Trends in Industrial Finance in India and Elsewhere

By Rashad Kaldany

Summary

Delivered as the 1998 A. D. Shroff Memorial Lecture, Rashad Kaldany — Director of the IFC’s Asia II Department — surveys how industrial finance has evolved in India and internationally. His central thesis is that the classical resource constraint on development has been relaxed: between 1991 and 1996 private capital flows to developing countries tripled (from about US$100 billion to nearly US$300 billion) while public flows collapsed, so the pressing task today is to build institutions that can assess, mitigate, and price financial risk rather than simply mobilise scarce capital.

Kaldany traces the changing role of development banks, arguing that India’s state development-finance institutions — IFCI, ICICI, and IDBI — have outgrown their original subsidised-credit mandates and diversified into credit rating, merchant banking, venture capital, and (in ICICI’s case) commercial banking and asset management, becoming increasingly market-oriented. He praises ICICI as an almost ideal blend of developmental orientation and financial innovation, reviews commercial-banking reform after 1991 (and the 1991/92 securities scam), and describes the World Bank Group’s and IFC’s technical-assistance and equity support for both public and newly licensed private banks.

The lecture then charts the rise of India’s capital markets — the dramatic growth of the Bombay/Mumbai Stock Exchange, the creation of SEBI, credit rating agencies, and a central clearing house, and the expansion of retail shareholding — alongside the post-1996 equity downturn. Kaldany closes by examining newer instruments and channels: GDR issuance, leasing finance, and venture capital, noting how India’s 1988 venture-capital guidelines privileged public over private institutions and thereby delayed private capital’s entry. Throughout, he positions a well-functioning, well-regulated financial sector as more central to industrial growth and employment in developing countries than is often recognised.

Key points

• The lecture is the 1998 A. D. Shroff Memorial Lecture; Kaldany is Director, Asia II Department, IFC.

• Central thesis: the classical resource (capital) constraint has been relaxed; the new challenge is building institutions to assess, mitigate, and price financial risk.

• Private capital flows to developing countries rose from ~US$100bn (1991) to ~US$300bn (1996) while public/official flows fell from ~US$50bn to under US$3bn.

• India’s development finance institutions (IFCI, ICICI, IDBI) have diversified beyond subsidised long-term lending; ICICI is praised as a near-ideal developmental-cum-innovative intermediary.

• Reviews post-1991 commercial banking reform, the 1991/92 securities scam, and World Bank/IFC support for public and private banks.

• Documents capital-market growth: Mumbai Stock Exchange market cap from US$17bn (1987) to over US$120bn (1996-97), creation of SEBI, ~40 million shareholders by mid-1990s.

• Surveys newer financing channels — GDRs (over US$5.3bn raised), leasing finance, and venture capital — and critiques India’s 1988 VC guidelines for favouring public over private institutions.

• Argues a well-functioning, well-regulated financial sector matters more for industrial growth and employment in developing countries than often realised.

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