BB0030 – Role of International Financial Institutions

Feb drive 2011

Bachelor of Business Administration-BBA Semester 6

BB0030 – Role of International Financial Institutions

Subject code – BB0030  (2 credits)

Marks 30

Q1. How has India benefited from International Development Association?

Ans :  The International Development Association (IDA) is an international financial institution which offers concessional loans and grants to the world's poorest developing countries. The IDA is a member of the World Bank Group and is headquartered in Washington, D.C., United States. It was established in 1960 to complement the existing International Bank for Reconstruction and Development by lending to developing countries which suffer from the lowest gross national income, from troubled creditworthiness, or from the lowest per capita income. Together, the International Development Association and International Bank for Reconstruction and Development are collectively known as the World Bank, as they follow the same executive leadership and operate with the same staff

India largest borrower of IDA, which helps poorest countries. The IDA (International Development Association) benefits the Indian state in several ways, but overall its main objective is to help combat poverty.

Because India has a low gross national income and has a low credit rating, it would really struggle to borrow funds. The IDA works together with the International Bank to make it easier for under developed and developing countries to gain access to loans and grants, and being part of the IDA allows India access to that financial support.

The IDA lends to countries with the aim to finance projects that will develop infrastructure and improve education, healthcare, access to clean water and sanitation facilities, and environmental responsibility. It is considered to be the soft lending window of the World Bank, while the IBRD is considered to be the hard lending window. The association offers grants and loans with maturities ranging from 25 to 40 years, grace periods of 5 to 10 years, and interest rates of 2.8% or 1.25% depending on whether the borrower is a blend country and to which degree it is eligible. Regular IDA-eligible borrowers may take advantage of no-interest loans. Financial resources are allocated to eligible countries based on their success at implementing pro-growth and a poverty-reducing domestic policies. The IDA uses the World Bank's Country Policy and Institutional Assessment (CPIA) development indicator to determine each country's place in a resource allocation index. It then prioritizes its lending to those countries which are indicated to be most promising in terms of favorable policies and aid effectiveness. The IDA adopted the Crisis Response Window in 2007 to enable the rapid provision of emergency financing in response to crises. The association adopted the Immediate Response Mechanism in 2011 to provide IDA borrowers with immediate access to withdraw undisbursed portions of their loans, should a crisis arise that meets the mechanism's criteria

Q2. What are the types of assistance given by The International Finance Corporation?

Ans :

The International Finance Corporation (IFC) is the private sector lending arm of the World Bank Group, providing financial services to businesses investing in the developing world. As private enterprises often privilege “business confidentiality” over the public’s right to know, it is frequently difficult for the public to measure or influence the development impacts of the IFC’s activities.

The IFC was established in 1956 to support the growth of the private sector in the developing world. The IFC’s stated mission is “to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people’s lives.” While the World Bank (IBRD and IDA) provides credit and non-lending assistance to governments, the IFC provides loans and equity financing, advice, and technical services to the private sector. The IFC also plays a catalytic role, by mobilizing additional capital through loan syndication and by lessening the political risk for investors, enabling their participation in a given project. The IFC has worked with more than 3319 companies in 140 countries since its inception in 1956.

The IFC is one of the fastest growing institutions in the World Bank Group, with a committed portfolio of USD $32.4 billion for IFCs own account, and $7.5 billion in loan syndications as of Fiscal Year 2008. It is a public entity, although its clientele consists of transnational, national, and local private sector companies, operating in a competitive and fast-moving business environment.

Investment services:

The IFC's investment services consist of loans, equity, trade finance, syndicated loans, structured and securitized finance, client risk management services, treasury services, and liquidity management. In its fiscal year 2010, the IFC invested $12.7 billion in 528 projects across 103 countries. Of that total investment commitment, approximately 39% ($4.9 billion) was invested into 255 projects across 58 member nations of the World Bank's International Development Association (IDA)

Advisory services:

In addition to its investment activities the IFC provides a range of advisory services to support corporate decision making regarding business, environment, social impact, and sustainability. The IFC's corporate advice targets governance, managerial capacity, scalability, and corporate responsibility. It prioritizes the encouragement of reforms that improve the trade friendliness and ease of doing business in an effort to advise countries on fostering a suitable investment climate. It also offers advice to governments on infrastructure development and public-private partnerships. The IFC attempts to guide businesses toward more sustainable practices particularly with regards to having good governance, supporting women in business, and proactively combating climate change.

Asset Management Company:

The IFC established IFC Asset Management Company LLC (IFC AMC) in 2009 as a wholly owned subsidiary to manage all capital funds to be invested in emerging markets. The AMC manages capital mobilized by the IFC as well as by third parties such as sovereign or pension funds, and other development financing organizations.

Q3. In what way has the Asian Development Bank assisted India? Give current information also.

Ans : India joined ADB at its founding in 1966 and since lending operations began in 1986, the world’s largest democracy of 1.2 billion people has undergone dramatic changes. Growth rates have climbed steadily from under 3% in the 1970’s to over 8% in fiscal year 2010, as the government carried out major economic reforms. But while the past four decades have seen a significant reduction in absolute poverty and the emergence of a burgeoning middle class, vast numbers of people still remain poor, and the country needs to address the challenge of ensuring that growth is inclusive. The goal of ADB’s current partnership with India is to help ensure the benefits of a fast expanding economy are shared by all, and that the growth is made environmentally sustainable, amidst increasing pressure on natural resources.

Past support

ADB’s early assistance was focused on support for national programs in sectors including transport, energy and urban infrastructure development. While it remains committed to providing support in these sectors, ADB has also been widening the scope of its assistance into areas such as agribusiness infrastructure, water resource management, climate change resilience, and tourism development.

It has also begun to shift its operations to assist individual states, particularly states which are economically lagging behind. Expanding the use of renewable energy, including solar power and providing assistance to deepen public-private partnerships for infrastructure development, are also an important part of the ongoing India-ADB partnership.

Present support :

In 2010, new highs were set for loan approvals and the performance of projects and programs in ADB’s broad portfolio of activities. Contract awards and disbursements also reached record levels. At the end of 2010 cumulative lending assistance had reached over $24 billion. Development gains in India have been achieved in many areas, with primary school enrolment rates likely to meet, or even exceed, this key 2015 Millennium Development Goal (MDG). However the country needs to keep pushing hard in progressing other key MDG indicators and continue to address structural changes to ensure growth is inclusive and sustainable.

Future progress:

Looking forward, ADB’s focus will be on helping India meet the goals of its current five year economic development plan, which includes improving the delivery of essential services to the poor, building up the rural economy, balancing growth with protection of the environment, and reducing development gaps between states, regions, sectors, and genders.

Earlier in 2011, a new three-year country business plan was signed that will see ADB provide India with lending assistance of $6.25 billion for 2012-2014. This assistance will be targeted across a broad range of areas, including the continued rollout of infrastructure in states and rural areas where the need is greatest.

Creating an environment for small businesses and the private sector to flourish, along with tackling daunting climate change and other environmental challenges are also high on the agenda.