ADAPTING TO CHANGES IN FINANCIAL SYSTEMS,

POLICIES AND STRUCTURES

PRAHALATHAN IYER

Chief General Manager, Export-Import Bank of India

Gaborone, Nov 3, 2016

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

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 Dynamics20

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Real GDP Growth Emerging market and developing economiesWorld

2011 2012 2013 2014 20150

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7Growth in Volume of Merchandise ExportsTotal Volume of Mer-

chandise ExportsDeveloped Economies

2015 - the 4th consecutive year in which growth in volume of world trade stayed below 3.0%

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(%)

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

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

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)

Exim Bank’s Flagship ProgramsLines 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

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

New Innovative Products/Initiatives for Project ExportsSpecial 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

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

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

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

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

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

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

Partner in India’s

Globalization

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