FINANCE FINANCE EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT National Development Financial Institutions: Trends, Crisis Response Activities, and Lessons Learned Authors: Eva Gutierrez and Tatsiana Kliatskova © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permis- sion is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Cover design and layout: Diego Catto / www.diegocatto.com >>> Acknowledgments This paper is a product of the World Bank Group’s Finance, Competitiveness and Innovation Global Practice with financial support from the FIRST Trust Fund. It was prepared by Eva Gutierrez (Lead Financial Sector Specialist in the Latin America and Caribbean Region) and Tatsiana Kliatskova (Financial Sector Economist in the South Asia Region). Jean Pesme (Global Director, EFNDR) and Cedric Mousset (Lead Financial Sector Specialist, EFNFS) provided overall guidance. We are grateful for the substantive feedback received from peer reviewers William F. Maloney (Chief Economist, Latin America and Caribbean Region), Carlos Pinerua (Program Manager, EFNFT), and Ugo Panizza (Professor, International Economics Pictet Chair in Finance and Development, Graduate Institute Geneva). We would also like to thank the World Bank Country Management Units covering countries mentioned in this paper, and in particular Country Directors Paloma Anos Casero (Brazil), Martin Raiser (China, South Korea), Ulrich Zachau (Colombia), Gallina A. Vincelette (Croatia, Poland), Pierre Frank Laporte (Ghana), Junaid Kamal Ahmad (India), Ndiame Diop (Malaysia), Mark Roland Thomas (Mexico), Renaud Seligmann (Russian Federation), Marie Francoise Marie-Nelly (South Africa), and Auguste Tano Kouame (Turkey), for their excellent cooperation. The team thanks Linda Stringer and Marcy Gessel of Publications Professionals LLC for editorial support and Diego Catto Val for design and layout assistance. >>> Contents Acronyms 5 Executive Summary 7 Introduction 9 Section 1: Development Financial Institutions Landscape and Challenges 12 Section 2: Lessons from Development Financial Institutions Around the World 17 Section 3: COVID-19 Response by National Development Financial Institutions 31 Section 4: Conclusion 39 Annex 1: COVID-19 Response of the Selected National Development Financial Institutions 42 >>> Acronyms ADF Automatization and Digitalization Facility AFD Agence française de développment Bancomext Banco Nacional de Comercio Exterior BBB British Business Bank BBLS Bounce Back Loan Scheme BCAP Business Credit Availability Program BDC Business Development Bank of Canada BDCC BDC Capital BGK Bank Gospodarstwa Krajowego BNDES Brazilian Development Bank CBILS Coronavirus Business Interruption Loan Scheme CDB China Development Bank CEBA Canada Emergency Business Account CEF Caixa Economica Federal CGC Credit Guarantee Corporation CLBILS Coronavirus Large Business Interruption Loan Scheme DB development bank DBG Development Bank Ghana DBJ Development Bank of Japan DFI development financial institution ECLGS Emergency Credit Line Guarantee Scheme EDC Export Development Canada FDN Financiera de Desarrollo Nacional FGO Fundo Garantidor de Operacaos FIRA Trust Funds for Rural Development FND Financiera Nacional de Desarrollo FSAP Financial Sector Assessment Program GDP gross domestic product GECL Guaranteed Emergency Credit Line HBOR Croatian Bank for Reconstruction and Development IADB Inter-American Development Bank IADB Inter-American Development Bank IBK Industrial Bank of Korea ICO Instituto de Crédito Oficial EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 5 IDC Industrial Development Corporation, South Africa IMF International Monetary Fund IPO initial public offering KDB Korea Development Bank KfW Kreditanstalt für Wiederaufbau KGF Credit Guarantee Fund, Turkey KISF Key Industry Stabilization Fund KODIT Korea Credit Guarantee Fund KOGSEB Small and Medium Industry Development Organization, Turkey KPI key performance indicators M&A mergers and acquisitions M&E monitoring and evaluation MFI microfinance institution MSMEs micro, small and medium enterprises NAFIN Nacional Financiera, Mexico NAO National Audit Office NBFC nonbank financial company NDFI national development financial institution NPLs nonperforming loans OECD Organisation for Economic Co-operation and Development PCBO Primary Collateralized Bond Obligation PCG partial credit guarantee PEAC Emergency Credit Access Program PESE Emergency Employment Support Program PRONAMPE Programa Nacional de Apoio às Microempresas e Empresas de Pequeño Porte PSB public sector bank SAFE simple agreement for equity SEBRAE Brazilian Micro and Small Enterprises' Support Service SEFA Small Enterprise Finance Agency SELIC Brazilian federal funds rate SIDBI Small Industries Development Bank of India SJPP Syarikat Jaminan Pembiayaan Perniagaan SMEs small and medium enterprises SOB state-owned bank SOE state-owned enterprise SOFI state-owned financial institution SPV special purpose vehicle SRP Special Relief Program TCU Tribunal de Contas da União TKYB Turkey Development and Investment Bank (Turkiye Kalkinma ve Yatirim Bankasi) TRRF Targeted Relief and Recovery Facility, Malaysia TSKB Industrial Development Bank of Turkey (Turkiye Sinai Kalkinma Bankasi) TWARIT Timely Working Capital Assistance to Revitalize Industries in Times of corona crisis VEB Vnesheconombank, State Development Corporation EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 >>> Executive Summary In recent years, there has been renewed interest in providing countercyclical lending and sustainable development financing through national development financial institu- tions (NDFIs).1 Research indicates that there are benefits to this approach. NDFIs often ad- dress existing market failures. They can encourage private investment and finance long-term infrastructure projects, as well as other large investment projects. NDFIs can finance projects in underserved sectors seen as too risky for private financiers, such as agriculture and small and medium enterprises (SMEs). In addition, NDFIs might be willing to invest in sectors that produce benefits for society overall, but that may not be financially profitable, such as projects in educa- tion or the environment. Procyclical lending of state-owned banks and development banks (DBs) can compensate for retrenchment of private lending during recessions. Despite these benefits, the activities of national development financial institutions can be controversial. Critics cite complaints of competition with commercial banks, crowding-out of pri- vate investment, and support to objectives of political elites, rather than addressing sustainable development objectives. Some have been criticized as inefficient and mismanaged. Nonethe- less, several countries, including advanced economies, are creating new development financial institutions. Seventy-four new NDFIs were established during the period of 2010–2020, and both the European Commission and United Nations have expressed strong support for NDFIs. In 2018, NDFIs accounted for 6.5 percent of global banking assets. While NDFIs are often a feasible solution for addressing development needs and clos- ing financing gaps, they are not always the best solution, and their setup and structure need to be tailored to the country’s needs. It is important that prior to setting up a new NDFI or increasing the scope of operations of the existing ones, governments consider all available public policy interventions as well as options for private capital involvement to address unmet financing needs of the private sector. Directly providing financial support by the state, especially at subsidized rates, can be an expeditious way to close the financing gap. However, it is rarely optimal or enough on its own, particularly for countries with weak institutions and fiscal con- straints. Nevertheless, NDFIs can play an important role as part of a strategy to support financial access to certain underserved sectors, at least while more structural solutions are implemented and take root. 1 In this paper, development financial institutions (DFIs) are represented by development banks (DBs), publicly owned nonbank institutions that provide credit for develop- mental purposes, and partial credit guarantee (PCG) funds. The paper primarily focuses on DFIs operating under micro, small, and medium enterprise (MSME) and export/ import mandates. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 NDFIs will likely see strong demand for their interven- the environment is not supportive of DFI effectiveness, it may tions in a post-COVID-19 recovery phase. This calls for be advisable to operate in second tier through other financial enhanced NDFI efficiency and effectiveness. The effective- intermediaries and raise funds in international capital markets. ness of DFIs in serving development objectives differs sub- stantially across countries and within a country, with impor- NDFIs have been important actors in the implementation tant lessons to be drawn. NDFIs should have a well-defined of countercyclical finance in response to the COVID-19 mandate or mission statement focused on complementing the pandemic and have helped mitigate a credit crunch. A re- private sector and crowding-in private investors to provide fi- view of COVID-19 programs implemented by selected NDFIs nancial solutions to identified underserved segments or proj- supporting SMEs in 13 countries—Brazil, Canada, China, ects while preserving financial sustainability. A focus on ser- Germany, India, Malaysia, Mexico, Poland, Republic of Ko- vicing credit-constrained viable borrowers should be the key rea, Russian Federation, South Africa, Turkey, and the United to filling in the financing gap and providing additionality to the Kingdom—provides insights on how these institutions have private sector, while ensuring that private sector finance is not been used during the crisis. The most common interventions crowded-out and net economic impact is maximized. At the were lending, mostly at preferential terms, and credit guar- same time, development of a range of instruments to leverage antees provided by DBs or credit guarantee institutions. Next private sector funding through risk sharing mechanisms or most common were measures to facilitate access to credit through instruments that support the development of an eco- and debt repayment moratoria. In addition, NDFIs provided system of financial sector providers should accompany NDFIs’ liquidity support to other financial institutions. Less frequently, operations. Direct provision of preferential lending should be NDFIs provided equity-financing solutions for firms or guar- used only sparingly and for a limited period when large exter- antees on firm securities. Support included not only funding, nalities can be justified, and subsidies should be channeled in but also advisory services provided to the borrowers. Many a transparent and nondistortionary way. The focus on financial interventions supported all firms, not only the affected firms sustainability helps ensure subsidized lending will not be the or those producing goods to fight COVID-19. Few programs primary focus of the institution, limiting the potential for crowd- set conditions on recipient firms beyond financial performance ing-out the private sector, reducing the scope for corruption, prepandemic. Overall, credit growth in most of the analyzed and fostering innovation at the NDFIs. countries was similar to, or even higher than, credit growth in the previous year, partly thanks to public-credit support pro- To maximize the net benefits of NDFIs and ensure their grams. The longer-term effects of these programs are still to financial sustainability, NDFIs should be effectively man- be assessed, with main concerns focusing on support to unvi- aged and properly supervised. NDFIs should be effectively able firms and fraudulent use of schemes. managed, and the incentives of management and staff should be aligned with the objectives of the institution through effec- During the COVID-19 pandemic, governments have taken tive corporate governance, risk management, and mecha- on large balance-sheet risks to support credit growth, in nisms to evaluate the performance of NDFIs. Financial su- many cases using NDFIs as administrators of public anti- pervisory authorities should ensure that NDFIs are properly crisis programs. In Brazil, Canada, Korea, and the United supervised and operate on a level playing field related to pru- Kingdom, for example, governments used NDFIs to adminis- dential regulations and competition. Specifically, a DB’s over- ter partial credit guarantee programs and other credit support sight framework should be based on its activity and risk profile programs, without expanding their balance sheet. In this way, and not on the nature of the shareholders, with credit, market, NDFIs did not need to hold excess capital to support counter- and operational risks being supervised in accordance with in- cyclical activities, which limits the scope for mission creep and ternational regulatory standards applying to private commer- crowding-out of private finance post-crisis. Separating crisis cial banks. DBs should not receive preferential tax treatment activities from the balance sheet of the institution also facili- and subsidies that are not available to private institutions or tates monitoring the results and costs of anti-crisis programs be exempted from prudential regulatory requirements—either and helps preserve NDFIs’ financial sustainability, as the gov- de jure or de facto through lax supervision. In cases where ernment directly assumes risks and provides the funding.  EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 >>> Introduction In recent years, episodes of global crisis and an increased focus on sustainable develop- ment have contributed to renewed interest in national development financial institutions (NDFIs). NDFIs are financial institutions with a policy objective that is closely related to the economic development of a country or given sector. While technically they may not be financial institutions under country definitions, they have their own balance sheets, independent from the government that owns them.2 Development financial institutions (DFIs) include development banks (DBs), nonbank institutions that provide credit for developmental purposes (for example, Corfo in Chile or Caisse des Dépôts in France), and partial credit guarantee (PCG) funds. DBs are DFIs with a banking license, which allows them to collect deposits (retail or wholesale) and provide credit, and since they are the most common type of DFIs sometimes the terms are used indistinguishably.3 In the aftermath of the 2008 global financial crisis and the COVID-19 pan- demic, NDFIs have played a substantial role in countercyclical lending and sustainable recovery. With quantitative easing showing limited impact on economic growth following the 2008 global financial crisis and many countries facing tightening fiscal constraints, policy makers have in- creasingly explored state-owned banks as potential providers of countercyclical finance. The Eu- ropean Commission envisioned a key role for DBs in the implementation of the Investment Plan for Europe and has provided guidelines for the establishment of development banks in countries that do not yet have one.4 Furthermore, the Addis Ababa Action Agenda, approved by all United Nations members after the 2015 Financing for Development Conference, expressed strong sup- port for using national development banks, in collaboration with private financial institutions and investors, to help fund infrastructure and, more broadly, achieve sustainable development goals. The United Nations also has concluded that “the time is ripe to promote development banks.”5 Reflecting renewed interest, several new DFIs have recently been created or are in the pro- cess of being created in both advanced and developing and emerging economies. The defi- nition of what constitutes a development financial institution has changed over time. In the 1990s, they were defined as “unique financial institutions in under-developed countries. They specialize in providing high-risk, long-term financing for the purpose of industrialization.”6 Inter-American Develop- 2 J. Xu, X. Ren, and X. Wu, “Mapping Development Finance Institutions Worldwide: Definitions, Rationales, and Varieties” (NSE Development Financing Research Report No. 1, Institute of New Structural Economics, Peking University, 2019). 3 For example, World Bank defines DBs as “any type of financial institution that a national government fully or partially owns or controls and has been given an explicit legal mandate to reach socioeconomic goals in a region, sector, or market segment.” World Bank, “2017 Survey of National Development Banks” (World Bank, Washington, DC, 2018), p. 12. Definitions of DFIs and DBs often refer to state ownership, although there are some private DBs such as Industrial Development Bank of Turkey (TSKB). 4 European Commission, “Working Together for Jobs and Growth: The Role of National Promotional Banks (NPBs) in Supporting the Investment Plan for Europe” (COM/2015/0361, Communication from the Commission to the European Parliament and the Council, Brussels, 2015). 5 UNCTAD (United Nations Conference on Trade and Development), “The Role of Development Banks in Promoting Growth and Sustainable Development in the South” (United Nations, Geneva and New York, 2016), p. 6. 6 P. E. Roberts Jr., “Development Banking: The Issue of Public and Private Development Banking,” Economic Development and Cultural Change 19, no. 3 (1971): 424–37, p. 2. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 ment Bank (IADB) highlights that DFIs are “concerned with offer- prevent the development of a financial sector that can meet a ing long-term capital finance to projects that are deemed to gen- country’s development needs.17 The literature also highlights erate positive externalities and hence would be underfinanced countercyclical lending of state-owned DFIs that compensates by private creditors.7 Apart from that, support to private sector for a credit crunch in private lending during a recession,18 thus development in developing countries8 and induction of growth, facilitating economic recovery and supporting economic growth development and structural change9 are named as important ob- and job creation. At the same time, intervention of the state in jectives of DFIs. DFIs are defined as financial institutions with the financial sector is often challenged by the view that state- a policy objective that is closely related to the economic devel- owned enterprises only exist to provide rents to the policymakers opment of a country or given sector,10 and are typically focused that control them.19 NDFIs might be used for political reasons, on financing productive investment through the provision of me- supporting the objectives of political elites rather than addressing dium- and long-term funding.11 Examples of NDFIs created after market failures and supporting sustainable development objec- 2010 include Financiera Nacional de Desarrollo de Colombia, tives. For example, increases in credit near election years might the Green Investment Bank of the United Kingdom (subsequent- be used to favorably influence election outcomes.20 In addition, ly privatized), British Business Bank of the United Kingdom, the NDFIs that lend directly to final borrowers compete with com- Nigerian Development Bank, and the Development Bank Ghana. mercial banks, thus potentially crowding-out private investment.21 Several countries, including Cyprus, Greece, India, and Roma- nia, are also considering establishing new DBs. The United King- Traditional development financing in the form of provision dom is considering setting up a new green investment bank just of credit at subsidized rates remains controversial as a tool three years after the privatization of the original one.12 to address structural issues. There are several criticisms associated with NDFIs, while new challenges are emerging. The policymakers and academics emphasize the pros Among the criticisms is that interventions through NDFIs are and cons of state ownership of financial institutions. State a second-best option to address problems compared to more ownership of financial institutions is often justified by market structural policies that directly address the root of the problem. failures and development goals. NDFIs help crowd-in private For example, asymmetric information problems are prevalent in investment,13 as well as finance long-term infrastructure projects financial markets and are a key factor behind the underprovi- or any other large investment projects.14 Further, NDFIs finance sion of loans to small firms, which is often used to justify NDFI projects that the private sector is unwilling or unable to finance,15 interventions.22 However, the public sector does not have any for example, in such underserved sectors as agriculture and informational advantage over the private sector albeit it has a small and medium enterprises (SMEs), highlighting social views higher risk tolerance. Strengthening credit information systems of public interventions.16 La Porta, López-de-Silanes, and Shle- and improving the framework for pledging and executing collat- ifer describe the development view that points out the necessity eral could be a more effective measure compared to NDFI lend- of state-owned financial institutions where institutional failures ing.23 Externalities offer a justification for the use of subsidies, 7 Inter-American Development Bank, Unlocking Credit: The Quest for Deep and Stable Bank Lending—Economic and Social Progress in Latin America, 2005 Report (Wash- ington, DC: IDB, 2004). 8 OECD (Organisation for Economic Co-operation and Development), “Development Finance Institutions and Private Sector Development,” http://www.oecd.org/dac/stats/ development-finance-institutions-private-sector-development.htm. 9 J. C. Ferraz, “Uncertainty, Investment, and Financing: The Strategic Role of National Development Banks,” in Efficiency, Finance, and Varieties of Industrial Policy: Guiding Resources, Learning, and Technology for Sustained Growth, ed. Akbar Noman and Joseph E. Stiglitz (New York: Columbia University Press, 2017), 105–30. 10 B. Armendáriz de Aghion, “Development Banking,” Journal of Development Economics 58 (1999): 83–100. 