 4. Initiatives by Exim Bank of India
- 3. Reversal in capital flows in emerging markets - estimated US$ 531 billion of net capital outflows in 2015, as compared to nearly US$ 48 billion of net inflows in 2014 Slowing global trade and output, weakening commodity prices and tighter financial conditions – Adversely impacts financial systems Changing Global Dynamics -1 0 1 2 3 4 5 6 7 8 9 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Real GDP Growth Emerging market and developing economies World 0 1 2 3 4 5 6 7 2011 2012 2013 2014 2015 Growth in Volume of Merchandise Exports Total Volume of Merchandise Exports Developed Economies Developing Economies 2015 - the 4th consecutive year in which growth in volume of world trade stayed below 3.0%
- 4. Slowdown in credit growth Growth in credit to industries slowed to 0.2 per cent by end-August 2016 from 5.0 per cent in the year-ago period By size-wise classification, credit disbursed to both small and medium industries declined sharply while credit to large firms rose marginally Reversal of convergence in performance of public and private sector banks -- Public sector banks lag private banks on asset quality, profitability, and credit growth Declining profitability, high leverage and low debt servicing capacity in the Corporate Sector impacting financial sector Challenges in the Indian Financial System Increasing Non- Performing Assets (NPA) in the banking sector- In the June Quarter, gross NPAs rose by 97.4 per cent Source: Centre for Policy Research Cross-Country Comparison of NPA to Total Loans(%)
- 5. Key Policy Developments in the Indian Financial System Plan for Revamp of Public Sector Banks (PSB) -- Indradhanush Based on the seven pillars of Appointments, Bank Board Bureau, Capitalization, De-stressing PSBs, Empowerment, Framework of Accountability and Governance Reforms Government will infuse Rs.700 bn (~US$ 10.5 bn) out of budgetary allocations over the period FY16 to FY19 Changes in Bank Licensing Policy Licence to two new banks after nearly 10 years -- IDFC Ltd and Bandhan Financial Services Differentiated banks to be permitted- Payment Banks, Small Finance Banks, and niche licenses for banks with more narrowly defined businesses Financial Inclusion Jan-Dhan Yojana -- envisages universal access to banking facilities; nearly 242.7 million accounts opened Payment Banks and Small Finance Banks will also further financial inclusion Strengthening of Eco System Bankruptcy Code -- Enable banks to foreclose on defaulting borrowers Strengthen role of Asset Reconstruction Companies
- 6. DFIs have direct counter-cyclical and stabilising effect on economies; helps overcome adverse economic shocks Possess significant risk appetite, high credit ratings, willingness to provide or guarantee long tenor financing Cost of borrowing, capital reserves and return expectations lower than commercial lenders – passed on to borrowers ‘Soft support’ through intra-government relationships, political knowledge, diplomatic goodwill and reputational strength Commercial and political risk insurance provides commercial lenders the necessary comfort to continue lending DFIs adapting to new environment and developing new products – including venturing into capital markets Role of DFIs in Post-Crisis Period South–South Co-operation among DFIs has emerged as important mechanism for development financing
- 7. Export-Import Bank of India Set up in September 1981 under an Act of Parliament to finance, facilitate and promote India’s international trade and investment. Wholly owned by Government of India. Commenced operations in March 1982. Objectives: “… for providing financial assistance to exporters and importers, and for functioning as the principal financial institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country’s international trade…” “… shall act on business principles with due regard to public interest” (Export-Import Bank of India Act, 1981)
- 8. Exim Bank’s Flagship Programs Lines of Credit Provides a safe mode of non-recourse financing option to Indian exporters to enter new export markets or expand business in existing export markets; no payment risk from the overseas importers Cover a variety of sectors like Agriculture, Transportation, Manufacturing (cement, sugar), Energy (generation, transmission and rural electrification) and Infrastructure As on 31st March 2016, EXIM Bank has 203 LOCs, covering 63 countries with credit commitments and authorization of over US$ 14.26 bn (Additional US$ 10 billion announced for African continent). Overseas Investment Finance Encourages Indian companies to invest abroad for, inter alia, setting up manufacturing units and for acquiring overseas companies to get access to the foreign market, technology, raw material, brand, IPR etc. As on end-March 2016, Exim Bank provided finance to more than 559 ventures set up by around 530 companies
