Achin Biyani
Gone are the days when there were limited channels for the private sector to avail loans for setting up units or scaling up operations. At one point in time, there were just banks having their challenges in the form of a lengthy documentation process, long turnaround time, and higher interest rates. However, the rise in entrepreneurship on the backdrop of emerging markets, technological innovations, and increased government support – widen the supply side providing funding assistance. With India aiming to become a USD 5 trillion economy by 2024-25[1], coupled with a rise in start-ups (61,400 as recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) with 14,000 being recognised in FY 2022)[2], the avenues for fund raise is expected to rise further as we witness a shift towards a combination of financial and technical assistance, specifically in case of development and social sector. How do you provide that assistance when most of the capital flows into infrastructure development, considered a fast and sustained way of reviving the economy and consolidation through its multiplier effect?
Let’s look at some numbers first – from the point of bank credit…
Historically, the Indian economy witnessed a bank credit boom during 2007-08 to 2013-14, registering a Compounded Annual Growth Rate (CAGR) of 16.8%, primarily driven by the industrial sector (50% contribution among the other sectors agriculture and allied activities, industry, services, and personal loans). Years 2014-15 to 2020-21 witnessed a qualitative shift as credit growth decelerated, registering a CAGR of 8.3% primarily due to a reversal in credit growth in the industrial sector. The credit growth to non-industrial sectors registered a CAGR of 12.4%, primarily driven by the personal loan segment. The reason for deceleration was primarily driven down by reversal in credit growth to the industrial sector because of deleveraging by non-financial firms, increased dependence on other sources for financial assistance (Foreign Direct Investment (FDIs), equity, Initial Public Offer (IPOs), bonds/debentures, Private Equity (PE) / Venture Capitalist (VC) deals, etc.) coupled with risk aversion on the part of banks owing to problems of stressed assets, which got further compounded post the outbreak of COVID19 pandemic[3]. The recent reports highlight a visible expansion in credit growth sectors for Q3 in FY2022, with an incremental credit-deposit ratio of 133 in Q3[4].
The other funding source, specifically, the private equity deals…
The decade 2011-2020 witnessed PE/VC investments grow at a CAGR of 19% from a base of USD 8.4 billion in 2010 to USD 47.6 billion in 2020, leading to an increase in the flow of risk capital over the last decade. By 2021, the investments in Indian companies touched an all-time high of USD 77 billion, almost 62% higher than in 2020, across 1,266 deals[5]. Thus, it has emerged as one of the single largest sources of much needed FDI. A positive sign for sure.
The analysis further states that, in the case of banks, most of the traction is from sectors, viz. telecom, petroleum, chemicals, electronics, gems & jewellery and infrastructure, including power and roads. It is also visible from the government’s push for capital expenditure (CAPEX), which has gotten the biggest share in the last 18 years – A huge capital outlay of USD 100.62 billion (INR 7.5 trillion), representing 19% of the total expenditure[6]. Likewise, in the case of PE deals, from a sector’s point of view, 60 to 70% of the investments have gone into financial services, infrastructure, real estate, e-commerce and technology[7].
Fund-raise, a challenge for development and social sector…
So, what happens to the social and development sectors which draw limited traction from the banks, the venture capitalists and the angel investors? In fact, as per Budget 2022-23, the overall social sector spending is also set to fall next fiscal – from 6.5% of the total expenditure in FY 2021, it is expected to decline to 6.1%.[8] In times of pandemic, the sector gasp for breath. So, how does one tackle the above-stated challenge?
The solution – Blended finance for the development and social sector…
Budget 2022-23 mentions ‘Government backed Funds National Investment and Infrastructure Fund (NIIF), and Small Industries Development Bank of India (SIDBI) Fund of Funds have provided scale capital creating a multiplier effect. Hence, for encouraging important sunrise sectors such as Climate Action, Deep-Tech, Digital Economy, Pharma and Agri-Tech, the government will promote thematic funds for blended finance with the government share being limited to 20% and the funds being managed by private fund managers.’ It has been one of the impressive parts of the Budget 2022-23. It raises confidence for facilities, viz., SAMRIDH Blended Finance Facility (BFF), a USD 250 million facility, supported by United States Agency for International Development (USAID) and implemented by IPE Global, already working in this space since 2021.
But then, what is blended finance? How does it work? Do some principles govern it? Does it help in achieving social goals? Who are the stakeholders, and who gets benefitted? How would the government implement it? These are just a few of the questions that come to my mind.
While we wait for the finer details to understand the government’s implementation strategy, for now, let’s understand it in brief…
Today, entrepreneurs need more than funding. Landing an investment is not challenging these days – it also requires guidance and expertise. It could be drawing a business plan, drafting a marketing strategy, or improving operational efficiency. A blended finance facility aims to blend commercial capital with public and private grants to reduce the cost of capital (interest rate) and pair with direct technical assistance to strengthen the services, scale up the operations, etc., as per the need. It works in the following directions – provides financial assistance and technical guidance, creates leverage and ensures environmental and social impact. In addition, facilities like SAMRIDH have also focused on achieving financial returns for private investors.
Blended finance is a financial structure in which multiple investors participates according to their priorities. Some of the examples include; a Social Success Note based on the principle of pay-for-success, helping for-profit social enterprises access affordable debt and create on-ground impact; Partial Risk Guarantee, wherein the guarantor agrees to pay part of the entire value of the loan to the lender, reducing the cost of capital, making the investments commercially viable; Interest Subvention, wherein, the interest component on loan get paid fully or partially by a developmental funder or a donor to promote the achievement of social goals. Another advantage of this structure is that the financial institutions and Non-Banking financial Company (NBFCs) can provide collateral-free loans to entities with support from such blended finance facilities ensuring no equity dilution.
However, there are principles to follow, such as the investments should be tied up with social goals. A strong monitoring and evaluation technique to measure the impact. These are just a few.
To, sum up…
Blended Finance Capital is an agent of change. It plays an important role in providing a push to development and the social sector – a space that requires patience capital to bring in the transformation and contribute towards economic revival. After all, every penny counts.
[1] Based on PIB release (Report submitted by a working group task)
[2] Economic survey 2022
[3] Bank credit numbers: RBI report on Changes in Sectoral Bank Credit Allocation
[4] News articles
[5] PE/VC agenda: India Trend Book 2021; IVCA and EY; VCCircle; Tracxn
[6] Budget 2022-23 figures
[7] PE/VC agenda: India Trend Book 2021; IVCA and EY; VCCircle; Tracxn
[8] Analysis based on budget 2022-23 figures