11 E. Gutierrez, H. P. Rudolph, T. Homa, and E. Bianco Beneit, “Development Banks: Role and Mechanisms to Increase Their Efficiency” (Policy Research Working Paper WPS 5729, World Bank, Washington, DC, 2011). 12 J. Ambrose, “UK Government Planning New Green Investment Bank,” Guardian, July 15, 2020, https://www.theguardian.com/environment/2020/jul/15/uk-government- planning-new-green-investment-bank. 13 E. Gutierrez, H. P. Rudolph, T. Homa, and E. Bianco Beneit, “Development Banks: Role and Mechanisms to Increase Their Efficiency” (Policy Research Working Paper WPS 5729, World Bank, Washington, DC, 2011); A. de la Torre, J. C. Gozzi, and S. L. Schmukler, Innovative Experiences in Access to Finance: Market-Friendly Roles for the Visible Hand? (Latin American Development Forum, World Bank, Washington, DC, 2007). 14 World Bank, Global Financial Development Report 2013: Rethinking the Role of the State in Finance (Washington, DC: World Bank, 2012). 15 C. Hainz and H. Hakenes, “The Politician and His Banker—How to Efficiently Grant State Aid,” Journal of Public Economics 96, no. 1–2 (2012): 218–25. 16 E. L. Levy-Yeyati, A. Micco, and U. Panizza, “Should the Government Be in the Banking Business? The Role of State-Owned and Development Banks” (Working Paper 517, Inter-American Development Bank, Washington, DC, 2004). 17 R. La Porta, F. López-de-Silanes, and A. Shleifer, “Government Ownership of Banks” Journal of Finance 57, no. 1 (2002): 265–301; W. A. Lewis, The Principles of Economic Planning (London: G. Allen & Unwin, 1949).; A. Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge, MA: Harvard University Press, 1962). 18 A. Micco, and U. Panizza, “Bank Ownership and Lending Behavior” Economics Letters 93, no. 2 (2006): 248–54;E. Gutierrez, H. P. Rudolph, T. Homa, and E. Bianco Beneit, “Development Banks: Role and Mechanisms to Increase Their Efficiency” (Policy Research Working Paper WPS 5729, World Bank, Washington, DC, 2011); M. Brei and A. Schclarek, “Public Bank Lending in Times of Crisis,” Journal of Financial Stability 9, no. 4 (2013): 820–30; A. Bertay, A. Demirgüç-Kunt, and H.Huizinga, “Bank Ownership and Credit over the Business Cycle: Is Lending by State Banks Less Procyclical?” Journal of Banking & Finance 50 (2015): 326–39. 19 J. Kornai, “Resource-Constrained Versus Demand-Constrained Systems,” Econometrica 47, no. 4 (1979): 801–19; A. Shleifer, and R. W. Vishny, “Politicians and Firms,” Quarterly Journal of Economics 109, no. 4 (1994): 995–1025 20 S. Cole, “Fixing Market Failures or Fixing Elections? Agricultural Credit in India.” American Economic Journal: Applied Economics 1, no. 1 (2009): 219–50. 21 E. L. Levy-Yeyati, A. Micco, and U. Panizza, “Should the Government Be in the Banking Business? The Role of State-Owned and Development Banks” (Working Paper 517, Inter-American Development Bank, Washington, DC, 2004). 22 UNCTAD (United Nations Conference on Trade and Development), “The Role of Development Banks in Promoting Growth and Sustainable Development in the South” (United Nations, Geneva and New York, 2016); S. Griffith-Jones and J. A. Ocampo, eds. The Future of National Development Banks (New York: Oxford University Press, 2018). 23 Gutierrez et al., “Development Banks.” EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 but tax subsidies and transfers could be a superior instrument ing crises,27 although they can also be used to expand credit to loan subsidies. Nevertheless, it can be argued that financial around election years for political purposes.28 Using the most infrastructure reforms tend to be a long-term process, with di- comprehensive dataset on public banks, Panizza recently rect state intervention providing a bridge until the constraints found no evidence that state ownership has any impact on are lifted. Also, some societies see more value in developing a financial development and that state ownership does not ex- culture of credit and repayment than a culture of subsidy. In ad- plain future financial crises (albeit financial crises result in in- dition, fiscal constraints may favor loans over subsidies.24 Thus, creased state ownership).29 It also finds that public banks were subsidized student loans, for example, are seen by some gov- less profitable during the 1995–2009 period but not afterwards ernments as a preferable tool than grants to fund education for and that public bank lending is less procyclical. students without sufficient means. While successful stories are not plentiful, some NDFIs Even when market failures provide a justification for state have proved effective in addressing market failures and intervention in the financial sector, government failures creating new markets, while preserving financial sustain- present risks that need to be addressed through an en- ability. NDFIs can, beyond directly financing the projects, fa- abling environment for public intervention that is not easy cilitate allocation of resources by assuming some project risks to attain in countries with weak institutions. In many cases, that the private sector is not willing to take (in risk-sharing political interference, poor governance, and sometimes outright schemes) and solving private sector coordination failures. The corruption have prompted dismal financial performance and electronic factoring platform created by Nacional Financiera resulted in DFIs’ insolvency and important quasi-fiscal losses (NAFIN) in Mexico,30 the combination of technical assistance arising from government guarantees of their liabilities. Further- and loans at above market rates to young and innovative com- more, if public institutions enjoy advantages due to subsidies or panies offered by the Business Development Bank of Canada favorable regulatory or supervisory treatment, they can create (BDC),31 and the Techno Banking solution implemented by distortions and crowd-out the private sector. All these risks can the Korea Development Bank (KDB) that develops a financial be mitigated through good corporate governance, strong risk infrastructure to provide loans using intellectual property as management, and an adequate oversight framework. However, collateral,32 are examples of such interventions. Furthermore, creating an enabling environment is a tall order and particularly these institutions are financially sustainable, with most of their difficult in countries with weak institutions. facilities either provided at market rates or cross-subsidized with profits from other operations. Overall, there is little empirical evidence that state own- ership of financial institutions provides substantial ben- As many countries are opting to establish new NDFIs and efits (relative to other types of ownership), particularly in expand operations of the existing institutions in response developing countries. However, studies have not focused to the COVID-19 pandemic, this paper reflects on lessons on DFIs. Empirical studies tend to find that public banks have learned from well-performing NDFIs to inform policymakers higher nonperforming loans (NPLs) and operational costs as and practitioners. The paper primarily focuses on DFIs oper- well as lower profitability compared to private banks, despite ating under micro, small and medium enterprises (MSMEs) having lower funding costs in many instances. Reflecting and export/import mandates. The paper is structured as fol- poorer financial indicators, government-owned banks tend to lows. Section 1 provides an overview of the NDFI landscape display a higher likelihood of default as captured by a lower Z- and takes stock of emerging challenges as reported by NDFIs score.25 However, the evidence on whether government bank themselves. Section 2 distills lessons from reviewing opera- ownership is directly related to the incidence of banking crises tions and organizational features of NDFIs around the world. is inconclusive.26 On the other hand, evidence indicates that Section 3 reviews NDFI interventions in the context of CO- government-owned banks can help stabilize credit growth dur- VID-19, and section 4 provides concluding thoughts. 24 Gutierrez et al., “Development Banks.” 25 Z-score is a common measure of stability at the level of individual institutions. It explicitly compares buffers (capitalization and returns) with risk (volatility of returns) to measure a bank’s solvency risk. https://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/financial-stability 26 R. Cull, M. S. Martinez Peria, and J. Verrier. “Bank Ownership: Trends and Implications” (IMF Working Paper WP17/60, International Monetary Fund, Washington, DC, 2017). 27 Brei, and Schclarek, “Public Bank Lending in Times of Crisis”; M. J. Choi, E. Gutierrez, and M. S. Martinez, “Dissecting Foreign Bank Lending Behavior during the 2008– 2009 Crisis,” Financial Markets, Institutions and Instruments 25, no. 5, (2014): 361–98. 28 Cole, “Fixing Market Failures or Fixing Elections?” 29 U. Panizza, “State-Owned Commercial Banks,” Journal of Policy Reform, forthcoming. 30 A. de la Torre, J. C. Gozzi, and S. L. Schmukler, Innovative Experiences in Access to Finance: Market-Friendly Roles for the Visible Hand? (Latin American Development Forum, World Bank, Washington, DC, 2007). 31 Gutierrez et al., “Development Banks.” 32 E. Gutierrez, E. Klepikova, and K. Levitanskaya, “Expanding Access to Financing for Micro, Small, and Medium-Size Enterprises in Russia by Leveraging Innovative Financial Solutions: Policy Note” (World Bank, Washington, DC, 2019). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 1. >>> Development Financial Institutions Landscape and Challenges NDFIs held about 6.5 percent of global banking assets in 2018 and creation of new NDFIs has seen a revival. A recent dataset33 reports 453 state-owned DFIs, of which 45 are multilat- eral and the rest are at the national or subnational level. As of 2018, these NDFIs had equity of US$1.3 trillion and assets of US$9.5 trillion that represent approximately 6.5 percent of global banking assets. The number of NDFIs substantially increased after World War II, plateaued in the 1980s, and peaked in 1990s, after the collapse of the Soviet Union. During the period of 2010–2020, 74 new NDFIs were established, with those in Africa (20) and Asia and the Pacific (19) accounting for more than half of the new institutions. Most of them have either a general mandate (40) or serve MSMEs (20). While discussion of NDFIs tends to be centered around developing economies, high- income and upper middle-income countries alone account for about two thirds of NDFIs. The number of NDFIs in low-income countries is rather small (0.9 NDFIs on average per country) and high-income countries (3.2 NDFIs on average per country) have a similar number of NDFIs as low-income and lower middle-income economies together (figure 1). The small number of NDFIs in low-income countries can possibly be explained by difficulties in raising funds in the capital markets as well as poor institutional quality preventing these countries from successfully creating and operating NDFIs. Also, the small market size and high fixed costs of operating an NDFI may result in having few NDFIs in low-income countries, while specialized NDFIs operat- ing in a given sector may function in larger markets. The largest numbers of national and sub- national NDFIs can be found in Europe and Central Asia (22 percent of total), East Asia and the Pacific (18 percent), Sub-Saharan Africa (17 percent), and Latin America (17 percent) regions (figure 1). The number of NDFIs in North America, South Asia, and the Middle East and North Africa is substantially lower. 33 J. Xu, R. Marodon, and X. Ru, “Identifying and Classifying Public Development Banks and Development Financing Institutions” (New Structural Economics Development Financing Research Report No. 2/ Agence française de développment [AFD] Working Paper Series No. n° 192, AFD, Paris, 2020). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 > > > F I G U R E 1 . - Distribution of NDFIs by Region and Income Group 150 120 49; 139 39; 102 41; 123 35; 114 24; 81 24; 78 37; 76 100 70 15; 28 7; 26 2; 17 50 20 26; 32 ECA EAP SSA LAC MENA SAR NA 0 -30 HI UMI LMI LI Source: J. Xu, R. Marodon, and X. Ru, “Identifying and Classifying Public Development Banks and Development Financing Institutions” (New Structural Economics Development Financing Research Report No. 2/ Agence française de développment [AFD] Working Paper Series No. n° 192, AFD, Paris, 2020); Agence française de développment Public Development Banks Database, 2020; World Bank Group calculations. Note: First number is the number of countries, second number is the number of NDFIs. EAP = East Asia and Pacific; ECA = Europe and Central Asia; HI = high-income; LAC = Latin America and the Caribbean; LI = low-income; LMI = lower-middle income; MENA = Middle East and North Africa; NA = North America; NDFI = national development financial institution; SAR = South Asia; SSA = Sub-Saharan Africa; UMI = upper-middle income. About a third of national NDFIs have a broad general mission of supporting economic and social development. In low- income economies, more than half of NDFIs have a general mandate, while NDFIs in countries with higher income have more specific mandates, probably because there is more than one NDFI in these countries (figure 2). NDFIs focused on supporting MSMEs and entrepreneurship have a high share in all but low-income countries, reaching 49 percent in high-income economies. In contrast, agriculture banks are much more prevalent in low-income economies. > > > F I G U R E 2 . - Distribution of National DFIs by Their Mandate, by Income Group 100% 80% 60% 40% 20% 0% HI UMI LMI LI General Agriculture Micro, small & medium enterprises Export/import Housing Local Source: J. Xu, R. Marodon, and X. Ru, “Identifying and Classifying Public Development Banks and Development Financing Institutions” (New Structural Economics Development Financing Research Report No. 2/ Agence française de développment [AFD] Working Paper Series No. n° 192, AFD, Paris, 2020); Agence française de développment Public Development Banks Database, 2020; World Bank Group calculations. Note: HI = high-income; LI = low income; LMI = lower-middle income; NDFI = national development financial institution; UMI = upper-middle income. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 NDFIs provide credit, often at subsidized rates, using mostly wholesale funding. Almost all NDFIs provide loans directly to final borrowers. According to the World Bank 2017 Survey of National Development Banks,34 the most common sources of funding for the 64 NDFIs in the survey are borrowing from international and national institutional investors and development as- sistance. Only 30 percent of NDFIs collect deposits from the public, and less than half receive deposits from government institu- tions. About 30 percent receive budgetary transfers (figure 3). The core activity of NDFIs is lending. Worth mentioning, about half of NDFIs provide loans at subsidized rates, funding them through cheaper lines of credit from donors, budget transfers from the government, and to a lesser extent through cross-subsidization from profitable business lines. > > > F I G U R E 3 - Sources of Funding of NDFIs, Percent of Respondents Issuing debt in international debt markets 85 Borowing from other financial institutions 84 Official development assistance 77 Issuing debt in local debt markets 75 Participation at the local interbank market 56 Deposits from government agencies 46 Deposits from general public 31 Direct budget transfers 29 0 10 20 30 40 50 60 70 80 90 Sources: World Bank, “2017 Survey of National Development Banks” (World Bank, Washington, DC, 2018). Note: NDFI = national development financial institution. NDFIs played a countercyclical role during the 2008 that often prompted the creation of many NDFIs.35 As a result, global financial crisis, but most continued to grow, sug- many NDFIs face a structural decrease in demand for long- gesting an exit problem. NDFIs in the World Bank Survey term second-tier loans (that is, loans provide to financial in- increased their loan portfolio 20 percent in 2008 and 2009 at termediaries to on-lend to final borrowers), a traditional NDFI the height of the crisis, but credit growth continued at an aver- activity. The countercyclical role of NDFIs requires increased age 13 percent during 2010–2015. Only 18 percent of NDFIs risk taking as commercial banks tend to retrench credit, even reported negative growth in their loan portfolios, while the rest in the face of massive liquidity support from central banks. continued expanding their portfolios. NDFIs have also been Also, NDFIs are increasingly focusing on funding new in- an important conduit for the implementation of countercyclical dustries and firms, green and infrastructure projects in many activities in response to the COVID-19 pandemic as described cases crowding-in private sector finance by taking risks the in section 3. private sector is not willing to take. This, however, introduces complexities, as the NDFI needs to operate in segments that Development banking is becoming increasingly challeng- are outside commercial banks’ risk appetite, yet still viable. To ing as market developments are forcing NDFIs toward act complementarily to the private sector (by providing loans, more complex interventions. Increased foreign bank activ- guarantees, or equity investments) and provide additionality, ity across the world and capital market development in many NDFIs are increasingly required to invest in highly specialized emerging markets have facilitated access to long-term finance risk management. 34 World Bank, “2017 Survey of National Development Banks.” 35 Gutierrez et al., “Development Banks.” EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 Reflecting this reality, few NDFIs provide credit exclusively through financial intermediaries, and many NDFIs provide loan guarantees and equity investments in addition to loans. According to the World Bank Survey, only 10 percent of NDFIs provide loans and other financial services only in second tier, 40 percent only provide loans to final borrowers, and 50 percent a combination of the two. Apart from lending, NDFIs also offer loan guarantees (55 percent of respondent), private equity and ven- ture capital (47 percent), and deposit accounts (44 percent). Other products and services are offered less frequently (figure 4).36 > > > F I G U R E 4 - Financial Products and Services Offered by NDFIs, Percent of Respondents Loan guarantees 55 Private equity 47 Deposit accounts 44 Money transfer 34 Leasing 34 Corporate bond issuance 30 Saving accounts 29 Forex trading 28 E-banking 28 Mobile banking 23 ODA loans 23 Trust services 22 Environment initiatives 22 Factoring 22 Agent banking 20 Securitization 18 IPO and M&A services 16 Derivatives trading 14 Debt collection 12 Microinsurance 10 Property/asset selling 5 0 10 20 30 40 50 60 Sources: World Bank, “2017 Survey of National Development Banks” (Washington, DC: WB, 2018). Note: Forex = foreign exchange; IPO = initial public offering; M&A = mergers and acquisitions; NDFI = national development financial institution; ODA = official development assistance. 36 World Bank, “2017 Survey of National Development Banks.” EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 Managing risks while preserving the financial sustainability of the institution seems to be a main challenge for NDFIs in the face of political pressures to charge low rates. NDFIs often lend to high-risk clients or invest in high-risk development proj- ects without the ability to price the risk accordingly by charging higher interest rates or fees due to lack of capacity to assess and manage risks, but also due to pressures from public sector shareholders to provide low rates. As a result, NDFIs often struggle to maintain financial sustainability. Low profitability prevents them from building an adequate capital base as well as from increasing operational expenses on staff training and operational tools (new software, office equipment, and so forth) About half of NDFIs in the World Bank Survey indicated low risk-management capacity and a low level of financial sustainability as main challenges, while 40 percent of respondents identified weak corporate governance and transparency. About 30 percent indicated high credit and market risk as well as difficulties in hiring qualified staff as main challenges (figure 5). > > > F I G U R E 5 - Challenges Faced by NDFIs, Percent of Respondents Low risk- management capacity 51 Not financially self-sustainable 48 Weak corporate governance and transparency 39 High credit and market risk 33 Difficulties with hiring and retaining qualified staff 31 Undue political interference 14 0 10 20 30 40 50 60 Source: World Bank, “2017 Survey of National Development Banks” (Washington, DC: World Bank, 2018). Note: In brackets, we indicate percentage of respondents that included the given challenge in top-three challenges. NDFI = national development financial institution. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 2. >>> Lessons from Development Financial Institutions Around the World Measuring the performance of development financial institutions is a tall order as it re- quires measuring the economic impact of developmental operations and comparing it with the costs of operating such institutions. Measuring the economic impact of develop- mental operations in terms of output or employment is quite complex, let alone translating those effects into income and tax revenues. Furthermore, some would argue that even a cost-benefit analysis is not enough, as what one would like to measure is the economic additionality that a development financial institution provides. That is, the economic impact that would not be other- wise generated by the private sector. While comprehensive impact evaluation studies on NDFI interventions are scarce, review of NDFI operations and organizational features in several countries provides valuable insights not only the upsides and downsides of NDFI interventions but also the features of NDFIs that appear to be more effective. Scarce information on economic performance can be complemented with assessment of how the NDFIs conduct operations vis-a-vis good practices. The guidance note for the assessment of state-owed financial institutions (SOFIs) under the World Bank integrated state-owned enterprise framework proposes a comprehensive approach that evaluates the func- tional and economic performance of SOFIs, as well as their operational environment.37 The approach aims to compensate for data deficiencies in evaluating the economic performance of the institution by looking at what the SOFI does and how it operates, as indirect indicators of efficiency. The func- tional assessment evaluates the rationale for NDFI operations, potential alternative policy interven- tions, and the consistency between the NDFI objectives and its operations. The economic perfor- mance assessment looks at the financial performance and economic impact of SOFIs’ operations. The financial performance is measured by the return on equity net of subsidies and assesses the risk-adjusted profitability through stress tests. The operational environment looks at the regulatory framework in which the NDFI operates, its corporate governance and risk management capabilities and its monitoring and evaluation function.38 The approach is based on insights on what has worked well and what has not from more than 30 years of World Bank experience supporting NDFIs through advisory and lending operations. Following this approach, this section discusses selected lessons from well-performing institutions and illustrates how these are applied in practice by some NDFIs. 