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Sanjay Saxena Managing Director Challenges in Empowering Underserviced Groups in Accessing Finance.

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Presentation on theme: "Sanjay Saxena Managing Director Challenges in Empowering Underserviced Groups in Accessing Finance."— Presentation transcript:

1 Sanjay Saxena Managing Director Challenges in Empowering Underserviced Groups in Accessing Finance

2 2Access To Finance - Access to Finance is a key constraint for MSMEs. - Correlation between Financial Access & Depth, Poverty & Inequality - Correlation between Financial Access & Depth, Poverty & Inequality -Lack of access to finance impacts smaller firms (-10%) more then larger ones (-6%). -Lack of access to finance impacts smaller firms (-10%) more then larger ones (-6%). - It is important to distinguish ‘Access’ from ‘Use’ but its not easy to measure the two independently. - It is important to distinguish ‘Access’ from ‘Use’ but its not easy to measure the two independently. - Bank finance is the biggest source of Finance, but it does not mean non-bank finance is less important. - Bank finance is the biggest source of Finance, but it does not mean non-bank finance is less important. Background

3 3 Preference of bankers for Collateral rather than ‘Cash Flow’ based lending - Less than 25% of small firms use external finance as opposed Bigger Firms have better access to Finance - Less than 25% of small firms use external finance as opposed Bigger Firms have better access to Finance Serving the MSME involves higher transaction costs Lenders give preference to ‘Priority Sectors’ Key role of efficient Financial Intermediaries Access To Finance

4 4 Enforcement Context Regulatory Context Social Context Market Context Political Context Economic Context Empowering Underserviced Groups in Accessing Finance involves U involves Understanding the : Access To Finance

5 5 Enforcement Context Regulatory Context Social Context Market Context Political Context Economic Context Cultural / Religious Issues (Sharia Laws, Islamic Banking, Lack of Banking habits and Credit culture, Cultural bias towards some activities etc.) - Reason for Taking Loans (Consumption Expenditure, Investment) Trust Deficit (Trust in Banking, MFIs, Cooperatives, Government, etc.) Absorptive Capacity (MSME have Weak Documentation skills, Lack of awareness of available schemes, or Financial products) Absorptive Capacity (MSME have Weak Documentation skills, Lack of awareness of available schemes, or Financial products) Law and Order Situation (Organized crime, Threat of Violence, Enforcement) Law and Order Situation (Organized crime, Threat of Violence, Enforcement) Access To Finance Empowering Underserviced Groups in Accessing Finance involves U involves Understanding the :

6 6 Enforcement Context Regulatory Context Social Context Market Context Political Context Economic Context -Existence of Capital Markets (Debt and Equity Market option, etc.) Size of the Market and Talent Pool Distance (Spread, Communication challenge, High transaction costs etc.) Sectoral Issues (Typical requirements of each industry, sector, seasonality etc.) Sectoral Issues (Typical requirements of each industry, sector, seasonality etc.) Access To Finance Loan Guarantees, Banking competition, CIB & CAR Incentives within Financial Organizations Empowering Underserviced Groups in Accessing Finance involves U involves Understanding the :

7 7 Enforcement Context Regulatory Context Social Context Market Context Political Context Economic Context - Inefficiency Gap, Insufficiency Gap and Feasibility gap Availability of Micro-Financing, Capital Markets, Informal Lenders -Exchange Rate controls & Volatility, De/Regulated Interest Rates and Inflation -Import / Export potential Investor Rights protection, E-Commerce Laws, Taxation Macroeconomic stability and Potential for Regional Cooperation (Regional stock exchanges, Cross border trade, etc.) Macroeconomic stability and Potential for Regional Cooperation (Regional stock exchanges, Cross border trade, etc.) Access To Finance Empowering Underserviced Groups in Accessing Finance involves U involves Understanding the :

8 8 Enforcement Context Regulatory Context Social Context Market Context Political Context Economic Context Polarization (Existence of completely divergent viewpoints) Access to Information Incentives for Politicians (Does good economics makes good politics?) Need for ‘Selling’ reforms Strength of Democratic Institutions Access To Finance Empowering Underserviced Groups in Accessing Finance involves U involves Understanding the :

9 9 Enforcement Context Regulatory Context Social Context Market Context Political Context Economic Context - Laws and legal framework (Consumer Protection Laws, Banking Laws, Insurance Laws, CIB / CAR Laws, Bankruptcy Laws etc. ) - Institutional Capacity for Regulatory & Judicial Supervision (Functioning of Judiciary and Legal System, Statutory functions, Mandate, Powers, etc.) Knowledge and Skills (Competent Regulators, Judges) Knowledge and Skills (Competent Regulators, Judges) Access To Finance Adverse selection / Moral hazard / Sovereign Risk Need to monitor the Borrower Empowering Underserviced Groups in Accessing Finance involves U involves Understanding the :