- 9. New Innovative Products/Initiatives for Project Exports With industrial demand slowing down globally, Exim Bank is targeting energy and infrastructure projects as vital conduits for exporting high-value machinery, labour, expertise, and technology packaged as project exports Buyer’s Credit under NEIA Began in 2o11, in conjunction with Export Credit Guarantee Corporation of India Limited (ECGC) Provides non-recourse finance to Indian Exporter by converting the deferred credit contract into cash contract; Indian supplier do not carry any credit or country risk; The Bank extends credit facility to overseas sovereign governments and government owned entities for import of goods and services from India on deferred credit terms Exim Bank obtains cover under NEIA through ECGC; guarantee fee to be borne by the buyer/ seller, as may be agreed Facility covers 85% of contract value The Bank has till end-March 2016 sanctioned US$ 2.19 bn for 22 projects valued US$ 2.49 bn
- 10. New Innovative Products/Initiatives for Project Exports Special Purpose Facility for Financing Strategic Infrastructure Projects in Neighbouring Countries New financing scheme launched last year to offer concessional finance to support Indian companies bidding for strategically important infrastructure projects overseas Under the programme, Exim Bank with the support of Government of India, has extended commitment to finance the strategic Maitree Power Project in Bangladesh valued US$ 1.8 bn Kukuza Project Development Company Kukuza Project Development Company for Africa, based out of Nairobi, has been floated by Exim Bank, IL&FS, AfDB and SBI; expected to provide specialist project development expertise to take infrastructure projects from the concept stage to the commissioning stage in the African Continent Project Development Fund Created by Government of India with a corpus of Rs 5 bn for catalysing Indian economic presence in Cambodia, Laos Myanmar and Vietnam; to be operated by Exim Bank
- 11. Products/ Initiatives for MSMEs Globally, since 2008, bank lending to MSMEs has declined; over half of trade finance requests by SMEs are rejected Exim Bank operates a wide range of lending, service and support programmes to promote two-way transfer of technology, trade and investments for the SMEs Financial Support Variety of loan products; special lending programme for financing the Indian creative goods and services industry Tied up with the Asian Development Bank for a US $ 100 million loan facility for providing loans to export oriented SMEs, especially in economically weaker states Cooperation arrangements with various institutions to support export clusters in India Grassroots Initiative and Development Financial support to promote grassroots initiatives/technologies, particularly those having export potential Provides assistance at various stages of product development / business cycle including capacity building, export capability creation, expansion/diversification and exports
- 12. Technology Support Launched the Technology & Innovation Enhancement and Infrastructure Development fund to augment export competitiveness and internationalization efforts of MSMEs Support to techno-entrepreneurs through partnership with Rural Technology Business Incubator of the Indian Institute of Technology Madras Products/ Initiatives for MSMEs Marketing Advisory Services Commercial assistance to Indian companies, including MSMEs, to access overseas and domestic markets by way of locating distributor(s) / buyer(s) / partner(s) for quality Indian products & services Capacity building, design sensitization, product development, diversification and innovation through workshops / seminars / training programme
- 13. Research studies undertaken on products, sectors, countries, macro economic issues relevant to international trade and investment Disseminates information on export opportunities and highlights developments that have a bearing on Indian exports Exim Bank represented on various strategic Committees of the Government: Cross-border Capacity and Institutional Development Capacity building of export credit insurance industry to enhance the international trade competiveness of Sri Lanka Institutional Capacity Building for export credit and insurance in Rwanda Expertise provided on developing a National Export Strategy of Myanmar Strategy paper for SAARC Development Fund to promote intra-regional projects in the South Asian Region Knowledge Creation and Dissemination