37 The World Bank, “Integrated State-Owned Enterprise Framework” (iSOEF) (Washington D.C, June 2019), Internal document. 38 This approach combines approaches previously used. For example, Francisco et al. evaluated the performance of Banadesa in Honduras and Banrural in Guatemala. M. Francisco, Y. Mascaró, J. C. Mendoza, and J. Yaron, “Measuring the Performance and Achievement of Social Objectives of Development Finance Institutions” (Policy Research Working Paper 4506, World Bank, Washington, DC, 2008). Following Yaron, they calculate a subsidy dependence index, but also develop an output index that measures the level at which the government’s social objective was achieved by the development finance institution. J. Yaron, “State-Owned Development Financial Insti- tutions (SDFIs): Background, Political Economy, and Performance Assessment” (Paper presented at the Inter-American Development Bank Conference on Public Banks, Washington, DC, February 2005 evaluates the cost-effectiveness ratio of DBs integrating both indexes. Smallridge and De Olloqui propose evaluating the health of DFIs by assessing the quality of corporate governance, financial and operational performance and impact according to a set of normative principles. D. Smallridge and F. de Olloqui, “A Health Diagnostic Tool for Public Development Banks” (Technical Notes IDB-TN no. 225, Inter-American Development Bank, Washington, DC, 2011). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 LESSON 1 Identify the unmet needs and factors preventing private sectors at least while more structural solutions are implemented sector involvement and consider all public policy interven- and take root using a wide range of tools. Moreover, even in tions available, beyond provision of public sector funding, systems with good financial infrastructure (credit bureaus, in- to address the problem. In-depth financial sector diagnostics solvency regimes, and so forth), banks may not expand their and mechanisms for structured dialogue with financial sector SME portfolio due to lack of suitable scoring methodologies to and industry representatives help identify financing gaps, fac- assess credit risk or because they find risk-return for the seg- tors that originate those gaps, and a menu of policy interven- ment unattractive and would rather focus on consumer lending. tions to address the problem. Observed financing gaps are typi- Interventions to foster development of an ecosystem of non- cally due to a variety of reasons and require multiple actions. bank specialized SME lenders or support for the development While directly providing financial support by the state, especially of products with embedded risk mitigants, including through at subsidized rates, is an expeditious way to alleviate the prob- demonstration effects on new lending models, may be more lem, it is rarely optimal or enough on its own given fiscal con- sustainable and scalable interventions that direct credit provi- straints. However, NDFIs can play an important role as part of sion. Box 1 provides examples of identifying the unmet needs a strategy to support financial access to certain underserved and factors preventing private sector involvement. > > > B O X 1 - Lesson 1. Examples from the United Kingdom and Mexico. The British Business Bank (BBB) was created in 2014 to address market weaknesses in the provision of finance to small and medium enterprises (SMEs) identified in research studies. Those weaknesses include (a) younger businesses with a shorter track record can find it difficult to access finance; (b) owing to the United Kingdom’s concentrated finance market, there has been a narrow choice of finance type and provider; (c) businesses either lack knowledge of finance choices or are not confident in applying for them, meaning they are less likely to find the right finance; (d) all these issues are amplified in regions outside of London and the southeast of England. At moments of economic stress, BBB acts in a countercyclical manner, maintaining or increasing our market exposure while other market participants may be disengaging.a The 2016 Mexican Financial Sector Assessment Program (FSAP)b technical note on development banks noted that at the time development bank (DBs) were increasingly considered the primary solution for addressing market failures in the provision of finance. The FSAP technical note on development banks noted that Unit of Productivity in the Ministry of Finance in several sectoral dialogue groups with private sector industry stakeholders had identified access to finance as a factor that impeded productivity enhancements. In response, the productivity unit contacted a DB working with that sector to explore what type of financial solutions could be designed for the sector. The FSAP noted that “increased dialogue with the private financial sector to understand what factors impede intermediation to certain markets could help identify a map for reforms (including regulatory and financial infrastructure reforms as well as technical assistance to firms or financial providers) that would enhance provision of finance. If necessary, DBs could participate supporting private providers but for the purpose of policy formulation should be considered as a complementary policy tool not the primary and first solution.”c a. BBB Annual Report 2020. https://annualreport2020.british-business-bank.co.uk/uploads/documents/BBB_Annual_Report_2020.pdf. b. World Bank Group, International Monetary Fund. Mexico Financial Sector Assessment Program: Development Banks. (World Bank, Washington, DC, 2016). https://openknowledge.worldbank.org/handle/10986/28603. c. Mexico Financial Sector Assessment Program: Development Banks, p. 4. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 LESSON 2 Set up a mandate or mission statement for NDFI focused need to complement and catalyze private investments. In- on complementing the private sector and crowding-in clusion of complement and catalyzation of private invest- private investors to provide financial solutions to identi- ments in the mandate would be the best way to ensure fied underserved segments or projects while preserving additionality of the institution and avoid crowding-out. financial sustainability. Mandates should be closely aligned Focusing on complementarity does not prevent the NDFI to the rationale for the existence of the NDFI to ensure the from serving certain segments on commercial terms and institution remains focused and avoid mission creep that cross-subsidizing certain sectors where externalities are could end up crowding-out private sector. However, virtually present (for example, green finance). However, it will limit all NDFIs have either broad mandates referring to economic the share of commercial operations in the NDFI portfolio. support or social development of the countries or mandates focused on supporting a specific economic sector (for exam- • Crowding-in private sector finance means that the NDFI ple, agriculture) or segment (SMEs) underserved by the pri- balance sheet is used to attract capital that otherwise vate sector.39 As there are many agribusinesses, SMEs, and would not be mobilized. The instrument alone does not economic projects that are well served by the private sector, imply crowding-in but the targeting does.44 However, the focus may be better placed on SMEs lacking collateral focusing on crowding-in private investors promotes le- or credit history or firms in sectors affected by shocks. While verage and efficient use of bank resources. It does not such a level of detail should not be included in the mandate, preclude the NDFI from directly providing credit (that is, references to providing additionality to private sector offer- first-tier operations). But it encourages the NDFI to cofi- ings by complementing and crowding-in private investors nance larger projects and to provide guarantees as op- to fill financing gaps forces NDFIs to improve targeting and posed to credit in retail segments. efficiency and ensures the mandate does not stale.40 As ar- gued by Gutierrez et al. a clear mandate should address the • The obligation to preserve financial sustainability protects issue of positioning the NDFI against private sector institu- the NDFI from political influence that pressures the insti- tions.41 Preserving financial sustainability is another impor- tution to underprice risks. Combined with the focus on tant element to include in the mandate, as it provides incen- complementing the private sector, it provides incentives tives for effective risk management and resource allocation for adequate risk taking and risk pricing, which ensures and reduces fiscal costs associated with contingent liabilities. effective allocation of financial resources. Financial sus- Box 2 provides example of setting up a mandate for NDFIs. tainability precludes large subsidized operations. While some dispute the need for NDFI financial sustainability • The economic literature provides different arguments that (for example, Fernández-Arias, Haussman, and Paniz- support the operation of NDFIs, such as addressing mar- za45) in the presence of large social benefits, most institu- ket failures, including externalities; supporting financial tions lack systems to prove those benefits. A large volume market development (including through solving coordi- of subsidized lending has many drawbacks (discussed in nation failures and supporting development of nonbank lesson 5), and it is not essential for development financ- financial providers); and providing countercyclical support ing. Furthermore, financially unsustainable DFIs could in the face of increased risk aversion.42 More recently, prompt financial instability if fiscal constraints prevent res- voices have been raised in support of NDFIs as part of toration of NDFIs’ capital buffers. an entrepreneurial state where the state plays a leading investment role across the entire innovation chain, from • NDFI sectoral specialization has the advantage of having basic research to early-stage seed financing of compa- specialized staff in close contact with the sector, acquiring nies and then financing commercialization and market en- in tightly defined areas. However, the niche needs to able to try in an effort to lead innovation-led growth.43 While it is support the financial sustainability of the bank, which may be still unclear that NDFIs are the best tool to address such difficult in smaller markets given overhead costs. Sectorial problems, a common thread in all these arguments is the focus also reduces the scope for risk diversification. 39 See J. de Luna-Martinez and C. L. Vicente, “Global Survey of Development Banks” (Policy Research Working Paper WPS 5969, World Bank, Washington, DC, 2012) or Xu, Ren, and Wu, “Mapping Development Finance Institutions Worldwide.” 40 Few NDFIs periodically review their mandate. 41 Gutierrez et al., “Development Banks.” 42 See, for example, Gutierrez et al., “Development Banks” or Griffith-Jones et al., “The Future of National Development Banks.” 43 M. Mazzucato, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, rev. ed. (New York: PublicAffairs, 2015). 44 For example, the Development Bank of Japan (DBJ) was active in loan syndication in solar and onshore wind projects, but as these sectors matured so did their financing markets, and DBJ exited this market. The fact that DBJ does not provide concessional loans facilitated market exit as alternative funding was equally attractive. DBJ con- centrates on providing equity and mezzanine capital for these projects. See A. Attridge, J. Xu, and, K. Gallagher, “Piloting and Scaling Up Clean Energy Transitions: The Role of Development Finance Institutions” (Working Paper, Agence française de développment, Paris, 2020). 45 Fernández-Arias, E, Haussman, R. and Panizza, U. “Smart Development Banks.” Journal of Industry, Competition and Trade 20 (2020): 395–420. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 > > > B O X 2 - Lesson 2. Examples from Colombia, Korea, the United Kingdom, Spain, and Ghana. The decree that created Colombia’s Financiera de Desarrollo Nacional (FDN) through transformation of an existing entity includes that as a guidance principle, “FDN will promote the participation of other sources of financing, through mechanisms such as the organization of consortia for the granting of credits, the subscription and guarantees of securi- ties and participations and other forms of association” (art. 3).a Peer internal regulations can only finance 25 percent of any infrastructure projects that are the focus of FDN’s activities, which forces the institution to catalyze large amounts of private finance. Korean Development Bank’s vision is to be “Korea’s Financial Platform leading to a bright future.” As such, it is “an in- novative financial institution that performs more than intermediary role between borrowers and lenders, it connects all stakeholders, allows information exchanges and provides comprehensive financial services.”b The vision points to a role in addressing coordination and information failures to foster market development. The British Business Bank’s (BBB) mission is “to make finance markets work better so smaller businesses across the UK can prosper and grow.” The BBB principal business model is to work indirectly through delivery partners, which are financial services providers for smaller businesses (such as banks, nonbank lenders, equity funds, and private debt funds). The BBB notes that “For most of its programmes, this indirect approach enables us to ‘leverage in’ third-party funding in addition to our own, maximising the impact of the public funds we deploy.”c The Instituto de Crédito Oficial (ICO), Spain’s development bank, is governed by the financial equilibrium principle, in accordance with its articles of incorporation. The recently created Development Bank Ghana has also incorporated financial sustainability in its mandate. a. Decreto 4174 de 2011. b. KDB website, https://www.kdb.co.kr/index.jsp. c. BBB Annual Report 2020. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 LESSON 3 Design NDFI facilities focused on servicing credit-con- at conditions (for example, amount, maturity, or interest rate) strained borrowers to ensure additionality. While man- that allow for the optimal amount of investment. Focus on dates and missions are high level and principle-based, they credit-constrained borrowers, in a particular sector or econ- need to be operationalized by targeting the facilities to a set omy-wide, allows NDFIs to take a countercyclical role as the of borrowers or projects. To ensure a gap-filling role and pro- universe of potential borrowers increases during credit bust vide additionality (for example, net positive economic impact), periods. Tight eligibility criteria for accessing NDFI financing NDFI facilities should be made available only to viable credit- facilities and pricing above market levels are ways in which constrained borrowers, which are those unable to receive fi- NDFIs can ensure effective targeting with a view to increas- nance from elsewhere. Provision of funding to unconstrained ing their economic impact. In addition to the ability to identify borrowers would only crowd-out private sector finance and credit constrained borrowers, effective targeting requires so- have limited net economic impact. Borrowers and projects phisticated risk management as NDFIs will need to assume can be constrained because they are not able to obtain any risks that private institutions are not willing to take. Box 3 pro- funding at all or because the funding they can obtain is not vides an example of a design of NDFI facilities. > > > B O X 3 - Lesson 3. Examples from the US, Canada and Finland. Eligibility criteria for the US Small Business Administration financial facilities states that the borrower cannot get funds from any other financial lender. The Business Development Bank of Canada (BDC) charges higher interest rates on loans to small and medium enterprises than private commercial lenders, which ensures that firms exit BDC facilities once their access to market funding is reestablished. Many national development financial institutions target younger firms that are typically credit constrained due to lack of collateral and credit history. For example, Finland’s Export Credit Agency, Finnvera, offers a partial credit guarantee to firms with less than three years since their entry in the Trade Reg- istry under its Start Guarantee program. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 LESSON 4 Develop a range of instruments to leverage private sector of products. The creation of financial platforms under which funding. While focusing on underserved segments ensures private sector intermediaries provide funding are an example financial and economic additionality (that is, provision of credit of the second type. Given the limited resources at the dispose to viable underserved borrowers, which in turn has a positive of NDFIs, mobilizing private sector funds presents clear ad- economic impact), such focus can be done using a variety vantages, including a more efficient use of available resources of instruments. Leveraging private sector funding means us- and the fact that impact and outreach can be considerably ing instruments that mobilize private sector finance. This can scaled up. Focusing on mobilizing private capital, including be done through risk-sharing mechanisms or through instru- through market creation, requires innovative vision on the in- ments that support the development of an ecosystem of finan- stitution. Box 4 provides examples of a development of instru- cial sector providers. Syndicated loans, partial credit guaran- ments to leverage private sector funding. tees, and credit enhancements are examples of the first type > > > B O X 4 - Lesson 4. Examples from Mexico. Nacional Financiera in Mexico (NAFIN) has a range of products aimed at mobilizing private sector funding. It provides funding for renewable energy projects only in syndication, taking at most 50 percent of the risk of the project. It provides partial credit guarantees on small and medium enterprise (SME) loan portfolios to financial institutions. NAFIN initially auctioned its guarantees, fixing the coverage and allocating guarantees to the banks that offered the lowest interest rates for the borrowers. In 2014, they changed the auction to allocate to banks requesting the lowest coverage and capping the rates on the loans to final borrowers at the official 28-day interbank rate plus 700 basis points. NAFIN also offers pari- passu guarantees covering from 50 to 100 percent of loan loss (the latter only in disaster or emergency situations). The introduction of first-loss schemes and the auction has reduced the average public sector coverage of all guaranteed loan portfolios to below 40 percent, increasing the amount of risk transferred to the private sector and the outstanding amount of SME loans guaranteed. NAFIN also provides pari-passu guarantees on commercial papers issued by firms. Its elec- tronic reverse factoring platform, launched in 2017, helped develop the factoring market in Mexico, substantially increasing the volume of operations by automatizing and simplifying the process. Initially, financial intermediaries participating in the platform needed to borrow funds from NAFIN to purchase the invoices, but now they can use their own funding as well. