Since 1956, the International Finance Corporation (IFC), a part of the World Bank Group, has invested in nearly 400 companies in India, providing almost $15 billion in financing from its own account and mobilization of external resources.

IFC deals exclusively with the private sector, while the World Bank works only with the Government. “In every country, the private sector is largely composed of SMEs and in India about 90% of job creation is in the private sector of which 40% belong to the SMEs. Small Business always plays a very major role, especially in the development and that is always the focus of IFC. We are not a retail bank and do not deal with SMEs individually, but work on an aggregate basis,” says Jun Zhang, Country Head-India, IFC.

To undertake its lending activities, IFC primarily invests in Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs), who in turn lend to SMEs. Zhang says creating an enabling environment is very important in India since small businesses face considerable challenges.

The world’s sixth largest economy needs to develop new markets, incomes and jobs, including for the country’s poorest and the marginalized, but the going has not been easy. SMEs have largely suffered due to lack of finance, poor management, information asymmetry, regulatory burden and various other challenges in the ecosystem. Growth for small businesses has been anaemic and in some cases even the very survival becomes difficult.

“A case study that has been quoted a lot recently is a 10 year research done in three countries – India, Mexico and the US. Of the SMEs surveyed it was found that small businesses on an average in the US in a 10 year period grew by about 16 times. In Mexico, the SMEs surveyed grew by two and half times, but in India the same 10 years the size of the SMEs surveyed shrank by 40%,” says Zhang.

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This is despite the Government’s best effort, pumping money and creating initiatives like priority sector lending. “A lot of the issues are not about the intent, but the nature of the sector. Lack of information, large scale informality, lack of documentation, reports, etc. makes it very difficult for financial institutions to lend. This is a problem of the borrower and this is a huge issue that needs to be solved. There is then the capacity of SMEs – generally speaking, the financial literacy level is very low and the smaller you are, the more severe is the problem of lack of capacity,” says Zhang. Financial literacy is your ability to use all the financial tools to get access to finance and minimize the cost of financing.

To ensure the expansion of private enterprises and create a support system for such companies, IFC has a robust mechanism of working that has seen considerable success over the years. However, IFC’s own role has undergone a change to deal with the vagaries of the world post financial crisis of 2008-09. “Since the global financial crisis, we have reviewed and reflected on the role of institutions like IFC, especially with regards to helping a country in its private sector development. We are now taking a noticeable stance, which we call IFC 3.0,” says Zhang.

He adds that IFC is not in the country to make random investments, but here with a purpose to help the country transform into a middle and high-middle income nation.

“Our change of role is to move from individual transactions to helping the country close large developmental gaps that are measurable. We want to create a market for our investment capacity of $2-3 billion a year and also ensure we can take people along with us along with demand, supply and price where everybody can function well,” says Zhang.

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IFC moved towards working on a fund-of-fund basis and in the last 10 years has made significant contributions to the expansion of private enterprises in the country.

Zhang cites the example of the microfinance sector, where IFC has invested in 14 MFIs and after seven years, these institutions are responsible for 50% of the total disbursement of the sector. “In every company that we invest, it is not just about giving some money and expecting it to grow, but we participate in their working, take a board seat, ensure corporate governance etc. Each investment amounts to investment building,” says Zhang. Among success stories for IFC includes the $29 million equity investment it made in Bandhan in 2011. Bandhan went on to become the largest MFI in the country and received the Reserve Bank of India nod to become a bank in 2015.

The world has not been the same since 2008 and even international financial institutions needed to change the way they work. The learnings of the economic crisis and IFC’s new approach did bear results and provided enough data and conviction that development capital investment method for private enterprises work. But, exactly 10 years after the crisis that shook the world, India would be having its own Lehman Brothers moment. As a liquidity crisis hit SMEs, IFC in India would need to play a pivotal role.

Tomorrow, read about how IFC worked behind the scenes to help placate markets as the IL&FS storm played out.





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