- 14. Exim Bank’s Institutional Linkages Exim Bank is on the Board of ADFIAP; regularly participates in the Annual Events to share developmental experiences Exim Bank is the nominated member development bank under the BRICS Interbank Cooperation Mechanism; has signed about 10 agreements for cooperation with the objective of strengthening trade and investment relations. Asian Exim Bank Forum (AEBF) BRICS Inter-Bank Cooperation Mechanism Set up in Geneva in March 2006 through the Bank's initiative, under the auspices of UNCTAD; Serves as a global forum for promoting investment and trade finance for development through cooperation and technical assistance activities. Global Network of Exim Banks and Development Finance Institutions (G-NEXID) Supporting Indian Trade and Investment for Africa (SITA) Exim Bank is a partner institution in ITC’s SITA initiative which aims at promoting exports from five East African countries - Ethiopia, Kenya, Rwanda, Tanzania and Uganda - to India through investment and skills transfer from the Indian side. In 1996, Exim Bank took the initiative of forming AEBF which seeks to enhance trade and investment cooperation Association of Development Financing Institutions in Asia and the Pacific (ADFIAP) Committed to Promote South-South Cooperation for Mutual Empowerment and Resurgence
- 15. Challenges Unlike other ECAs, the Central Bank in India regulates Exim Bank at par with commercial banks Leverage ratio restricted to 10-11 times of Net Owned Funds, as against 15-50 times for other ECAs Single borrower exposure limits restrict lending to large value projects Need to pay tax; transfer balance of its profit to the Government Tepid global demand and fall in international commodity prices impacted India’s exports – Declined for 18 consecutive months before rebounding in June 2016 Oil and Gas, Petroleum Products amongst top 10 sectors of exposure for Exim Bank Cost of funds limited by sovereign rating – need for a credit evaluation framework that benchmarks risks across emerging markets
- 16. Way Ahead In spite of challenges, financial system in India remains robust -- Risk of banking distress is low According to BIS, among 40 economies, credit-to-GDP gap was among the least for India in the first quarter of the current year Selective adoption of Basel III capital framework by Exim Bank with effect from 1st April 2018 to improve safety and soundness Current focus of Exim Bank on medium to long term credit, especially for project exports Greater focus on sustainable financing- 1st ever USD-denominated Green bond offering out of India; Part of the Advisory Committee of International Solar Alliance; EIB line of €500m for green projects Going forward, need for greater cooperation among DFIs for achieving developmental outcomes Reducing dependence on hard currency through local currency financing mechanisms; BRICS countries making significant headway Focus on financing green projects to promote sustainable development Financing for regional integration can help reduce vulnerability, especially in smaller economies
Editor's Notes
- #4: After several years of success, developing economies are now facing vulnerabilities and risks in the face of slowing global trade, weakening commodity prices and tighter financial conditions. Growth in emerging market and developing economies declined for the fifth consecutive year in 2015. This was also the fourth consecutive year when the growth in the volume of world merchandise trade was below the 3 percent mark. There has also been a reversal in capital flows – emerging markets saw an estimated US$ 531 billion of net capital outflows in 2015, as compared to nearly US$ 48 billion of net inflows in 2014.
- #5: Growth in outstanding total credit of SCBs slowed to 7.6 per cent per cent by end-August 2016 as compared to 8.2 per cent growth witnessed in the year-ago period. Within non-food credit, credit disbursed to industries contracted by 0.2 per cent by end-August 2016 as compared to a growth of five per cent recorded in the year-ago period. Major sub-sectors which witnessed contraction in credit include food processing, infrastructure, textiles and cement & cement products. By size-wise classification, credit disbursed to both small and medium industries declined while credit to large firms rose marginally. Credit to micro & small industries contracted by 3.7 per cent compared to a rise of six per cent in the year-ago period. Credit to medium industries contracted by 5.5 per cent over a fall of 5.6 per cent in the year-ago period. Growth in credit to large industries slowed to 0.7 per cent by end-August 2016 from 5.4 per cent in the year-ago period. In 2015, Public Sector Banks seemed to lag private banks on asset quality, profitability, and credit growth, among others. For instance, the PSBs recorded the highest level of stressed assets at 14.1 per cent, followed by private banks at 4.6 per cent, and foreign banks at 3.4 per cent. Because of the pressure on asset quality, the PSBs have also been lending more cautiously, resulting in muted credit growth for them. On the profitability front, PAT declined by 22.7 per cent for PSBs, whereas it increased by 11.5 per cent for PVBs (private banks) and 4.6 per cent for FBs (foreign banks) during the same period. Stressed assets in the banking system rose to 12 per cent by end-June 2016 from 11.4 per cent till end-March 2016 indicating pressure on the banking sector. This was led by a rise in stressed assets in PSBs to 15.4 per cent by June 2016 from 14.4 per cent by March 2016. The Deputy governor of the RBI offered the following measures to get over the problem of stressed assets in the banking system. Complete cleaning of PSBs balance sheets Fulfilling requirements of Basel-III norms Migration to International Financial Reporting Standards
