We Empower MSMEs

Development Banking in India

– An overview

GSR Murthy
AGM, SIDBI, Bhubaneswar
29 - Aug – 2010 @ ximb
sriram@sidbi.in
(o) 2394854
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 What is a Bank?

• Banks are financial

intermediaries

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 Definition : Banking

Banking Institutions are basically

intermediaries concerned with mobilising
resources from various sources and
channelising such resources from productive
activities serving different sectors of society

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 Different Banking Intermediaries

Commercial Banks
– Public, Private, Foreign
Development Banks
Investment Institutions

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 What are Development
Banks

They supply
1.Capital
2.Knowledge
3.Enterprise

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 Objectives of Development Banking

Economic Growth coupled with just distribution of

benefits

- To act as gap fillers in the capital market

- Acceleration of pace of industrialisation
- Rendering long term financial support and
entrepreneurial and managerial assistance to
deserving projects

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 Genesis of Development Banking
World War - II & destruction of economoies
Needed Reconstruction
 
Development of economies ...need infrastructure
...lot of capital … ..long term investments were
needed. ...long gestation period....asset liability
mismatch....high risk
 
for long term credit needs institutions with
Developmental outlook were needed

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 Philosophy of Development Banking

“Commercial banks : lend when borrower

doesn’t need and take back when he needs it;
DFI - lend in distress and take when he can pay”
- in a lighter vein
 
safety-----------------------------▼--------------------------daredevil
(comm banks) (DFI) (venture cap)

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First modern Development Bank in the world
first government sponsored DFI was created in Netherlands in 1822. In
France, Credit Foncier and Credit Mobiliser, over the period 1848-1852.

International Bank for Reconstruction &

Development - IBRD (World Bank) – 1944

World Bank's Mission Statement

“ to reduce poverty, and improve living standards by
promoting sustainable growth and investment in people.”

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 Evolution of World Bank’s Mission
From facilitator of post-war reconstruction and
development to the present day mandate of
worldwide poverty alleviation
 
Reconstruction remains an important part of WB
work. However, the global challenges in the world
compel them to focus on – poverty alleviation,
global issues like climate change, diseases, health,
trade, sustainable development etc.,

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 Evolution of World Bank’s Mission - 2
Millennium Development Goals

Millennium Development Goals (MDGs) are 8

international development goals that all 192 UN
member states and at least 23 international
organisations have agreed to achieve by 2015.

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 Evolution of World Bank’s Mission - 3

Goal 1: Eradicate extreme poverty and hunger

Goal 2: Achieve universal primary education
Goal 3: Promote gender equality and empower women
Goal 4: Reduce Child Mortality Rate
Goal 5: Improve maternal health
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Goal 7: Ensure environmental sustainability
Goal 8: Develop a global partnership for development
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 Genesis of Development Banking in India
At the time of independence in 1947, India's capital
market was relatively under-developed. Although
there was significant demand for new capital, there
was a dearth of providers. Merchant bankers and
underwriting firms were almost non-existent. And
commercial banks were not equipped to provide
long-term industrial finance in significant manner.

Industrial Finance Corporation of India (IFCI)

the first Development Bank of India in 1948.
State Financial Corporations (SFCs)
SFCs Act, 1951
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 Definition : Development Banking in India
DFI no where defined.
There is no specific use of the term ‘DFI’ in either the RBI
Act, 1934 or the Companies Act, 1956 or various statutes
establishing DFIs. While the RBI Act defines the term
‘Financial Institution’ (FI), the Companies Act has
categorised certain institutions as Public Financial
Institutions (PFIs).
They are defined as public financial institution (PFI) - "an
institution promoted or assisted by Government mainly to
provide development finance to one or more sectors or sub-
sectors of the economy.

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 contd.,
Other Development Banks
Financial Institutions set up between 1948 and 1990

[1955] NATIONAL SMALL INDUSTRIES CORPORATION -NSIC

[1955] INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA-ICICI
[1956] LIFE INSURANCE CORPORATION -LIC
[1958] REFINANCE CORPORATION FOR INDUSTRY LTD (merged with IDBI in 1964)
[1964] INDUSTRIAL DEVELOPMENT BANK OF INDIA - IDBI
[1964] UNIT TRUST OF INDIA -UTI
[1960s] STATE INDUSTRIAL DEVELOPMENT CORPORATIONS - SIDCs
[1960s] STATE SMALL INDUSTRIES DEVELOPMENT CORPORATIONS
[1971] INDUSTRIAL RECONSTRUCTION CORPORATION OF INDIA
[Converted into Industrial Reconstruction Bank of India (1985)
Industrial Investment Bank of India (1997)]
[1973] GENERAL INSURANCE CORPORATION -GIC
[1982] EXPORT IMPORT BANK OF INDIA -EXIM
[1982] NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT -NABARD
[1986] SHIPPING CREDIT AND INVESTMENT COMPANY OF INDIA
[merged with ICICI in 1986]
[1990] SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA

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 Network
Development Banks in India
ALL INDIA FINANCIAL INSTITUTIONS - 15
COMPRISING
- ALL INDIA DFIS 6
- SPECIALISED INSTITUTIONS 6
- INVESTMENT INSTITUTIONS 3

IFCI, ICICI, IDBI, IIBI, EXIM, SIDBI

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 Repositioning of
Development Banks in India

towards universal banking

(cafeteria approach)
Narasimham committee – 2 &
SH Khan committee
recommendations

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 Journey of ICICI Bank
(formerly Industrial Credit and Investment Corporation of India)

- 1955 Incorporated as a DFI

- 1994 Established a baking subsidiary ICICI Bank
- 2002 ICICI merged into ICICI Bank

Branch Network - 2,016 branches (as on 31 March 2010)

ATM Network - 5,219 ATMs in India
Overseas presence - in 18 countries

the second largest bank in India

the largest private sector bank in India by market capitalization

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 Journey of IDBI Bank
(formerly Industrial Development Bank of India)

- 1964 Incorporated as a DFI (as subsidiary of RBI)

- 1976 Ownership transferred to Govt of India
- 1994 Established a baking subsidiary IDBI Bank
- 2004 IDBI merged into IDBI Bank

leading public sector bank and 4th largest Bank in

overall ratings
categorised IDBI as an "other public sector bank".
10th largest development bank in the world i

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 Journey of IFCI
- 1948 Incorporated as a first DFI
- 1993 Converted into a company
- 1999 Became IFCI Limited

Showed some turnaround but still is in trouble

Surviving on govt life line
Consultant is being appointed to show the growth path
IDBI, PNB not ready to take over this FI

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 Journey of NABARD
- 1982 Established by an Act of Parliament
- 1993 Converted into a company
- 1999 Became IFCI Limited

To provide focused and undivided attention to the development

of rural India by facilitating credit flow for promotion of
agriculture and rural non farm sector.

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 What is an MSME
Definition : investment in plant & and machinery

micro small medium

enterprise enterprise enterprise
service
upto Rs.10 lakh Rs.10 - 200 lakh Rs.200 - 500 lakh
unit

manufacturin
upto Rs.25 lakh Rs.25 - 500 lakh Rs.500 - 1000 lakh
g unit

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 How Important are MSMEs
 Largest employment generating sector after agriculture
 Provide employment to more than 4 crore persons
 Employment potential at low capital cost
 Constitute 95% of industrial units
 Total of 1.3 Crore registered / unregistered MSMEs
 Key contributors to national economy
 45% of manufacturing output
 40% of total exports
 7% of Gross Domestic Product
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Mandate for SIDBI
 MISSION of SIDBI

“To empower the Micro, Small and Medium

Enterprises (MSME) for economic growth,
employment generation and balanced regional
development of our country.”
 SIDBI – Products & Services

SIDBI products & services are broadly

grouped into three groups

(i) Indirect Assistance

(ii) Direct Assistance

(iii) Development & Support Services

 Traditional Credit Products
SIDBI/ BANK

Fund Based Non Fund Based

Term Loan WC Finance

limits INLC LC s Guarantees
Guarantees
 SIDBI : Operational Highlights

Particulars FY 2009 FY 2010 % Growth

(Rs. Crore)
Sanction 29188 35521 21.69%
Disbursement 28298 31918 12.79%

Total Income 2082 2540 22%

Profit before tax 749 865 15.48%
Net Profit 299 421 40.80%
Earning per share 6.65 9.36 40.75%
% of Net NPA to net portfolio 0.08 0.18 (125%)
outstanding
 SIDBI’s
Cells, Subsidiaries & Associates
 Challenges before SIDBI

Strengths Weaknesses
Lean organisation Lack of focus & strategy
Talent pool Procedural bottlenecks
Large balance sheet size

Opportunities Threats
Retails lending Marginalised
Large market SFC bad portfolio
Developmental role Competition
 Future outlook

Options before SIDBI

- To acquire a banking arm (or)

- To merge with / get merged with a bank (or)
- To continue as a DFI (and)
- Expand market reach (and)
- Expand product reach