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 LESSON 5 Use preferential lending sparingly when large externali- of subsidized long-term lending may also negatively affect ties can be justified. NDFIs need to ensure that when capital market development as it reduces potential borrow- subsidies are necessary, they are channeled in a trans- ers’ incentives to search for funding in capital markets. parent and nondistortionary way. Traditional development financing is associated with the provision of preferential lend- • The way in which the subsidy is funded may have addi- ing, which typically involves providing some form of subsidy.46 tional negative consequences. For example, if subsidies Interest on subsidized loans does not cover the administra- are provided by taxpayers and result in increased sover- tive, funding (at market rates), capital, and credit risk costs of eign debt, interest rates on public debt will increase as the the loan47. NDFIs can receive budgetary allocations from the fiscal situation deteriorates. If credit subsidies are provid- government to subsidize the pricing of their financial products. ed by investors via compulsory investment requirements, They can receive credit subsidies in the form of loans at a it could affect savings behavior and overall financial sec- rate below the one at which the NDFI could fund itself. NDFIs tor development. If the NDFI does not receive subsidies, can also receive other subsidies; for example, they can be it might end up compromising its financial sustainability, exempted from tax payments or constitute provisions for loan which in turn could pose risks to financial stability and fis- losses. Finally, NDFIs can cross-subsidize the price of certain cal risks through contingent liabilities arising from NDFI financial products using profits from commercial operations to recapitalization. cover costs. In many cases, NDFIs were created to provide subsidies, circumventing budgetary restrictions, by exploit- • A large provision of subsidized lending by NDFIs can also ing their leverage capacity. Subsidized lending is often used undermine their operational efficiency. As the NDFI offers to address market failures that prevent access to finance. large volumes of credit at below-market rates, it is sure to However, it is the second-best option at least as it addresses have substantial demand for its product, which will in turn the symptoms instead of the cause of the illness, and it has reduce its incentives to innovate and develop new and unintended secondary effects. Furthermore, often loan pric- more sophisticated products to address market failures. ing is not the problem but lack of access due to lack of credit Furthermore, provision of subsidized lending by an NDFI history or collateral, and borrowers will be able and willing to provides incentives to policy makers to influence opera- pay higher rates than the ones offered by the NDFI if they tional decisions for political purposes and could even pro- were just offered credit. For these reasons, subsidies should vide incentives for corruption among NDFI employees.50 be used sparsely and when the positive effects are likely to Political interference and corruption in turn affect the al- outweigh the associated inefficiencies. The latter are related locative efficiency of NDFI loans. to the size of the subsidies and how the subsidy is funded and operated. Furthermore, it is important to ensure that subsidies • Focusing subsidized lending on activities with potentially are channeled in a transparent way to facilitate accountability. large externalities reduces overall subsidized lending and Box 5 provides examples of the use of preferential lending and helps ensure that the positive effects outweigh potential subsidies by NDFIs. distortions to create net positive developmental outcome. Socially and environmentally sustainable projects, inno- • Large volumes of subsidized lending can introduce several vation, infrastructure, and capital market development types of distortions. For example, when a large share of are, for example, areas that likely pass the externality test. credit does not respond to interest rate signals, monetary policy effectiveness through the credit channel is reduced.48 • The distortions arising from the method of subsidies fund- The Central Bank hence must increase rates more to attain ing depend on country characteristics, but, in general, all the same level of credit contraction. De Bolle estimated that forms present some drawbacks. Credit subsidies provid- an increase of 1 percentage point in the share of Brazilian ed by foreign development partners or taxpayer funded Development Bank (BNDES) lending in gross domestic subsidies in countries with strong fiscal positions are less product (GDP) increased real interest rates by 0.4–0.5 of a distortionary than credit subsidies provided by mandatory percentage point in the following quarter.49 Large volumes investments. However, if those loans are provided in hard 46 The same arguments in this discussion apply to the provision of subsidized guarantees. 47 The capital cost for a NDFI is typically lower than that of commercial entities and linked to the financial sustainability requirements of the shareholder (for example, sover- eign funding costs or inflation). 48 M. Bonomo and B. Martins, “The Impact of Government-Driven Loans in the Monetary Transmission Mechanism: What Can We Learn from Firm-Level Data?” (Texto para discussão nº, 419, Banco Central do Brasil, Brasilia, 2016). 49 M. de Bolle, “Do Public Development Banks Hurt Growth? Evidence from Brazil” (Policy Brief 15-16, Petersen Institute for International Economics, Washington, DC, 2015). 50 Several transactions in Brazil’s Caixa Economica Federal (CEF), in essence a DB that collects retail deposits to stimulate savings and provides subsidized finance for social purposes, were suspected of having received favorable terms in exchange for bribes, and several vice presidents of CEF were suspended in early 2018 as result of the investigation by the federal prosecutor’s office. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 currency and the income of the ultimate borrowers is de- bilized and the profitability of the institution before sub- nominated in local currency, such funding may not be very sidies. Budgetary resources are typically transparent as attractive as it exposes the NDFI to foreign exchange- they are disclosed in the budget, but credit subsidies pro- induced credit risk. Subsidies provided by cross-subsidi- vided by the treasury or through mandatory investments zation from NDFI commercial activities will introduce lim- are particularly opaque, and the cost of such subsidies ited distortions only if there is a level playing field and the should be calculated and disclosed. Also, NDFIs should commercial activities of the NDFI do not crowd-out private disclose their return on equity before subsidies to assess financial providers. the sustainability of the institution and whether profitability is enough to replenish the capital of the institution or if that • To foster accountability of the NDFI vis-a-vis society it would require tax-payer assistance. is important to report on the amounts of subsidies mo- > > > B O X 5 - Lesson 5. Examples from Brazil, Mexico, Canada, and Korea. In September 2017, the Brazilian legislature approved a bill to phase out the long-term subsidized credit rate, known as TJLP, over the next five years, replacing it with a market-based rate called the TLP. The TLP is linked to the sovereign cost of funding using a combination of an inflation indexed five-year sovereign bond, actual inflation, and the old TJLP. By aligning the Brazilian Development Bank (BNDES) lending rates to market funding costs, the reform aimed to reduce the distortionary effects that the large amount of subsidized credit had on monetary policy and credit allocation and to re- duce fiscal costs. As BNDES was largely funded through the issuance of treasury loans, the credit subsidy that the insti- tution received (the difference between the rate of the five-year sovereign and the TJLP) reached 0.72 percent of gross domestic product in 2015. A review of the operational policies in 2017 also aimed at improving targeting of subsidies.a Mexican development financial institutions have typically received subsidies for targeted programs from budgetary al- locations. For example, budgetary allocations to the entrepreneurship fund were used to provide counter-guarantee re- sources for the Nacional Financiera (NAFIN)–operated partial credit guarantee scheme for small and medium enterprise loans, with a view to subsidizing the guarantee fee. Budgetary resources were also allocated to Financiera Nacional de Desarrollo (FND) to cover expected losses in certain loan facilities so the institution could pass funding to borrowers at rates that included zero credit risk premium. Under the presidential administration that began December 2018, budget- ary subsidies to Mexican development banks have been greatly reduced. The Business Development Bank of Canada provides answers on its webpage to the questions most frequently re- ceived, which include “Do your offer grants or subsidies?” and “So you don’t give money? Shouldn’t a crown corporation be helping Canadians?”b Korea Development Bank reports that profit generated through fair competition with private financial institutions is their main resource for policy finance. a. C. Frischtak, C. Pazarbasioglu, S. Byskov, A. Hernandez Perez, and I. A. Carneiro, Towards a More Effective BNDES (World Bank, Washington, DC, 2017). b. Business Development Bank of Canada, general FAQ: https://www.bdc.ca/en/about/what-we-do/faq. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 24 LESSON 6 Operate the institution as a financial sector company not a management and procurement processes as the institutions op- public agency. In many instances, NDFIs operate like public erate under private company law. Furthermore, it allows for the agencies focused on compliance with administrative pro- entrance of minority private sector shareholders, as in the case cesses and record keeping rather than on servicing custom- of Financiera Nacional de Desarrollo (FND). Two-tier hiring sys- ers. NDFIs, particularly those providing subsidized lending, often tems, applied for example by KDB, can also be developed to have cumbersome and lengthy procedures for loan authorization provide flexibility to the institution without creating disparities with or product development. The strategic plans of financial institu- other public sector employees performing similar tasks. Flexibility tions present a good opportunity to optimize procedures, as was in operation does not amount to discretion, as public institutions, done for example, by the Croatian Development Bank (HBOR). even if operated under private company law, can still be subject Process simplification and use of technology can substantially to oversight by public sector institutions. However, it is impor- improve operational efficiency in product delivery, and BDC tant to ensure that the role of public oversight organizations is provides a good illustration of how this can function in practice. focused and targeted, avoiding overlap with prudential oversight Operational efficiency also requires adequate human resources, and interference in the financial institution’s business. Examples which are often compromised by NDFIs’ inability to hire quali- from Brazil and Mexico, as discussed in box 6, illustrate the neg- fied professionals due to the obligation to comply with public sec- ative effects on bank operations and governance from comptrol- tor hiring procedures and salary guidelines. Operating the NDFI ler entities’ overzealous oversight activities that focus more on as a joint stock company provides flexibility in human resource individual transactions than portfolio management. > > > B O X 6 - Lesson 6. Examples from Croatia, Canada, Colombia, Korea, Brazil and Mexico. The Croatian Bank for Reconstruction and Development, HBOR, the Croatian development bank, included in its 2020– 24 strategy, actions to improve operational efficiency, including (a) mapping key processes and identifying areas for process improvement, (b) developing a decision matrix and delegating the decision-making authority to a lower level, and (c) shortening the process of loan processing and decision making. Business Development Bank of Canada (BDC) loans can be applied for online. The online application contains a series of questions on the business, the specific project that necessitates the loan, and shareholder information. Once the ap- plication is complete, processing time varies between one to five business days. Once the BDC authorizes the loan, it usually takes 4 to 48 hours to receive the money. Financiera de Desarrollo Nacional is a “Sociedad de Economia Mixta” (public-private company) that is constituted with capital from the public sector and private shareholders and as such operates under private company law. It is overseen, by the Financial Superintendence of Colombia and by of the Office of the Controller. Korea Development Bank distinguishes between regular employees tasked with general duties and professional employees performing specific tasks, whose compensation and position are determined through individual contracts. Regular employees are hired through public recruitment once or twice a year, while professional employees are hired on an as-needed basis. In Brazil, the Controller General annually audits for compliance with administrative regulations applying to state-owned com- panies, use of earmarked funds, and application of resources. The Tribunal de Contas da União (TCU) monitors financial performance (peer analysis of financial and efficiency indicators), compliance with internal policies (akin to internal auditor), and financial accounts. It also investigates specific transactions when it receives a complaint. In 2017, TCU introduced a moratorium securitization of performing assets due to concerns that it would affect the solvency of state-owned banks as the it would dispose of good assets. Such moratoria limited Caixa Economica Federal’s options to improve capitalization ratios. The office of the Comptroller in Mexico interpreted the development bank obligation of preserving financial sustainability, embedded in their mandate, as applying to every transaction as opposed to the whole portfolio of assets. Review of all nonperforming loans by the comptroller office hampered the bank’s risk appetite. The financial sector reform of 2014 removed financial sustainability from the DB’s mandates (incorporated into law). Nowadays financial sustainability re- quirements are included in the business plans of the institution. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 25 LESSON 7 Ensure that the institution is effectively managed, and the of conditions of subsidized programs due to political inter- incentives of management and staff are aligned with the ference in operational decisions. objectives of the institution through effective corporate governance, risk management, and mechanisms to evalu- • Performance-related management contracts that set the ate the performance of NDFIs. Poor corporate governance responsibilities for and provide incentives to top manage- is one of the main reasons why state-owned enterprises ment for effective management and remuneration to staff (SOEs), including DFIs, fail to deliver on their developmental based on attainment of mandates help ensure incentives objectives and experience financial distress. The state should are aligned throughout the institution to achieve man- play an active shareholding role in NDFIs; however, the in- dates. Korea for example has implemented several good stitutions should have operational independence to develop practices in management performance evaluation. and price products and have adequate risk management ca- pabilities. Mechanisms to evaluate management performance • An effective monitoring and evaluation (M&E) framework as well as the developmental impact of the institution should to assess the economic impact of the operations of DFIs be introduced to align incentives through the institution. Box enhances institutions’ effectiveness in achieving their de- 7 provides examples on effective corporate governance, risk velopmental goals. M&E systems enhance accountabil- management, and mechanisms to evaluate the performance ity on the use of public resources and provide incentives of NDFIs. to improve operational efficiency. In most cases NDFIs’ developmental performance is assessed by resources in- • The adoption of Organisation for Economic Co-operation termediated or clients served, which can induce them to and Development (OECD) Standards for Corporate Gov- expand activities (volume and market shares), sacrificing ernance of SOEs and the recommendations of the Finan- quality, and compete with private providers. Comprehen- cial Reporting Council in its Code and Guidance for Cor- sive M&E systems include monitoring of key performance porate Board Effectiveness (2018) are important steps indicators (KPIs), as well a program to conduct rigorous to enhance the operation of NDFIs.51 As per those, the impact evaluation studies of DFIs’ main programs. KPIs state should (a) actively participate in shareholder meet- go beyond outputs (for example, clients in certain seg- ings, (b) establish professional supervisory boards with ments, loans disbursed), including outcome indicators merit-based transparent board nomination processes, (for example, jobs created or maintained or an increase (c) monitor the performance of the NDFIs, (d) develop a in sales thanks to the financial support provided). KPIs disclosure policy for NDFIs, (e) maintain a dialogue with can provide a view of the contribution of NDFIs’ opera- external auditors and state oversight authorities, and (f) tions to attain economic outcomes (for example, increase establish a remuneration policy for SOE boards that sup- in exports or employment), but also be able to attribute ports the goals of the NDFI and attracts and motivates such outcomes to NDFIs’ operations (that is, assess the qualified professionals. The Development Bank Ghana additionality of SOFIs’ operations) rigorous impact evalu- (DBG), for example, is adopting many of those principles ation studies are required. KPIs are also useful to moni- with World Bank support. tor financial inclusion objectives (that is, clients accessing formal financial services for the first time) or intermediate • To effectively manage an NDFI, it is essential to have ap- outcomes (for example, private funding mobilized using propriate risk management capabilities and ensure that public resources allocated to SOFIs). KPIs reflecting de- risks are properly priced with costs, including risk premi- velopmental goals should be well defined and measurable ums, either included in the price of the product or compen- to avoid focus on financial performance KPIs, which could sated for by subsidies. Financial institutions’ boards must in turn distort incentives. Information from M&E systems formulate risk tolerance policies and be able to ensure ap- should be used to scale, adapt, or eliminate programs and propriate pricing. Even in cases where risk management products, as required. Having M&E unites reporting di- capabilities exist to properly determine prices and have rectly to the board as opposed to management and mak- informed discussions with public sector shareholders on ing data available to research institutions to conduct stud- the required amount of subsides for specific programs, ies to enhance the credibility of the evaluation process. NDFIs do not always have the ability to determine terms 51 OECD, “Development Finance Institutions.” EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 26 > > > B O X 7 - Lesson 7. Examples from Ghana, Korea, Mexico, Brazil, and the United Kingdom. Development Bank Ghana (DBG) corporate governance arrangements include an independent board (at least 60 per- cent of the board is to be composed of independent directors) competitively recruited with the assistance of a credible search firm and subject to fit and proper test by the Central Bank. The chairman of the board shall be appointed by the board, from among its independent members, by simple majority. The shareholders are responsible for certain matters related to business and operations, capital structure and composition, and governance. The board provides the strate- gic guidance of the DBG, conducts effective monitoring of management, and is accountable to the shareholders. The managing director, with the support of key management personnel, is responsible for the day-to-day operations of the DBG and for execution of the strategy and plans approved by the board. In Korea, performance agreements for the head of state-owned enterprises were introduced in 2014. Annual perfor- mance evaluations are conducted by the Financial Services Commission on state-owned banks (Korea Development Bank, Industrial Bank of Korea, Export-Import Bank of Korea). Evaluation indicators are both quantitative and qualitative and relate to general management functions, as well as key projects. Indicators in the first category relate to strategy implementation, financial performance, human resource management, and customer satisfaction. Project indicators include attainment of goal funding levels, project financial performance, loan delinquency levels, support for corporate restructuring, or small and medium enterprises growth. The report is used to determine bonuses for management and employees and for decisions regarding chief executive officer continuity. ... EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 27 Mexican developmental banks set risk metrics to formulate their risk appetite and capacity. Those metrics vary depend- ing on the nature of the institution. For example, Trust Funds for Rural Development (FIRA), which is a trust fund provid- ing guarantees and loans to financial intermediaries for agricultural and agribusiness projects, uses value at risk limits. Financiera Nacional de Desarrollo (FND), which is a development agency providing credit to the rural sector directly and through financial intermediaries, sets limits on the leverage ratio. Both institutions have a comprehensive credit as- sessment process, including assessment of project viability (including managerial skills, market outlook, cash-flow rev- enues, debt service capacity, and, if applicable, currency volatility effects), credit history of the borrower, and evaluation of guarantees. Pricing of loans is based on the cost of funding, including capital cost and credit risk premium calculated based on expected loss and operational costs. FND prices apply to the product, while FIRA calculates different risk pre- miums for different counterparties within the same product. Pricing calculations have been used in negotiations with the Ministry of Finance to determine the amount of budgetary subsidy needed to preserve the sustainability of the institution in the case of special programs launched at preferential rates. However, the institutions have not always obtained the calculated subsidy. For example, FND suffered important losses in the operation of the Small Agricultural Producers Financing Program launched in 2014 with a 7 percent rate announced by the office of the President of Mexico. Brazilian Development Bank (BNDES) launched a corporate project to enhance monitoring and evaluation (M&E) in 2013, shortly after the creation of a dedicated M&E unit under the Department of Strategy and Planning. The BNDES M&E system comprises systematic project analysis and impact evaluations for counterfactual analysis. Systematic analysis includes ex-ante analysis of projects through result chains and monitoring performance of project indicators. For example, Innovation project key performance indicators (KPIs) include research-hours supported by projects while Infrastructure KPIs include reduction in travel times, population with access to sanitation services, or renewable mega- watts generated by projects. Impact evaluations are done in collaboration with research institutions that form part of a network for evaluation, discussion, and support and that include the World Bank, the Inter-American Development Bank, local universities, and the Central Bank. The 2001 Access to Information Law substantially increased the BNDES project data available to the public and spurred an interest among academics. BNDES evaluates the developmental impact of its operations over a two-year cycle and has already published two effectiveness reports (2015–16 and 2017–18), which report KPIs and disclose the outcomes of impact evaluations conducted internally and those published by ex- ternal researchers. In addition to the effectiveness report, a recommendations report is prepared for management that incorporates M&E findings. The British Business Bank (BBB) agrees on specific KPIs and targets for each of its four objectives with its sharehold- ers, against which the bank is held accountable. Objectives include increasing the supply of funding, diversifying the financial sector, better providing information, and efficiently managing taxpayer resources. KPIs for these objectives are respectively (a) stock of finance supported through its finance programs directly and leveraged in third-party funding; (b) percentage of finance we support through non–Big Five banks; (c) achievement of key targets associated with key aspects (awareness, consideration, usage, and outcomes), as well as delivering strategic milestones. Assessed using a “Red Amber Green” status, where green indicates met, amber indicates partially met, and red indicates not met. At year-end, the Board and Shareholder examine an internal report on activities and agree an assessment of performance delivery of specific initiatives, as well as contributions through the year on the key aspects of research and publica- tions, policy engagement, opinion engagement, and program development; (d) to earn greater than the government’s medium-term cost of capital over the next five years measured by the five year gilt rate at the beginning of the plan. Considering performance against KPIs the Remuneration Committee determines the corporate performance pay-out. The BBB research program includes third-party independent assessments of programs. In a value for money report published by the National Audit Office (NAO) on the BBB in January 2020, the NAO found that “the British Business Bank has performed well against its objectives,” enabling additional growth in UK small and medium enterprises (SMEs) as a result of its activities. It also said the bank “had clear performance metrics and carried out evaluation of its impact on SMEs. Overall, it has been performing well and SMEs have been growing as a result of its activities.”a a. National Audit Office, “British Business Bank” (Report by the Comptroller and Auditor General to the UK House of Commons, 2020), https://www.nao.org.uk/ wp-content/uploads/2020/01/British-Business-Bank.pdf. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 28 LESSON 8 Ensure that NDFIs are properly supervised by the finan- stitutions should be able to invest in those instruments. cial supervisory agency and that the institutions operate This likely requires legal modifications if the DBs operate on a level playing field. NDFIs should operate in a regula- under laws that determine the state-ownership nature of tory environment that supports their effective performance. In the institution, but it will ensure smooth resolution in the the case of DBs, the main regulatory issues relate to pruden- event of instability. Development banks are exposed to tial regulation and competition. Effective prudential oversight credit, market, and operational risks. They should be sub- helps ensure financial sustainability of the institution while a ject to international regulatory standards applying to pri- level playing field among DBs and private participants reduces vate commercial banks regarding how to manage those distortions that negatively affect net economic performance. risks, including through exposure limits (for example, on An example of supervision of the NDFI is provided in Box 8. large exposures and related-party lending and on net open foreign exchange positions), as well as on the al- • DFIs’ and DBs’ oversight framework should be based on location of capital and reserves. Supervision should be their activity and risk profiles and not on the nature of the conducted by politically independent supervisory authori- shareholders. Prudential regulation aims to preserve the ties to ensure supervision is intrusive and enforcement financial sustainability of the institution to protect deposi- appropriate. tors and avoid contagion effects that endanger the stabil- ity of the financial sector. Assuming that in the event of • NDFIs should not receive preferential tax treatment insolvency a DB’s liabilities will be honored by the govern- and subsidies not available to private institutions or be ment may not be realistic, particularly in countries with |exempted from prudential regulatory requirements—ei- weak fiscal positions, and the DB may need to be restruc- ther de jure or de facto through lax supervision.53 To the tured.52 If the institution is systemically important because extent that DBs operate in the same markets and seg- of its size, it should be regulated as other private systemic ments as private institutions, this can create an uneven institutions, regardless of whether it takes deposits or not. playing field that favors the expansion of the NDFI at To minimize potential instability effects in case the state the expense of private sector competitors, negatively af- faces difficulties to recapitalize institutions, DBs should fecting overall financing volumes and discouraging entry have issued subordinated debt instruments that they and market development as previously illustrated by the could convert into capital if needed and private sector in- BNDES discussion. > > > B O X 8 - Lesson 8. Examples from Brazil. The Brazilian Development Bank (BNDES) is supervised by the Central Bank of Brazil. The BNDES, as a development bank, is in principle not subject to Basel rules that were devised for commercial banks. But following good practices, most prudential regulations apply to it. The two main exceptions relate to concentration exposures (albeit compliance is envisioned by 2024) and the designation as a systemically important institution (The BNDES was not considered systemically important in 2018, though smaller institutions were). Worth noticing is that for prudential purposes state- owned enterprises are not considered related parties to state-owned banks (art. 34 of Banking Law). Central Bank of Brazil regulations restrict BNDES operations in certain areas (for example, derivatives, except for hedging purposes). The BNDES is not tax-exempt but receives subsided funding from the treasury (the new funds will be at market rates) and Workers Guarantee Fund. 52 Even if liabilities can be covered, this would require bailing out the institution, and the government would incur fiscal costs, as in the case of bailing out a too-big-to-fail private institution. Hence, the argument that justifies stricter supervision of too-big-to-fail or too-interconnected-to-fail private institutions can also be applied to SOFIs, especially large ones. 53 Also, they can benefit from explicit or implicit public guarantees on their liabilities that, provided the state has a strong fiscal position, may provide an advantage vis-a-vis smaller institutions; but typically large commercial banks will enjoy an implicit guarantee as well. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 29 LESSON 9 When the environment is not conducive to NDFI effec- may look restrictive, NDFIs operating on second tier allow for tiveness, operate in second tier54 and raise funds in inter- substantial impact and countercyclical activities through guar- national capital markets. While NDFIs can be an effective antees and the creation of financial platforms. Issuing bonds policy instrument if effectively managed, development bank- in international capital markets, at least to fund a small portion ing requires a level of institutional development that is difficult of the balance sheet, subjects the institution to market dis- to attain in many countries. Operation under private company cipline that helps mitigate shortcomings on governance and law, politically independent boards, the absence of corruption, oversight. Second-tier NDFIs can develop project preparation a level playing field, and politically independent supervisors capabilities and provide technical assistance to ensure that are some of the most difficult factors. In these cases, limiting the benefits of operating in first tier are not lost. Box 9 provides NDFI operations to second tier helps limit political interference examples of operating in second tier and raising funds in inter- as credit decisions are ultimately taken by private intermediar- national capital markets. ies, which helps ensure project viability.55 While the approach > > > B O X 9 - Lesson 9. Examples from Mexico. Mexico a priori does not have the most favorable operational environment for successful functioning of national de- velopment financial institutions (NDFIs). According to the 2019 World Governance Indicators published by the World Bank, Mexico ranks in the bottom quartile on the control of corruption indicator and below the median in government effectiveness among all countries. Product market regulation is less friendly, and price controls are more prevalent than in most of the Organisation for Economic Co-operation and Development (OECD) countries according to the OECD Product Market Regulation Indicators. There are no fit and proper criteria for chief executive officers of most Mexican NDFIs, and they are appointed by the president. The financial regulator, though it does supervise the institutions, does not have approval authority over the appointment of board members or the chief executive officers of the institutions. Nevertheless, the 2016 Financial Sector Assessment Program found that NDFIs’ operations did not pose major fiscal or financial stability risks. However, it raised concerns regarding the distortions and inefficiencies that the expansion of their first-tier operations could create. Among the Mexican development financial institutions, Trust Funds for Rural Development (FIRA) and Nacional Finan- ciera (NAFIN) have demonstrated innovation and are considered referents for other development banks in their areas. Both operate largely in second tier, with NAFIN also participating in syndicated project financing of renewable energy products but only taking up to 50 percent of project risk. It also provides technical support for project preparation. FIRA has an important regional presence and a crew of agronomists that support the structuring of bankable agricultural proj- ects, including through the provision of technical assistance to final borrowers, and share agrifood market information with the first-floor financial intermediaries. The approach seeks not only to finance production but also to create financ- ing mechanisms to turn producers into exporters, suppliers of agribusiness, and final consumers. FIRA has the capabili- ties and market-intelligence of a first-floor institution, structuring projects but offering them to private intermediaries for financing, which ensures the project passes the market test, and it is not subject to political interference. In fact, FIRA has more branches than Financiera Nacional de Desarrollo (a Mexican first tier agricultural developmental financial institution) and a similar number of employees despite operating only on second tier. Both FIRA and NAFIN are rated by international agencies and issue securities in capital markets. NAFIN was the first issuer of green bonds in Latin America. FIRA has been the first issuer in Latin America of social-themed bonds that were used to finance productive projects benefiting rural women. 54 First-tier lending is retail lending, under which DFIs interact directly with end customers. Second-tier lending is wholesale lending, under which DFIs provide financing to private financial institutions that then select and assess loan applications of end customers. 55 Provided the private banking system is not captured by oligarchs engaging on related party activities. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 30 3. >>> COVID-19 Response by National Development Financial Institutions The COVID-19 pandemic has had a devastating effect on the global economy and trade. The contraction of activity in 2020 was unprecedented in living memory in its speed and synchronized nature, and world economic growth is being projected to drop by 3.3 per- cent.56 To offset the negative effects of the collapse in consumer demand as well as closures and the slowing down of many industries, governments around the world implemented mas- sive financial support programs. By March 2021, Japan had spent as much as 44.2 percent of its GDP on a variety of fiscal and monetary packages; Germany had spent 38.8 percent, Canada—18.7 percent, and the United States—27.9 percent.57 The International Monetary Fund (IMF) estimates suggest that the contraction could have been three times as large if not for ex- traordinary policy support.58 National development banks and credit guarantee institutions, using their own resources as well as those included in COVID-19 stimulus packages, have been an important tool in the crisis response, supporting economic sectors and individual companies affected by the pandemic. NDFIs have been acting in line with their mandates by providing countercyclical lending, mobilizing and distributing resources, and overall supporting production and employ- ment.59 Often, this meant offering liquidity with generously reduced rates of interest, preferential repayment terms, and eased conditions of repayment. In the first half of 2020, Kreditanstalt für Wiederaufbau’s (KfW) financing vol¬ume more than doubled as a result of coronavirus aid pro- grams.60 By the end of March 2021, loan applications had topped 127,000. KfW COVID loans carry very low margins, and the federal government assumed close to full liability. Turkey’s credit volume, supported by the Credit Guarantee Fund, partly funded by the government, doubled during the pandemic. The bulk of those loans were directed to SMEs and shopkeepers and were 56 IMF (International Monetary Fund), World Economic Outlook: Managing Divergent Recoveries (Washington, DC: IMF, April 2021). 57 IMF Database of Fiscal Policy Responses to COVID-19, https://www.imf.org/en/Topics/imf-and-covid19/Fiscal-Policies-Database-in-Response-to-COVID-19. 58 International Monetary Fund, World Economic Outlook: Managing Divergent Recoveries (Washington, DC: IMF, April 2021). 59 Annalise Pflueger and Gillette Conner, “The Critical Role of DFIs in Preserving SME Solvency in a Pandemic,” (blog, SME Finance Forum, May 27, 2020), https://www. smefinanceforum.org/post/the-critical-role-of-dfis-in-preserving-sme-solvency-in-a-pandemic; Adva Saldinger, “How DFIs Are Responding to the COVID-19 Crisis,” Devex, 29 April 2020.https://www.devex.com/news/how-dfis-are-responding-to-the-covid-19-crisis-97081. 60 Kreditanstalt für Wiederaufbau, “First Half of 2020: KfW’s Financing Volume More Than Doubled as a Result of Coronavirus Aid Programmes” (Press Release, August 12, 2020), https://www.kfw.de/KfW-Group/Newsroom/Latest-News/Pressemitteilungen-Details_601280.html. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 31 originated mostly by public commercial banks.61 Despite its A review of COVID-19 programs in selected countries by low share in total banking sector lending, the Turkey Devel- their main DBs and credit guarantee institutions reveals opment and Investment Bank’s (Turkiye Kalkinma ve Yatirim that lending (mostly at preferential terms), and credit Bankasi, TKYB) loans increased by 35 percent in 2020.62 The guarantees have been the most common interventions United Kingdom announced a £330 billion package of govern- followed by measures to facilitate access to credit and ment-backed and guaranteed loans to be administered by the debt repayment moratoria. Results of this review are il- Business British Bank (BBB). China Development Bank (CDB) lustrated in figure 6. The most common measures were (a) issued RMB 728 billion in loans by the of end March 2020 to lending, including lending at preferential terms (16 DFIs in 12 provide countercyclical support (0.75 percent of GDP).63 The countries); (b) credit guarantees (11 DFIs in 10 countries); (c) collective scale of support measures by Korean DBs accounts facilitating access to credit (10 DFIs in 8 countries); (d) debt for about 3 percent of GDP.64 repayment moratoria (9 DFIs in 8 countries); and (e) injec- tion of equity (6 DFIs in 5 countries). Most NDFIs provided Countries with large state-owned commercial banks have more than one solution. Annex 1 contains details on NDFI in- provided credit support mainly through those institutions, terventions in the analyzed countries. Countries were selected though DFIs have supported such endeavors. In China, to provide wide regional coverage and to include the largest Germany, India, Russia, and Turkey, DFIs complemented the NDFIs. Assets of NDFIs of countries included in the sample actions taken by public commercial banks, which in most cas- account for over 80 percent of total NDFI assets in the Agence es were at the forefront of the COVID-19 support responses. française de développment (AFD) database. In Russia, for example, the bulk of the support to firms was provided by commercial banks using funds from the Central As an immediate response to COVID-19, many NDFIs Bank of Russia and state resources to provide subsidized made large amounts of resources available to firms for credit. Nevertheless, Russian DFIs were also active in origi- working capital, often at preferential rates, via direct and nating credit (for example, SME Bank) and providing guaran- wholesale lending. NDFIs established new facilities or re- tees to financial institutions (for example, Vnesheconombank, plenished existing ones to provide credit directly or through State Development Corporation, VEB SME Bank reported that financial institutions to the customers negatively affected by their loans, guaranteed by VEB had saved 130,000 jobs.65 COVID-19. For example, NAFIN and Bancomext in Mexico The People’s Bank of China provided 800 billion RMB in late manage a program of about US$2.5 billion through financial February 2020 through relending and rediscount facilities to intermediaries, to contribute to enterprise liquidity. BNDES be- provide loans at preferential rates (1.6 percent to 4.55 per- gan to transfer funds to MSMEs through financial technology cent) for firms involved in pandemic response or affected by providers in addition to banks and credit cooperatives. Other it. Loans were granted by local banks, largely state-owned, institutions such as BDC, CEF, and Russia’s SME Bank, pro- including policy banks. In Turkey and India, public commercial vided loans directly. Almost all NDFIs provided loans at prefer- banks also were at the forefront of the response, but DFIs ential rates under special COVID-19 facilities with the notable contributed as well. In 2020, Korean Credit Guarantee Fund exceptions of BDC, NAFIN, Bancomext, and BBB. (KODIT) guarantees outstanding increased by 22.4 percent to W 63.9 trillion as compared to a growth of 4 percent in 2019. 61 D. A. McDonald, T. Marois, and D. Barrowclough, eds., Public Banks and Covid-19: Combatting the Pandemic with Public Finance (Kingston: Municipal Services Project: Kingston, Canada; Geneva: UNCTAD; and Brussels: Eurodad, 2020). As of the end of 2020, the three largest commercial banks in Turkey in terms of assets are state-owned. 62 TKYB’s share in the total banking sector assets and loans is 0.5 and 0.6 percent, respectively, as of 2020. In addition to TKYB, other development banks are active in Turkey, but are not part of the study. These include the private development bank Industrial Development Bank of Turkey (Turkiye Sinai Kalkinma Bankasi, TSKB) and two other publicly owned development banks, the Turkish Export-Import Bank Eximbank and Illerbank, focused on municipal finance. 63 China Development Bank, “CDB Leverages Counter-cyclical Adjustment to Help Ensure ‘Six Priorities’ and Stability in Six Areas,” April 22, 2020, http://www.cdb.com.cn/ English/xwzx_715/khdt/202008/t20200820_7623.html. 64 Fitch Ratings, “South Korea’s Key Policy Banks Countercyclical Policy Role Stands Out Amid the Coronavirus-Triggered Downturn” (Special Report, June 22, 2020). 65 SME Bank,“SME Bank Helped to Save More Than 130 Thousand Jobs with the Help of Programs of State Support for SMEs,” September 29, 2020, “https://mspbank.ru/ media/news/MSP-Bank-pomog-sokhranit-bolee-130-tysyach-rabochikh-mest-s-pomoshchyu-programm-gospodderzhki-subekt/ EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 32 > > > F I G U R E 6 - COVID-19 Response of the Selected DFIs CANADA GERMANY POLAND RUSSIAN Business Development Bank of Kreditanstalt für Wiederaufbau Bank Gospodarstwa Krajowego FEDERATION Canada (BDC) (KfW) (BGK) VEB Russia Lending Preferential lending Preferential lending Credit guarantees Equity Equity Credit guarantees SME Development Bank Facilitating access to credit Credit guarantees Facilitating access to credit Preferential lending Moratorium Moratorium Moratorium Facilitating access to credit Other Other Export Development Canada (EDC) Credit guarantees CHINA Facilitating access to credit China Development Bank (CDB) Preferential lending Facilitating access to credit Moratorium Other SOUTH KOREA Korea Development Bank (KDB) Preferential lending Equity Facilitating access to credit Other Export-Import Bank of Korea Lending Equity Facilitating access to credit Industrial Bank of Korea (IBK) Preferential lending Other Korea Credit Guarantee Fund (KODIT) Credit guarantees Other BRAZIL TURKEY INDIA MALAYSIA Caixa Econômica Federal (CEF) Turkey Development and Small Industries Development SME Bank Preferential lending Investment Bank (TKYB) Bank of India (SIDBI) Preferential lending Liquidity support Preferential lending Lending Moratorium Facilitating access to credit Credit Guarantee Fund (KGF) Liquidity support Credit Guarantee Corporation Moratorium Credit guarantees National Credit Guarantee (CGC) and Syarikat Jaminan Other Small and Medium Industry Trustee Company Pembiayaan Perniagaan (SJPP) Brazilian Development Bank Development Organization Credit guarantees Credit guarantees (BNDES) (KOGSEB) Other Preferential lending Facilitating access to credit Equity Moratorium Credit guarantees Moratorium Other MEXICO SOUTH Fundo Garantidor de Nacional Financiera (NAFIN) AFRICA Operações (FGO) and Banco Nacional de Small Enterprise Finance Agency Credit guarantees Comercio Exterior (Bancomext) (SEFA) Lending Preferential lending Facilitating access to credit Moratorium Other Industrial Development Corporation Lending Source: Websites of the respective DFIs: https://publicbankscovid19.org/. Note: The COVID-19 response is reported for DFIs operating under micro, small, and medium enterprise and export/import mandates. The list of measures under- taken by the selected DFIs is not exhaustive. DFI = development financial institution. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 33 Generous partial credit guarantees were the main mode of private venture capital funds into start-ups with federal funds via intervention in many countries provided either by DBs or KfW. Besides matching schemes, BNDESpar, a subsidiary of credit guarantee institutions. In some cases, credit guaran- BNDES, has made R$ 4 billion available for purchasing quotas tee institutions guaranteed DB loans as well. As many compa- from SMEs debt capital funds. Korean Development Bank pro- nies faced reduced cash flows and depletion of the collateral, vided equity injections to stabilize firms in strategic sectors, while it became more difficult for them to obtain necessary financing Korea Exim Bank set up dedicated funds to invest in pharmaceu- at favorable terms. To provide risk mitigation to lenders through tical venture companies. the absorption of a portion of the lender’s losses on the loans, BBB, KfW, and KODIT offered 100 percent guarantees on cer- To alleviate repayment burden and facilitate access to tain loans. BNDES under the Emergency Credit Access Pro- credit, DFIs eased financial conditions for new and existing gram (PEAC) provided 30 percent first loss guarantee on new financial products, provided moratoria on loan payments SME loan portfolios granted during the COVID-19 emergency. and cofinanced bank loans. Many NDFIs (for example, EDC, Export Development Canada (EDC) and Bank Gospodarstwa CEF, KfW) offered loans at preferential rates to specific seg- Krajowego (BGK) in Poland provided up to 80 percent guaran- ments and suggested restructuring of existing loans (for ex- tees with guarantee fees deferred for the first six months or zero ample, TKYB) for sectors negatively affected by the pandemic. percent fee. Other conditions were eased as well. For example, In certain cases, the interest rate reduction was subsidized by BGK de minis guarantee (from January 1, 2021, to June 30, the state (for example, EDC, VEB) or cross-subsidized by sec- 2021) can be provided to companies in arrears with the Tax tors or products that were not affected by the pandemic. Con- Office, provided they did not have any on February 1, 2020.66 ditions on existing facilities were also reviewed. For example, In several countries guarantees are provided by specialized in- BGK in Poland extended grace periods and maturities on some stitutions (for example, Korea, Malaysia, South Africa, Turkey). of its loans and reduced interest rates on the new loans under Credit Guarantee Fund (KGF) in Turkey provides guarantees the existing schemes. Many NDFIs provided debt repayment on loans to SMEs and companies with liquidity needs and col- moratoria on existing loans and grace periods for new loans lateral deficit. The Turkey Development and Investment Bank for the period of 6 to 12 months. As most SMEs have experi- (TKYB), as all public banks in Turkey, has access to KGF guar- enced revenue losses and many of them do not have enough antees. During the pandemic, the capital of KGF was doubled of a safety cushion, debt repayment moratoria relieved their from TRY 25 billion to TL 50 billion.67 The Small Industries De- financial burden and saved them from bankruptcy. In this re- velopment Bank of India (SIDBI) obtained a 100 percent guar- gard, for instance, Small Enterprise Finance Agency (SEFA) in antee on loans from the Emergency Credit Line Guarantee South Africa provided debt repayment moratoria to MSMEs and Scheme (ECLGS) from the National Credit Guarantee Trustee BNDES in Brazil extended a moratorium to firms and munici- Company, while it did not provide guarantees itself. palities. BGK in Poland also offered moratoria on some of its loan programs but, in that case, to benefit from more favorable Several NDFIs also provided equity solutions for firms. loan conditions; the entrepreneur has to submit an application Matching facilities were developed for financing of start-ups in to the financial institution that granted the loan containing a jus- Canada, Germany, and the United Kingdom that are generally tification that the crisis related to the COVID-19 pandemic has not eligible for other COVID-19 financial support schemes. For affected or will have a negative impact on the firm. The financial example, BDC’s investment arm, BDC Capital (BDCC), may intermediaries that granted the loan decide on the changes in match with a subordinated convertible note of up to CAD 3 mil- repayment terms. Some NDFIs (for example, BDC in Canada) lion, a current financing round by an eligible Canadian start-up also facilitated access to credit by cofinancing loans. through a qualified investor. Eligible companies must have raised at least CAD 500,000 in external capital and, while impacted by NDFIs also provided liquidity support to other financial COVID-19, must have a high likelihood of survival. Subordinated, institutions facing difficulties as their borrowers experi- convertible, promissory notes issued to BDCC will accrue inter- enced distress and markets curtailed financing. For ex- est annually at the fluctuating BDCC rate plus 4 percent, have a ample, CEF purchased payroll loan portfolios from medium maturity date of three years, and will be convertible at the option banks and agribusinesses. SIDBI established two schemes of BDC. KfW Corona Matching Facility provides liquidity to in- for special liquidity support to MSMEs affected due to CO- novative start-ups and young growth enterprises in the portfolio VID-19 through nonbank financial companies (NBFCs) and of venture capital funds. The facility matches equity financing by microfinance institutions (MFIs). 66 AECM (European Association of Guarantee Institutions), “Overview of Measures Against the Economic Impact of the Coronavirus (COVID-19) Outbreak,” https://aecm.eu/ wp-content/uploads/2020/05/2020.05.11-ELTI-NEFI-AECM-Coronavirus-COVID-19-Support-Measures-2.pdf. 67 The support of Turkey’s Ministry of Treasury and Finance for KGF guaranteed loans was increased from TL 25 billion to TL 50 billion in March 2020. Thus, the Minis- try-backed CGF guaranteed limit amounted to TRY 500 billion. Central Bank of the Republic of Turkey, “Financial Stability Report,” May 2020, https://www.tcmb.gov.tr/wps/wcm/ connect/531ffe44-17bd-46e9-9e55-02832723f110/Full+Text.pdf?MOD=AJPERES&CACHEID=ROOTWORKSPACE-531ffe44-17bd-46e9-9e55-02832723f110-ncfZ4cq. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 34 Some NDFIs also intervened to stabilize financial mar- firms were accompanied by training provided by Brazilian Micro kets and provided guarantees on firm securities. KDB and and Small Enterprises’ Support Service (SEBRAE). Industrial Bank of Korea (IBK) purchased high-grade (A and higher) corporate paper and commercial paper to help debt re- Despite substantial NDFI activity, it is also worth men- financing through participation in the bond market stabilization tioning that credit support programs for the smaller and fund. Mexican banks provided guarantees on payment of cap- larger firms in some of the analyzed countries have been ital and interest on the issuance of commercial paper, stock provided without involvement of NDFIs. In Mexico, for ex- market certificates, or any other instruments used in nation- ample, large support programs have been provided by the al or foreign stock exchanges. The Korea Credit Guarantee government directly, entirely bypassing public institutions. This Fund, in addition to credit guarantees, provides a guarantee is the case, for example, for the Credito a la palabra program on Primary Collateralized Bond Obligation (PCBO) to facilitate for family microenterprises, which provides 25,000 Mexican financing to companies more efficiently by guaranteeing the pesos to businesses registered in the Welfare Census, which repayment of their corporate bonds indirectly.68 identifies potential receptors of social programs, at 6.5 per- cent interest rate for three years, with a three month grace pe- Apart from standard operations, NDFIs also turned to riod. Government employees contact those registered in the innovative solutions to support companies and sectors Census offering the credit, which is disbursed into a financial affected by the pandemic. KDB set up a special purpose institution account. While Banco del Bienestar is a public de- vehicle (SPV) through which it could purchase corporate debt, velopment bank focused on financial inclusion and envisioned including low rated bonds carrying a KODIT guarantee to help to distribute social programs in Mexico, private institutions will finance low-rated firms that faced difficulties due to reduced disburse these loans, given Bienestar’s limited technological investment during the pandemic. BNDES set up a partnership capabilities. On the other hand, credit to support larger com- with different institutions for an online fundraising campaign, panies in the United Kingdom is provided directly by the Bank Salvando Vidas, for the acquisition of material, supplies, and of England via purchases of commercial paper either in the protective equipment for doctors, nurses, and other health primary or secondary market under the Corporate Finance Fa- professionals who work in hospitals. Salvando Vidas has a cility. In South Africa, the Treasury provided a credit guarantee partnership with and association of health institutions that for SMEs affected by COVID-19 administered by the Reserve centralizes demand and distribution among all the hospitals in Bank of South Africa.71 While the Treasury of the Central Bank the project. A nonprofit organization, Sitawi Finance Well, with can directly administer public credit support programs, an the support of match-funding platform Benfeitoria, manages NDFI that has a constant presence in the market and sectoral the financial, accountability, and procurement of the items and knowledge can be in a better position to administer those pro- the coordination of the campaign. A digital platform for health grams, provided it operates efficiently. sector purchases (Bionexo) makes its technology platform available for evaluation and price quotations, with more than Many programs offered support to all firms, not only those 10,000 suppliers, and will monitor the individualized deliveries affected or those producing goods to fight COVID-19, and at each health institution.69 a few programs set conditions on recipient firms beyond financial performance prepandemic. Several NDFIs provid- Support included not only funding but also advisory ser- ed support to all small firms for working capital without requir- vices. For example, BDC introduced three new advisory ser- ing proof of being affected by COVID-19 (for example, BDC vice solutions, accessible remotely, to help businesses plan for small business loans, CEF micro and small firms program, recovery, in which its experts provide advice on online sales op- BBB Bounce Back Loan Scheme), and in some cases also timization, operations and cash flow resilience, and workplace to medium firms (for example, KfW instant loans to medium health risk mitigation. A dedicated hub on its website includes firms, KDB SME loans and KODIT SME guarantees, SIBDI free tools and advice, such as a COVID-19 business toolkit TWARIT scheme72). Few programs and facilities operated by and a list of available support measures.70 In other cases, DFI DFIs imposed conditions on the recipients. Among the ana- credits were provided jointly with training delivered by another lyzed programs only the Brazilian Emergency Employment institution. In Brazil, CEF preferential credits to micro and small Support Program (PESE) managed by BNDES and a credit 68 PCBO is a kind of asset-backed security backed by a variety of corporate bonds with varying degrees of risks and coupon rates. 69 BNDES, Matchfunding Salvando Vidas, https://www.bndes.gov.br/wps/portal/site/home/bndes-contra-coronavirus/mais-informacoes/matchfunding-salvando-vidas. 70 Business Development Bank of Canada, Advisory Services, https://www.bdc.ca/en/consulting. 71 South Africa Treasury Department, COVID Loan Guarantee Scheme, http://www.treasury.gov.za/comm_media/press/2020/COVID-19%20loan%20guarantee%20 scheme%20FAQs%2026%20July.pdf 72 The Indian credit guarantee corporation also offered a 100 percent guarantee to financial institutions providing a credit up to 20 percent of existing debt to MSME borrow- ers, with a turnover of up to Rs. 1 billion, holding outstanding credit of up to INR 250 million from banks with loans less than 60 days delinquent. The loan maturity conditions are the same as in the Timely Working Capital Assistance to Revitalize Industries in Times of corona crisis (TWARIT) program. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 35 guarantee facility provided by Russian VEB included an obli- million to fund the PEAC program. Subsidized loans granted gation for the recipient firm to maintain employment. Most pro- by both public and private banks were supported exclusive¬ly grams reviewed required recipients to be current on their bank with resources from Brazil’s federal government. Korean DBs loans prepandemic or imposed some profitability requirement. tapped international markets through bond issuances, in the For example, KfW Instant Loans for medium enterprises with case of KDB with a COVID-19 label, and received capital injec- more than 10 employees required firms to be profitable on tions from the government. KDB also obtained a loan from the average for the three previous years. In India, beneficiaries of Bank of Korea to fund an SPV devoted to the purchase of low the TWARIT program and public partial credit guarantees had rating bonds issued by companies affected by the pandemic. to be less than 60 days overdue on their outstanding loans. In Malaysia, funding for government COVID-19 programs to BCD small business loans provided up to 100,000 Canadian enhance financing for businesses was provided by the Central dollars online for businesses that have been in operation for at Bank (Bank Negara Malaysia). least 24 months and are generating revenues. Eligible SMEs under the Russian SME bank needed to have a positive busi- Governments took an unprecedented amount of risk di- ness reputation and good credit history, operate with a profit rectly in their balance sheet or through partial credit guar- as of the end of March 2020, and be solvent. antee schemes and, in many cases, used NDFIs as pro- gram administrators. As previously discussed, governments Programs were offered for a limited time and subsequent- provided generous credit guarantees through DBs and special- ly extended as containment measures were prolonged. ized credit institutions. But governments also directly assumed Virtually all COVID-19 related programs have a limited dura- lending risks using budgetary resources with NDFIs, in many tion, although, in many cases, programs have been extended instances, simply administering government programs through as economic disruptions arising from COVID-19 have persist- off–balance sheet operations. EDC, for example, administers ed. For example, Malaysia’s SME Bank Targeted Relief and the Canada Emergency Business Account (CEBA), a govern- Recovery Facility (TRRF) was extended until December 2021 ment loan program that provides up to Can$60,000 of interest or until full funds utilization, due to reintroduction of COVID-19 free loans to businesses and not-for-profits affected by COV- containment measures. ID-19 to finance nondeferrable expenses (for example, payroll, lease, utilities). Loans are provided by financial institutions us- Diverse sources of funding were used, including securities ing government resources and repayment of Can$40,000 be- issuance, multilateral funding, and government or central fore December 31, 2022, will result in loan forgiveness of the bank funding. BGK expanded facilities using European Union reminder of the loan. In Brazil, the government took 85 percent funds as well as COVID-19 bonds. In February 2020, China De- of the risk in the PESE program, and 100 percent in the case velopment Bank (CDB) issued RMB 13.5 billion worth of Pan- of Programa Nacional de Apoio às Microempresas e Empresas demic Bonds with one-year maturity and 1.65 percent rate. The de Pequeño Porte (PRONAMPE), with the programs being ad- bonds were more than 11 times oversubscribed, purchased by ministered by DFIs. In Korea, the government created the Key domestic banks and retail investors. CDB also granted RMB Industry Stabilization Fund to prevent major companies from 10.3 billion to a People’s Bank of China relending facility. NA- going bankrupt during the COVID-19 pandemic. The fund is FIN obtained loans from the European Investment Bank and funded through bond issuance, fully guaranteed by the govern- the Corporación Andina de Fomento to support SMEs (about ment, and is administered by KDB. For example, Asiana Air- US$450 million). Indian banks obtained refinancing loans from lines, the nation’s second-biggest carrier, will receive 2.4 trillion the Reserve Bank of India at the policy rate (SIDBI was allo- won from the fund because its stake sale collapsed.74 cated INR 460 billion in total in 2020 and 2021). The Turkish Development bank obtained funds from the Central Bank as Programs were mostly disbursing funds quickly, favored well as from the World Bank (US$250 million) and the Asian by the state taking the risk as well as institutions’ opera- Infrastructure Investment Bank (US$300 million). In Brazil, the tional efficiency and previous experience during the 2008 federal government funded programs that were administered global financial crisis. However, new borrowers have faced by public banks. For example, it provided 34 billion reais to long delays in some programs. To speed up disbursement BNDES to implement the PESE program.73 To fund some of many NDFIs introduced simplified approval procedures and these programs, the government got multilateral funding; the digital technologies. KfW, for example, does not carry out its Inter-American Development Bank (IADB) provided US$200 own risk assessments for companies for loans up to €3 mil- 73 Presidency of the Republic [Brazil], “Emergency Employment Support Program, Provisional Measure No. 944 of 2020, https://www.congressonacional.leg.br/materias/ medidas-provisorias/-/mpv/141415. 74 Kyungji Cho, “Korea’s $35 Billion Rescue Fund Sells Debt as Airlines Seek Help” (Bloomberg, October 19, 2020), https://www.bloomberg.com/news/articles/2020-10-19/ korea-s-35-billion-rescue-fund-sells-debt-as-airlines-seek-help. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 36 lion, relying on the intermediary disbursing the loan, even if 100 technologies also played a role in speeding up disbursement of percent guaranteed by KfW. For loans of up to 10 million euros, loans. In India, the PSBLoanin59minutes initiative, which was KfW operates a simplified risk assessment procedure. On the launched before the COVID-19 pandemic, became an instru- instant loan, KfW does not conduct credit risk assessment be- mental tool that allowed MSMEs to get loan amount from Rs. 1 yond checking that companies were profitable in the last three Lakh to Rs. 5 Crore in less than 59 minutes from public and pri- years and in good credit standing. SIDBI simple agreement for vate sector banks as well as nonbanking financial companies. equity (SAFE) loans are originated in 40 hours, albeit disbursing takes longer. Export-Import Bank of Korea processes loans to In some cases, limited demand for credit given heightened import and export SMEs under a fast track by reviewing finan- economic conditions as well as design features of the cial statements and skipping nonfinancial assessment for credit schemes that limit eligibility and attractiveness hampered rating determination. The Bounce Back Loan Scheme (BBLS) program disbursement. At the initial stage of operation, the operated by BBB focused on decreasing the time between ap- government of India relaxed eligibility criteria under the Emer- plication and payment of loans by removing credit and afford- gency Credit Line Guarantee Scheme (ECLGS) to include firms ability checks required under the Consumer Credit Act. Lenders with higher total outstanding debt as well as individual loans approve loans for existing business customers within 24 to 72 given to professionals (for example, doctors, lawyers) to widen hours but approval times for new customers take substantially the scope of the program and allow for higher disbursements.76 longer (up to 12 weeks). Canada reinstated the Business Credit Brazil’s PESE program had only disbursed 7.3 billion reais Availability Program (BCAP) launched in the aftermath of the by the end of October (about 20 percent of original program global financial crisis that allowed for a rapid rollover by Ca- size), although the program was amended in August to finance nadian DFIs. The investments BDC has been making over the payrolls of larger firms. In July, half of the original program re- past few years in digital solutions were a key factor in helping sources (17 billion reais) were transferred to the PRONAMPE the bank respond to a high volume of financing requests dur- program. At the launch of the Coronavirus Business Interrup- ing that period.5175 Few banks, however, focused on assessing tion Loan Scheme (CBILS) provided by BBB, companies com- firm viability due to heightened uncertainty and focus on dis- plained that they could not get loans owing to demands for per- bursement. BDC is an exception as it loans are available to the sonal guarantees and strict rules set by banks. Strict eligibility firms that were financially stable and viable prior to the current criteria created a backlog of applications for the smaller end of economic situations and that have a plan to explain how invest- the SME market that prompted the government creation of the ment will bring activities back to pre-pandemic levels. Digital Bounce Back Loan Scheme (BBLS). > > > T A B L E 1 - Private Credit Growth by Banks, Year over Year Country Credit growth, 2018–2019 Credit growth, 2019–2020 Brazil 10.0% 12.7% China 12.5% 13.6% Germany 5.1% 4.4% India 7.2% 6.1% Korea, Rep. 8.6% 9.4% Malaysia 4.8% 4.0% Mexico 10.7% −3.8% Poland 4.3% 0.2% Russian Federation 8.2% 11.3% South Africa 5.7% 1.7% Turkey 12.4% 34.1% United Kingdom 2.7% 4.3% Source: IMF (International Monetary Fund), International Financial Statistics (IFS), data. Note: Numbers represent growth in claims on private sector by other depositary corporations (in nominal local currency unit, not adjusted for inflation). As infla- tion in some of the countries heightened in 2020, real credit growth might be more moderate. 