10 10 Enforcement Context Regulatory Context Social Context Market Context Political Context Economic Context - Judicial Enforcement Mechanisms (Civil Procedure Court, Consumer Court, etc.) Systems (Case Management System, Criminal database, Judgment Debt database) Titles to Business and Land, Labor Regulation Qualified and Competent Judges (Intellectual property Taxation, Banking, Insurance, Company liquidation) Qualified and Competent Judges (Intellectual property Taxation, Banking, Insurance, Company liquidation) Access To Finance Empowering Underserviced Groups in Accessing Finance involves U involves Understanding the :

11 11 Corruption  About 42% SMEs in middle-income countries and 34% in low-income countries perceive corruption to be a major obstacle.  Corruption contributes to inequality.  Corruption is negatively correlated with the income level.  Corruption is negatively correlated with growth.  Corruption erodes trust in banking and financial system.  Raises cost of capital.  Increases the impact of risks.  Discretionary powers given to government officials tends to prove counter productive to fight corruption.  Powerful supervisory agencies are prone to capture and manipulation by politicians, regulators, or both and hence, tend to lower the integrity of bank lending.  Private Monitoring works better for maintaining the integrity of bank lending in countries with sound legal and bureaucratic institutions.

12 12 Access To Finance S 85 Greater Kailash II, New Delhi , INDIA Tele : / Mobile : Home : Thank You

13 13 What do Economies Reform? Source : Financial Access Database Access To Finance

14 14 Sources of External Finance for New Investments Source: ICS, covering 71 countries Access To Finance

15 15 Sources of External Finance for New Investments Source: ICS, covering 71 countries Access To Finance

16 16 Distinguishing between Access to Finance and Use Access To Finance

17 17 Financing and Other Constraints faced by Small Firms Source: WBES and ICS Access To Finance

18 18 What Monitoring Action are available to Regulators Source: Financial Access Database Access To Finance What Enforcement Action can Regulator take

19 19 Excessive Rate/ Fees is the most common cause for Complaint Source : Financial Access Database Access To Finance

20 20 Number of Complaints received by Ombudsmen varies greatly across Countries Source : Financial Access Database Access To Finance

21 21 Which areas of Financial Inclusion are most frequently the Regulators’ Responsibility? Source : Financial Access Database Access To Finance

22 22 Use of Microcredit for Consumption Purposes Fig : 1 Source: Johnston and Morduch (2007) Access To Finance

23 23 Source: Beck, Demirgüç-Kunt, and Levine (2006) Supervisory Approaches and Corruption in Lending Access To Finance

24 24 Percentage of Firm using External Finance, by Firm Size Source - WBES and ICS Access To Finance

25 25 Supply Vs Demand Constraints Access To Finance

26 26 Requirements for Periodic Statements focus mainly on Rates and Fees Source : Financial Access Database Access To Finance

27 27 Access To Finance Financing Constraints faced by Small Firms Source: WBES Percentage of Firms reporting Finance as a problem Source: Investment Climate Survey (ICS) responses by enterprises in 76 countries, grouped by region.

28 28 Time to Process an SME Loan Application Access To Finance Source : Beck, Demirgüç-Kunt, and Martinez Peria (2007a)

29 29 Effect of Financing Constraints on Growth: Small VS Large Firms Source: Beck, Demirgüç-Kunt, and Maksimovic (2005) Access To Finance

30 30 Financial Depth and Poverty Alleviation Access To Finance Proportion of Households with an Account in an Financial Institution Source: Honohan (2006)

31 31 Access To Finance Inefficiency gap This gap separates current achievements in financial deepening from the potential supply. Current achievements differ from potential supply because all available resources for the production of various types of financial services are not being used efficiently. Inefficiency gap This gap separates current achievements in financial deepening from the potential supply. Current achievements differ from potential supply because all available resources for the production of various types of financial services are not being used efficiently. Insufficiency Gap This gap separates the potential supply of financial services from legitimate demand. Legitimate demand reflects the willingness and ability of the borrower to demand different types of financial services at the prices and terms and conditions at which they are offered or could be offered under competitive conditions Insufficiency Gap This gap separates the potential supply of financial services from legitimate demand. Legitimate demand reflects the willingness and ability of the borrower to demand different types of financial services at the prices and terms and conditions at which they are offered or could be offered under competitive conditions Feasibility gap The feasibility gap separates a legitimate demand for financial services from political promises and expectations about portfolio levels, dimensions of outreach, and loan prices Feasibility gap The feasibility gap separates a legitimate demand for financial services from political promises and expectations about portfolio levels, dimensions of outreach, and loan prices

32 32 USD Exchange Rates (2007 – 2011) Access To Finance Source :

33 33 Maldives Import/Export Potential Access To Finance


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