- #6: In the past few years, because of a variety of legacy issues including the delay caused in various approvals as well as land acquisition etc., and also because of low global and domestic demand, many large projects have stalled. Public Sector Banks (PSBs) have been affected on account of these developments. The Government has put in place a comprehensive framework for improving PSBs, which is based on the seven pillars of appointments, bank board bureau, capitalization, de-stressing PSBs, empowerment, framework of accountability and governance reforms. The Government wants to adequately capitalize all the banks to keep a safe buffer over and above the minimum norms of Basel III. As a response, the Government will infuse Rs.70,000 crore out of budgetary allocations over the period FY16 to FY19. The recapitalization is essential to maintain a robust financial architecture, although the allocated amount may need to be further beefed up. A healthy competitive banking sector that caters to all segments of the society and is deep and liquid enough to ensure efficient flow of capital to not just the most profitable ventures but also those in need of it is the need of the hour. The changes in bank licensing policy is reflective of this need. The Jan Dhan Yojana (JDY) has been a significant and impactful first step in financial inclusion. The project’s ambition and implementation are perhaps unprecedented. While the history of financial inclusion dates back to 1969, when the nationalisation of banks took place, the JDY has on paper carried out the most exhaustive financial inclusion process to date. Its initial goal of opening one bank account per Indian household was achieved in January, 2016. The new stressed assets resolution framework was announced in 2014, and according to RBI, Asset Reconstruction Companies (ARCs) should be “construed as a supportive system for stressed asset management”. The idea was to make sure these firms are well-capitalized and brought into the restructuring process at an early stage so they can help revive assets. For example, to ensure that bad assets are not simply parked with ARCs, RBI increased the upfront payment needed to buy assets to 15% of net asset value from 5% earlier.
- #15: SITA: India's investment-led trade approach could help sustain the dynamic trade growth between India and SITA partner countries, and help extend trade both in terms of the number of partners involved and also the range of goods and services traded. Investment for joint ventures between the countries could significantly open up the route for enhancing trade of goods. Currently, the focus is on the sectors of Cotton-Textiles, Sunflower oil, Spices: Ginger, Turmeric and Bird's Eye Chili (capsicum), Essential oils, IT, ITES, BPO, Pulses, Coffee, Leather, and Emerging sectors (health services, technical/vocational training services, treated water, bile processing).
- #17: BIS compiled data of over 40 economies and found that the credit-to-GDP gap was among the least for India in the first quarter of the calender year. In the first quarter of 2016, India’s credit-to-GDP gap stood at (-2.9), the lowest among the BRIC group of nations. The metric for China jumped up to 30.1 during January-March 2016. The metric for Brasil and Russia stood at 4.6 and 3.7, respectively. Among other major economies, the credit-to-GDP gap of United Kingdom (UK) was (-27), followed by United States of America (USA) (-9.9), Germany (-6.1). At present, the All India Financial Institutions (AIFIs) operate under the Basel I capital framework. Over the years, the operational landscape and risk profiles of AIFIs have changed significantly. With the introduction of Basel III by the Basel Committee on Banking Supervision (BCBS) as a part of global financial regulatory reforms, many development finance institutions across the world have adopted Basel III either voluntarily or as required by their regulatory authorities. Keeping in view the importance of ensuring the safety and soundness of financial institutions in general, it has been decided to selectively extend elements of the Basel III capital framework to the four AIFIs, viz., EXIM Bank, NHB, NABARD and SIDBI with effect from 1 April 2018. The guidelines in this regard will be issued by end-October 2016.