75 Business Development Bank of Canada, BDC Releases Its 2020 Financial Results (News Release, July 24, 2020), https://www.bdc.ca/en/about/mediaroom/news-releas- es/bdc-releases-2020-financial-results. 76 The scheme has undergone three iterations and currently the ECLGS version 4.0 is operational. As of June 2021, disbursements under the existing ECLGS have reached 89.7 percent, benefiting almost 10 per cent of the value of banking sector advances and over 60 percent value of advances to MSMEs. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 37 Nevertheless, credit growth in most of the analyzed coun- on principal, and interest repayments have yet to begin, as- tries was similar or higher than credit growth in the pre- sessing the value for money of the program is not yet possible. vious year; the counterfactual would have been much Fraudulent use of schemes is also a concern, although worse in the absence of public sector programs. The these considerations have also emerged in public credit KfW reports that it received 127,000 loan applications (with support programs implemented by private financial in- around 97 percent coming from SMEs) and lent out just under stitutions. In the United Kingdom, for example, there were 54.3 billion euro (as of March 2021).77 By the end of 2020, concerns raised by the Department of Small Business and the BNDES raised R$155.4 billion in the economy to help BBB regarding BBLS scope for fraud.82 The National Audit Brazilian companies overcome the effects of the COVID-19 Office (NAO) report on the program notes that BBB was not pandemic, with the highest allocation to MSMEs, with the able to prevent duplicate applications across lenders for the support of R$34.1 million to 466,000 clients.78 In the United first month of the program and that up to 2.3 percent of ap- Kingdom, at mid-March 2021, about 1.6 million government- proved applications were duplicates before the solution went guaranteed loans worth almost £75.1 billion were delivered live. Furthermore, given emphasis on quick disbursement and by BBB to small businesses to support their cashflow during the placement of antifraud checks on lenders, the Cabinet the crisis, of which £46.5 billion was provided under BBLS.79 Office’s Government Counter Fraud Function believes fraud To put the figure in perspective, new credit to SMEs in 2019 losses are likely to be significantly above the general esti- amounted to £57 billion. Partly thanks to decisive action of mates of public sector fraud levels of 0.5 to 5 percent. Fraud DBs in many countries, as well as public commercial lenders, and credit risks are interrelated and estimates of credit loss- most countries have broadly maintained or increased credit es for the program by government at the program inception growth levels in 2020 despite sharp economic deceleration, ranged between 35 and 60 percent. In China, a proportion of except for Mexico (table 1). The notable exception is Turkey loans provided by state-owned banks intended for improving that exhibited private credit growth of 34.1 percent over 2020 the li-quidity for SMEs were granted to shell corporations and thanks primarily to the credit expansion of state-owned com- diverted for speculation on real estate illegally, which appears mercial banks. On the other hand, credit in South Africa and to have contributed to the rising property prices in major cities, Poland virtually froze, and credit in Mexico decelerated sub- especially the Shenzhen special economic zone in southern stantially. In the case of Korea, for example, Fitch concluded China.83 However, it is worth noting considerations regarding that the support measures implemented by Korean DFIs were fraud and effectiveness of the publicly supported credit pro- effective in containing the immediate risk of a credit crunch.80 grams also applied in cases where they were operated by pri- vate banks. The US payroll protection program administered Beyond supporting credit growth, the effectiveness of by the Small Business Administration in the United States these programs is still to be assessed. The main concerns and implemented by private banks to support employment in refer to support to unviable firms. As the objective was promptly SMEs seems to have been prone to fraud. Furthermore, more disbursing funds to avoid economic paralysis, many programs than half of the funds under the program went to just 5 percent did away with credit assessment requirements which raises of the borrowers, as banks participating in the scheme tended concerns regarding support to unviable firms that could result to favor larger firms with well-established banking connections in large nonperforming loans. A report by the United Kingdom that are not the ones that are more credit constrained.84 Con- National Audit Office on the BBLS scheme concluded that cerns have also been raised about the limited transparency the program “prioritized one aspect of value for money—pay- of some of the programs. For example, the United Kingdom ment speed—over almost all others and has been prepared Treasury and BBB have been criticized by transparency cam- to tolerate a potentially very high level of losses as a result.”81 paigners for failing to provide the details of companies that However, as the program contains a 12-month grace period have accessed the state backed loan schemes.85 77 Kreditanstalt für Wiederaufbau, “KfW Annual Review 2020: Strong Operating Result—Negative Impacts of Coronavirus Weigh on Consolidated Profit” (Press Release, March 25, 2021), https://www.kfw.de/KfW-Group/Newsroom/Latest-News/Pressemitteilungen-Details_642752.html. 78 BNDES, “BNDES Supported More Than 460,000 Small- and Medium-Sized Enterprises in 2020 and Had a Record Profit of R$ 20.7 Billion,” March 12, 2021, https://www. bndes.gov.br/SiteBNDES/bndes/bndes_en/Institucional/Press/Destaques_Primeira_Pagina/20210312_small_and_medium_size_enterprises_record.html. 79 BBB, “British Business Bank Support Schemes Delivers over £75bn of Loans to 1.6m Smaller Businesses,” March 25, 2021,https://www.british-business-bank.co.uk/ british-business-bank-support-schemes-delivers-over-75bn-of-loans-to-1-6m-smaller-businesses/. 80 Fitch Ratings, “South Korea’s Key Policy Banks Countercyclical Policy Role Stands Out Amid the Coronavirus-Triggered Downturn” (Special Report, June 22, 2020). 81 NAO, “Investigation into the Bounce Back Loan Scheme,” October 7, 2020, https://www.nao.org.uk/report/bounce-back-loan-scheme/. 82 Fraud drivers include multiple applications, lack of legitimate business, impersonation, and organized crime. 83 McDonald, Marois, and Barrowclough, Public Banks and Covid-19. 84 Jonathan O’Connell et al., “More Than Half of Emergency Small-Business Funds Went to Larger Businesses, New Data Shows,” Washington Post, December 2, 2020, https://www.washingtonpost.com/business/2020/12/01/ppp-sba-data/. 85 Treasury under fire over disclosure silence on virus loans, Financial Times (August 23, 2020). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 38 4. >>> Conclusion NDFIs, specially DBs and PCG funds, have played an important role in implementing countercyclical policies to mitigate the economic effects of the COVID-19 pandemic. NDFIs have been acting in line with their mandates by providing countercyclical lending, mo- bilizing and distributing resources, and overall supporting the production system and employ- ment. Lending (mostly at preferential terms) and credit guarantees (provided by DBs or credit guarantee institutions) have been the most common interventions followed by measures to fa- cilitate access to credit and debt repayment moratoria. NDFIs also provided liquidity support to other financial institutions facing difficulties as their borrowers experienced distress and markets curtailed financing. Several NDFIs provided equity solutions for firms, and some intervened to stabilize financial markets and provided guarantees on firm securities. Support included not only funding but also advisory services. Governments not only provided generous credit guarantees through DBs and specialized credit institutions but also directly assumed lending risks using budgetary resources, with NDFIs, in many instances, simply administering government pro- grams through off–balance sheet operations. Programs were offered for a limited time and were subsequently extended as containment measures dragged on. Despite shortcomings identified in several programs, interventions have effectively sup- ported, jointly with other interventions, credit growth in most countries. In some cases, design features of the schemes that limit eligibility and attractiveness hampered program dis- bursement, which prompted the revision of program conditions. New borrowers have faced long delays in some programs as well. However, many programs were quickly disbursing funds, fa- vored by the state taking the risk as well as institutions operational efficiency and previous expe- rience during the global financial crisis. Overall, credit growth in most of the analyzed countries was similar to or higher than credit growth in the previous year; the counterfactual would have been much worse in the absence of public sector programs which in many countries included in public credit support programs implemented by DFIs. The longer-term effects of these programs are still to be assessed, with the main con- cerns referring to support going to unviable firms and fraudulent use of schemes. Howev- er, these considerations also applied to programs administered by private banks. As the objec- tive was promptly disbursing funds to avoid economic paralysis, many programs did away with credit assessment requirements or provided generous guarantees to financial intermediaries, which raise concerns regarding support to unviable firms that could result in large nonperforming loans. Concerns have also been raised about limited transparency of some of the programs. In the United Kingdom, for example, there were concerns raised by the Department of Small Busi- EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 39 ness regarding BBLS value for money and scope for fraud as As countries implement postpandemic recovery plans, the details of companies that have accessed the state backed with increased focus on resilience and equity, NDFIs will loan schemes were initially not provided. However, consider- continue to see strong demand for their interventions, ations regarding fraud and the effectiveness of the publicly which calls for enhanced efficiency and effectiveness of supported credit programs also applied in cases where they their operations. NDFIs are called to play an important role were operated by private banks, such as in the case of the US in the post COVID-19 recovery under a “building back better” payroll protection program. approach that focuses on green recovery and maximizes de- velopment results for the most vulnerable members of society. Governments unprecedented use of NDFIs during the Ensuring NDFIs’ effectiveness becomes more critical as their COVID-19 pandemic to administer public anti-crisis pro- role will likely expand in the medium-term, beyond countercy- grams in which the government directly assumed risks clical considerations. reduces the scope for mission creep and financial insta- bility at NDFIs while increasing transparency of the cost The review of NDFI operations and organizational fea- of the interventions. Countercyclical NDFI lending requires tures in several countries provides valuable insights on having excess capital to allow for balance sheet expansion in both the upside and downside of NDFI interventions and crisis times. However, there is a tendency to continue expand- features of NDFIs that improve their effectiveness. Follow- ing operations following crisis as reported in the World Bank ing the methodology of assessing the performance of SOFIs Global DB survey suggesting an “exit problem.” 86 NDFIs will under the World Bank Integrated SOE framework, this paper tend to use their capital funding new activities providing scope identifies lessons learned as summarized in Box 10 and il- to crowd-out private finance. Government use of DFIs to ad- lustrates how they are implemented in practice in different minister public programs without exposing the NDFI balance country cases. A well-defined mandate anchored in identified sheet does not require capital increases that could distort needs and focused on additionality and leverage as opposed NDFI operations going forward. By separating crisis activities to subsidy provision, ensuring effective management (through from the balance sheet of the institution, financial results and corporate governance and risk management), and aligning costs of anti-crisis programs can be more easily monitored. incentives (through remuneration policies, supervision, and Furthermore, the financial sustainability of the NDFIs is pre- monitoring and evaluation) are key drivers of effective perfor- served as the government directly assumes risks and pro- mance. In cases where the environment is not supportive of vides the funding. NDFI effectiveness, it may be advisable to operate in second tier through other financial intermediaries. 86 World Bank, “2017 Survey of National Development Banks.” EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 40 > > > BOX 10 - Lessons Learned from Efficient National Development Financial Institutions LESSON 1. Identify the unmet needs and factors preventing private sector involvement and consider all public policy interventions available, beyond provision of public sector funding, to address the problem. LESSON 2. Set up a mandate or mission statement for NDFI focused on complementing private sector and crowding in private investors to provide financial solutions to identified underserved segments or projects while pre- serving financial sustainability. LESSON 3. Design NDFI facilities focused on servicing credit-constrained borrowers to ensure additionality. LESSON 4. Develop a range of instruments to leverage private sector funding. LESSON 5. Use preferential lending sparingly when large externalities can be justified. NDFIs need to ensure that when subsidies are necessary, they are channeled in a transparent and nondistortionary way. LESSON 6. Operate the institution as a financial sector company not a public agency. LESSON 7. Ensure that the institution is effectively managed and the incentives of management and staff are aligned with the objectives of the institution through effective corporate governance, risk management, and mecha- nisms to evaluate the performance of NDFIs. LESSON 8. Ensure that NDFIs are properly supervised by the financial supervisory agency and that the institution operate on a level playing field. LESSON 9. When the environment is not conducive to NDFI effectiveness, operate in second tier and raise funds in international capital markets. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 41 >>> Annex 1: COVID-19 Response of the Selected National Development Financial Institutions EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 42 Country Policies Brazil Caixa Econômica LENDING: (a) Working capital loans to micro and small firms, 24–26 months with a 9–12 month grace period and 15–20 percent interest Federal (CEF) rate. Loans are 80 percent guaranteed by the Brazilian Micro and Small Enterprises’ Support Service (SEBRAE) through the Guarantee Brazil Fund for Micro and Small Companies. Credit is accompanied by training provided by SEBRAE. To access the line of credit, the SEBRAE tutorial must first be run by the business owner. The training suggests solutions that will help the company grow and make better use of the resources freed up. In addition, entrepreneurs must meet some annual income requirements according to industry, services, and trade. LIQUIDITY SUPPORT: purchase of payroll loan portfolios from medium banks and agribusinesses. FACILITATING ACCESS TO CREDIT: (a) cut interest rates on some types of credit, overdraft, and credit card installment fees; (b) offered clients a grace period of 90 days. MORATORIUM: Home building and development companies are allowed to pause the payment of financing contracts by diluting the dif- ference over the life of the loan. OTHER: Plan to create 45 million digital accounts to shorten lines at its branch agencies as part of the pandemic emergency assistance. Brazilian LENDING: (a) Expanded its Small Business Credit Line, which provides working capital loans at rates determined by the financial inter- Development mediaries that provide the loan (BNDES charges banks Brazilian federal funds rate [SELIC] plus 1.25 percent). Micro, small, and medium Bank (BNDES), enterprises (MSMEs) and individual entrepreneurs with sales of up to R$90 million are eligible to apply; there is no need to provide informa- Brazil tion on the use of credit; (b) Emergency Employment Support Program (PESE), offering firms two monthly minimum wages per employee for a four month period. BNDES manages PESE and operates it for medium and large firms. The loan has a fixed rate of 3.75 percent per year and a total term of 36 months, including a six-month grace period. In return, the company cannot dismiss employees without cause, for up to 60 days after receipt of the last installment of the credit line, in the same proportion as the total payroll that has been paid with program resources. Loans are 85 percent guaranteed by the government, which also provides 85 percent of funding through BNDES. Program until June 30, 2020, was extended till October 31, 2020. Entrepreneurs, business societies, and cooperative societies with annual sales exceeding R$360 thousand and equal to or less than R$50 million are eligible to apply. CREDIT GUARANTEES: Emergency Credit Access Program (PEAC) provides 30 percent first loss guarantee on new small and medium enterprises (SME) loan portfolios granted during the COVID-19 emergency using resources of the Investment Guarantee Fund, which is administered by BNDEs. Loans have a 12–60 month maturity and a 6–12 month grace period. Program operates until December 2020. EQUITY: BNDESpar, a subsidiary of BNDES, made R$4 billion available for purchasing quotas from SMEs debt capital funds (up to R$500 million per fund and 90 percent of the total quotas). MORATORIUM: six months suspension of payments (standstill) to the private sector as well as suspension of payments by states and municipalities. In addition, BNDES accelerated the release of financing contracted by states. OTHER: Matchfunding Salvando Vidas (Saving Lives), a collective financing action aimed at the purchase of materials, supplies, and equipment for santas casas and philanthropic hospitals. Fundo CREDIT GUARANTEES: Guarantees 100 percent of the Programa Nacional de Apoio às Microempresas e Empresas de Pequeño Porte Garantidor de (PRONAMPE) loans, in which banks provide loans to micro and small businesses for working capital in amounts up to 30 percent of 2019 Operacaos firm-declared revenue. Rate is fixed at SELIC +1.25, banks can charge administrative fees. Loan term is 36 months. FGO is administered (FGO), Brazil by Banco do Brasil, a state-owned commercial bank. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 43 Country Policies Canada Business LENDING: (a) Working Capital Financing Loans of up to CAD 2 million for businesses directly or indirectly impacted by COVID-19, with Development flexible repayment terms such as principal postponements for qualifying businesses. Loans are available to firms that were financially Bank of Canada stable and viable prior to the current economic situations and that have a plan to explain how investment will bring activities back to pre- (BDC), Canada pandemic levels. (b) Small business loan: Up to CAD 100,000 online for businesses who have been in operation for at least 24 months and are generating revenues. EQUITY: BDC’s investment arm, BDC Capital (BDCC), is offering up to CAD 150 million in short-term liquidity to venture capital-backed, high potential, companies. BDCC may match, with a subordinated convertible note of up to CAD 3 million, a current financing round by an eligible Canadian start-up through a qualified investor. The financing may be either equity or bridge financing (such as convertible debt or a simple agreement for equity, SAFE) and must be a minimum of CAD 250,000. Eligible companies must have raised at least CAD 500,000 in external capital and while impacted by COVID-19, must have a high likelihood of surviving the impact of COVID-19. Subordinated, con- vertible, promissory notes issued to BDCC will accrue interest annually at the fluctuating BDCC rate plus 4 percent, have a maturity date of three years and will be convertible at the option of BDC. FACILITATING ACCESS TO CREDIT: (a) BDC co-lending program to support businesses experiencing cash flow challenges due to COVID-19. Eligible businesses may obtain incremental credit amounts up to CAD 6.25 million, 80 percent of which would be provided by BDC, with the remaining 20 percent provided by a financial institution and up to 12-month grace period. Available until June 2021 to businesses that were financially stable and viable prior to the current economic situations, subject to primary financial institution’s credit criteria. (b) Mid-Market Financing Program for medium businesses affected by COVID-19. Loans ranging between CAD 12.5 million and CAD 60 million each, available until or before June 2021. Cofinanced by BDC and financial institutions. Junior loans spanning up to four years, after which principal is to be repaid as a balloon payment. Interest payments for the first 12 months will be capitalized and due at maturity. These programs are part of the Business Credit Availability Program (BCAP) announced by the government. Loans are available for companies that have been financially stable and viable prior to current economic situation, with annual revenues between CAD 100 and CAD 500 million. MORATORIUM: postponement of principal payments for up to six months, for existing BDC clients with total BDC loan commitment of CAD 1 million or less. OTHER: three new advisory service solutions, accessible remotely, to help businesses plan for recovery in which its experts provide advice on online sales optimization, operations and cash flow resilience and workplace health risk mitigation. A dedicated hub on its website that includes free tools and advice, such as a COVID-19 business toolkit and a list of available support measures. Export CREDIT GUARANTEES: As part of BACP, EDC provides up to 80 percent guarantee for new operating lines of credit or new term loans for Development small and medium enterprises (SMEs) to sustain operations in response to COVID-19. EDC fees related to this guarantee may be deferred Canada (EDC), for the first six months for smaller credit amounts. Canada FACILITATING ACCESS TO CREDIT: EDC administers the Canada Emergency Business Account (CEBA), a government loan program that provides up to CAD60,000 of interest free loans until March 31, 2021, to businesses and not-for-profits affected by COVID-19 to fi- nance nondeferrable expenses (for example, payroll, lease, utilities). Repayment of CAD 40,000 from total CAD 60,000 loan on or before December 31, 2022, will result in loan forgiveness of 33 percent (up to CAD 20,000). If the loan cannot be repaid by December 31, 2022, it can be converted into a three-year term loan with an interest rate of 5 percent. Loans are provided by financial institutions using govern- ment resources. To qualify, applicants must demonstrate that their total payroll in 2019 was between CAD 20,000 and CAD 1.5 million, and that they were operating as of March 1, 2020. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 44 Country Policies China China LENDING: (a) Loans and grants to local governments to bolster medical response for prevention and control of the pandemic and for en- Development terprises participating in pandemic response activities. Loans granted withing 24–48 hours. (b) CDB set up a special working capital loan Bank (CDB), facility at preferential rates for supporting work and production resumption of enterprises engaged in epidemic prevention and control, pro- China duction of essential goods, and logistics; helping major projects resume construction as soon as possible; and helping epidemic-affected enterprises engaged in foreign trade and global expansion to resume work and production. FACILITATING ACCESS TO CREDIT: CDB may temporarily lower the interest rates of new loans for major projects and core enterprises in epidemic-stricken regions, fields, and industries. CDB can change to an installment payment plan, extend loan terms, or enter into refi- nancing arrangements, provided that effective control of related risks is ensured. MORATORIUM: Affected enterprises are allowed to defer loan payments OTHER: CDB issued Pandemic Bonds, raising funds to provide emergency financing for epidemic prevention and control. Germany Kreditanstalt für LENDING: KfW Special Programme 2020 for small and medium enterprises as well as large companies with lower interest rates and sim- Wiederaufbau plified risk assessment. KfW Instant Loans for medium enterprises for firms with more than 10 employees, which are profitable on average (KfW), Germany for the three previous years. Ten-year loans are granted at 3 percent interest. The issuing or on-lending bank is backed 100 percent by the KfW once the conditions are met, no further risk assessment needs be done by the issuing bank or by the KfW. The KfW Entrepreneur Loan and start-up loans provide investment and working capital loans for firms, with KfW assuming 80 percent of the risk for large companies and 90 percent for SMEs. Interest rates range between 1 percent and 1.46 percent per annum for SMEs and between 2 percent and 2.12 percent per annum for all other companies. The large-scale Special Program provides support to medium and large compa¬nies, with KfW providing syndicated financing of at least €25 million and up to 50 percent of total debt, taking 80 percent of the risk. CREDIT GUARANTEES: KfW provides several guarantees on COVID-19 schemes as described above. EQUITY: Corona Matching Facility to support start-ups and young, growing companies. The facility matches equity financing by private venture-capital funds for start-ups with a share of up to 50 percent per investment. MORATORIUM: Principal payment delays for nine monthly or three quarterly repayment installments on loans provided through financial intermediaries. The repayment of the delayed repayment installments may be done at the obligor’s request either equally distributed over the term to maturity or as a lump sum with the final repayment installment (balloon). Program was available for March–October 2020. India Small Industries LIQUIDITY SUPPORT: (a) Scheme for special liquidity support to MSMEs through nonbank financial companies (NBFCs), microfinance Development institutions (MFIs) and Banks; (b) purchases of assets and bonds issued by NBFCs and public sector banks (PSBs) was implemented by Bank of India SIDBI and included a 20 percent government guarantee on first losses for two years (up to March 2021). Purchases were made by com- (SIDBI), India mercial banks, while SIDBI was an implementing agency that did not actually purchase any assets or bonds under this scheme. National Bank for Agriculture and Rural Development also facilitated a liquidity facility during the COVID-19 pandemic. LENDING: (a) SIDBI SAFE provides up to 100 percent financing for capital expenditures and working capital to MSMEs that are manu- facturing any products or providing any services directly related to fighting coronavirus under five-year term loans or revolving credit lines. SAFE PLUS provides revolving credit lines for SMEs with confirmed orders of government agencies for goods and services related to the COVID-19 fight. Both loans carry a 5 percent fixed rate. For both schemes, new customers should have at least two years of cash profits and an account not in SMA1/2 category, and existing customers should have cash profit in last audited balance sheet and account not in SMA1/2 category. (b) Working capital assistance to existing borrowers with loans less than 60 days past due to revitalize industries in Timely Working Capital Assistance to Revitalize Industries in Times of corona crisis (TWARIT) repayable in four years with a year grace period and rate of 8.25 percent with annual reset, using same security as in current loans. The scheme is valid for existing customers on the books of the bank. Borrower accounts should be less than or equal to 60 days past due as of February 29, 2020, to be eligible under the scheme. National Credit CREDIT GUARANTEES: 100 percent guarantee on the loans from the Emergency Credit Line Guarantee Scheme (ECLGS) under which Guarantee a Guaranteed Emergency Credit Line (GECL) was to be provided to MSME borrowers, with a turnover of up to INR 1 billion, holding out- Trustee standing credit of up to INR 250 million from banks, finan¬cial institutions, and NBFCs. Any past due on the credit outstanding had to be Company (state- of a duration less than or equal to 60 days as of February 20 for the unit to be eligible for a GECL. If these criteria were met, the unit could owned guarantee apply for an additional credit line without collateral equal to 20 percent of its past borrowing. Loans under the scheme have a ten¬ure of institution), India four years with a debt service moratorium of one year on the principal amount. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 45 Country Policies Korea, Rep. Korea LENDING: (a) Loans to SMEs at preferential rates (guarantee by Korea Credit Guarantee Fund, KODIT), (b) loans, and bond purchases Development into firms in strategic industries through the Key Industry Stabilization Fund (KISF) administered by KDB. Bank (KDB), Korea, Rep. EQUITY: Equity injections under KISF. FACILITATING ACCESS TO CREDIT: loan renewals and restructurings. OTHER: (a) purchase of high grade (A and higher) corporate paper and commercial paper to help debt refinancing through participation in the bond market stabilization fund; (b) KDB set up a special purpose vehicle (SPV), through which they will purchase corporate debt, including low rated bonds of firms affected by COVID-19; (c) issuance of about US$1 billion bonds with a COVID-19 label on a portion of the issuance to support COVID-19 related facilities. Export-Import LENDING: (a) Emergency Operating Loan to support Korean companies at risk of losing business foothold due to COVID-19; (b) Export Bank of Korea, Performance-Based Loan to support exporters and large business groups in industries leading innovative growth and material and equip- (Korea Exim ment industries; (c) Special Loans for Companies without Credit Ratings. Bank), Korea, Rep. EQUITY: Fund dedicated to investments in healthcare and pharmaceutical sectors FACILITATING ACCESS TO CREDIT: Fast track approval process for SMEs by reviewing financial statements, skipping nonfinancial as- sessment for credit rating determination, and cutting interest rates. Industrial Bank LENDING: loans to SMEs at preferential rates (guarantee by KODIT). of Korea (IBK), Korea, Rep. OHER: participation in government capital markets stabilization funds (see KDB other operations). Korea Credit CREDIT GUARANTEES: (a) Quick and full-coverage guarantees for SMEs and small business owners; (b) guarantees for the IBK’s low- Guarantee Fund interest loans for small business owners and the self-employed; (c) preferential guarantees for enhancing corporate vitality for companies (KODIT), Korea, in main industries and small and medium export companies in new growth engine sectors. Rep. OTHER: Guarantee of Primary Collateralized Bond Obligation (PCBO) to facilitate financing to companies more efficiently by guaranteeing the repayment of their corporate bonds indirectly. It is a kind of asset-backed security backed by a variety of corporate bonds with varying degrees of risks and coupon rates. Malaysia SME Bank, LENDING: SME bank participates in the Bank Negara COVID SME programs including the following: (a) SME Special Relief Program Malaysia (SRP) provides for up to RM 1 million working capital for SMEs in select sectors until the end of September 2021. (b) Targeted Relief and Recovery Facility (TRRF) provides up to RM 500,000 capital loans to service sector SMEs affected by reintroduction of COVID-19 con- tainment measures in June 2020, active until December 2021. Loans are uncollateralized and with at least 6 months grace period. Loans are up to five and seven years respectively with fixed annual rates (up to 3.5 percent) including guarantee fees. Loans guaranteed by the Credit Guarantee Corporation (CGC) or Syarikat Jaminan Pembiayaan Perniagaan (SJPP). (c) SME Automatization and Digitalization Fa- cility (ADF) provides up to 10 years investment loans for digitalization of operations up to RM 3 million with SJPP guarantee and 4 percent annual rate (included guarantee fee). (d) High Tech Facility—National Investment Aspirations to support high tech and innovation-driven SMEs provides working capital and capital expenditure loans (up to RM 5 million) with seven-year maturity. Guarantee can be requested to CGC if deemed necessary. Available until December 2021. Borrowers should be assessed by financial institutions, however, no specific criteria regarding financial health of the borrowers are applied. (e) PEMERKASA+ SME Go contract financing scheme funded by SME Bank to assist contractors offered contracts by federal or state governments, ministries, or agencies with working capital up to RM 1 million MORATORIUM: Automatic moratorium of payment was provided until the end of September 2020, with targeted repayment thereafter. Under SRP program, existing borrowers can get an additional six months principal moratorium and loan restructurings. Credit Guarantee CREDIT GUARANTEES: In addition to existing guarantee facilities (typically at 70 percent or below), provides 80 percent guarantee on Corporation loans granted under SRP, TRRF, ADF, and other COVID-19 related programs. (CGC) and Syarikat Jaminan Pembiayaan Perniagaan (SJPP), Malaysia EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 46 Country Policies Mexico Nacional LENDING: NAFIN and Bancomext manage a program of about US$2.5 billion in Mexico through financial intermediaries, to contribute to Financiera enterprise liquidity. The program provides new loans for the purpose of supporting working capital needs. Participating banks should per- (NAFIN) and form credit evaluations to determine eligibility of companies to participate in the program. In addition, participating SMEs should be at least Banco Nacional two years old, have a favorable record in the credit bureau, and generate sufficient cash flows to support the financing. de Comercio Exterior FACILITATING ACCESS TO CREDIT: The program lengthens loan terms or provides longer grace periods to creditors. (Bancomext), Mexico OTHER: Stock market guarantees to improve the liquidity situation of borrowers (payment of capital and interest on the issuance of com- mercial paper, stock market certificates, or any other instrument used in national or foreign stock exchanges). Poland Bank LENDING: Expansion of existing lending facilities financed with the European Union funds. Gospodarstwa Krajowego CREDIT GUARANTEES: (a) 80 percent de minimis guarantees for MSMEs loans; (b) Businessmax guarantee covers 80 percent revolv- (BGK), Poland ing subsidized working capital loan for MSMEs during COVID-19 times; (c) Liquidity Guarantee Fund guarantees to medium and large companies affected by the pandemic. Up to 80 percent of the loan (only loans with commitments up to Zl. 250 million. FACILITATING ACCESS TO CREDIT: Interest rate subsidies for bank loans granted to provide financial liquidity to entrepreneurs. Relief in the repayment of the loans granted by BGK under the loan program First Business—Startup Support, includes extension of the grace period for up to 6 months and extension of the repayment period for up to 12 months. MORATORIUM: Moratorium for firms impacted by COVID-19 that request it. Medium and large firms had to be creditworthy at the end of 2019 and not initiated bankruptcy procedures. Small firms had to be less than 30 days behind on repayments as of the end of February 2020. Moratorium periods according to European Bank Authority guidelines. OTHER: Raising revenues through issuance of bonds by BGK to establish a new fund (COVID Fund) dedicated to combating the negative impacts of the pandemic. Russian Federation VEB, Russian CREDIT GUARANTEES: The state via VEB provides credit guarantees on loans to SMEs in strategic sectors as identified by a govern- Federation ment list: (a) guarantees loans with six months interest-free in amount of minimal monthly salary for each employee in case the company does not cut the staff and keeps people employed; (b) 50 percent guarantees on working capital loans with subsidized interest rate by the state. SME Bank, LENDING: Loans to SMEs to support employment using state interest rate subsidies. Loans provided at 2 and 0 percent and guaranteed Russian by VEB. The eligible SMEs should have a positive business reputation and good credit history, operate with profit as of the end of March Federation 2020, and be solvent. FACILITATING ACCESS TO CREDIT: SME Bank was the first institution in Russia to consider self-employed citizens as a special type of business organization and developed a special loan product for them in 2020. Maximum amount of unsecured loans for self-employed entrepreneurs was increased to Rub 1 million and interest rate reduced during the year to 6.25 percent annual fixed for up to three years. South Africa Small Enterprise LENDING: (a) Debt Relief Refinancing scheme is a soft-loan facility aimed at assisting existing MSMEs to keep them afloat during the CO- Finance Agency VID-19 pandemic for a period of six months beginning in April 2020. (b) Business Growth Resilience Facility offers working capital, stock, (SEFA), South bridging finance, order finance, and equipment finance to MSMEs that locally manufacture or supply hygiene, medical, and food items that Africa are in demand to curb and manage the spread of the COVID-19 virus. (c) Spaza Support Scheme is a working capital facility that provides loans and grants for small general stores or “Spaza” shops. For these schemes, eligible companies must be 100 percent owned by South African citizens, employees must be 70 percent South Africans, with a priority given to businesses owned by women, youth, and people with disabilities. While companies must provide financial statements, there is no specific requirement regarding companies’ financial health. MORATORIUM: A payment moratorium is given to the qualifying MSME for a period of a maximum of six months. Industrial LENDING: (a) Distressed Fund (R 2.5 billion) assists companies that are in distress resulting from the COVID-19 pandemic. The fund Development provides affordable business loans to IDC clients and other businesses operating in sectors within the IDC’s mandate. (b) Small Industrial Corporation Finance Distress Fund (R 300 million) assists qualifying IDC clients, as well as new clients, that have been negatively affected by the (IDC), South COVID-19 pandemic. The fund offers concessionary finance to cover their short-term operating costs. (c) Essential Supplies Fund (R 800 Africa million) provides financial support to companies providing essential supplies to address the COVID-19 pandemic. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 47 Country Policies Turkey Turkey LENDING: Provision of loans through financial intermediaries to SMEs and large firms using resources from multilaterals. Investment loan Development facility using Turkish lira rediscount facility provided by the central bank. and Investment Bank (TKYB), Turkey Credit Guarantee CREDIT GUARANTEES: limits offered in the scope of Economic Stability Shield package were increased from TL 25 billion to TL 50 bil- Fund (KGF), lion and the total maximum amount of guarantees that may be given by KFG was increased from TL 250 billion to TL 500 billion. Turkey Turkey Development and Investment Bank can access KGF guarantees. Up to December 2020, limits on maximum guarantees provided to SMEs and large companies extended to TL 50 and 350 million, respectively. Several other KGF packages have been also released during the COVID-19 pandemic. As of July 2021, the share of KGF-backed loans in total banking sector loans is 7.5 percent. Small and FACILITATING ACCESS TO CREDIT: KOGSEB provides credit support to industrial SMEs by paying a portion of the financing costs of the Medium Industry loans (including interest) that they borrow from Turkish banks. In response to COVID-19, nonindustrial SMEs were included in the scheme Development and the limit on support provided to SMEs increased from 300,000 to 3 million liras. Loans have to be provided at below market rates and Organization for up to 60 months. (KOGSEB), Turkey MORATORIUM: The repayments on outstanding KOSGEB-supported loans were postponed until June 30, 2020, and KOSGEB is to bear the extra financing costs arising from such postponement vis-à-vis the Turkish banks. United Kingdom British Business CREDIT GUARANTEES: Administered by BBB on loans originated by accredited lenders: (a) 100 percent guarantee on principal and Bank (BBB), interest on loans to small business up to £50,000, or a maximum of 25 percent of annual turnover under the Bounce Back Loan Scheme United Kingdom (BBLS). The loans have a fixed interest rate of 2.5 percent and a maximum length of 10 years; in the first year of the loan there are no capital repayments due, and the government pays the interest. (b) 80 percent guarantee on outstanding loan balances to SMEs (up to £45 million turnover) under the Coronavirus Business Interruption Loan Scheme (CBILS). Loans up to £5 million to SMEs affected by CO- VID-19, interest and fees paid by the government for 12 months. Loans up to six years, overdrafts and invoice finance up to three years maturity, interest determined by the lender. Personal guarantees of any form will not be taken for facilities below £250,000. To be eligible, borrowers should have a borrowing proposal that the lender would consider viable, were it not for the current pandemic; self-certify that it has been affected by the coronavirus (COVID-19); and not be classed as a business or ‘undertaking’ in difficulty. (c) An 80 percent govern- ment guarantee on loans Coronavirus Large Business Interruption Loan Scheme. It is similar to CBILS but for larger firms, however there is no 12-month interest payment coverage by the government. The scheme is intended to include businesses where there are short- to medium-term performance issues due to adverse impacts of the coronavirus, but lending can only be agreed where a lender reasonably believes (i) the finance will help them trade out of any short- to medium-term cashflow difficulties, and (ii) if the facility is granted, the bor- rower is not expected to go out of business in the short- to medium-term. EQUITY: Future Fund. £250 million match-funded, convertible loans program, targeting equity-funded businesses that would be unlikely to be eligible for CBILS. It supports the United Kingdom’s innovative businesses affected by COVID-19. These businesses have been unable to access other government business support programs, such as CBILS, because they are either prerevenue or preprofit and typically rely on equity investment. The program can provide investment of between £125,000 and £5 million to eligible businesses. Source: Websites of the respective development financial institutions (DFIs); https://publicbankscovid19.org/; https://www.whitecase.com/publications/alert/covid- 19-turkish-government-financial-assistance-measures. Note: The COVID-19 response is reported for DFIs operating under micro, small and medium enterprise and export/import mandates. The list of measures undertaken by the selected DFIs is non-exhaustive. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 48