Exim Bank as turbo-charger

The challenge is to rev up India's project exports dramatically. Export-Import Bank of India should be re-geared to play a pivotal role

One of the biggest positive side-effects of India’s infrastructure boom in the last 20 years has been the creation of a set of companies with deep experience in building high quality infrastructure with the associated expertise in engineering. The logical next step has obviously been to look beyond India’s borders and seek out projects overseas.

But when compared with its big neighbours to the east, India still lags far behind.

China’s mammoth One Belt One Road (OBOR) initiative for example, which seeks to build a connectivity network stretching across Asia dwarfs anything on the scale that has ever been done before. India’s project exports were around $8.1 billion in 2016-17, according to the Project Exports Promotion Council of India. In contrast, and even though the figure is not exactly comparable to that of India’s, China’s investments under the OBOR initiative are expected to be in the hundreds of billions of dollars at the very least. And this does not even include the dozens of projects it is executing outside the ambit of the OBOR across the world.

The Chinese have been happy to offer highly concessional finance terms for projects, making them undeniably attractive to countries across Africa, the Middle East, South Asia and Central Asia. As is also well known, Japan has been deeply involved in funding an array of infrastructure projects through JICA, including India’s bullet train. JICA is Japan International Cooperation Agency, which is a governmental agency that co-ordinates official development assistance for the Government of Japan. Korea does likewise through the Exim Bank of Korea, operating the Economic Development Cooperation Fund.

Illustration by Binay Sinha

Globally, Exim banks have often been key drivers of project export initiatives. Since they are owned by national governments, they can raise funds at highly attractive terms. In turn, they can pass on those benefits and provide financing and guarantees to exporters on terms which can make all the difference between a winning and losing bid. National ownership enables them to take on higher risk as compared to commercial entities, and also enables them to access long term bond market funding at competitive cost. 

However, India’s Exim Bank has long suffered from two key drawbacks — a relatively small capital base compared to its counterparts in other countries, and the fact that as a bank it is subject to the same regulatory norms as other banks, even though it is very unlike every other institution in the financial system.

In 2014, the Exim Bank of India had a capital base of around $800 million, not too different from that of Exim China’s capital base. By 2016 though, Exim China’s capital base had expanded dramatically, to over $21 billion, while Exim Bank of India’s capital had gone up to only $1 billion. That same year, the Exim Banks of Japan, Korea and Brazil had a capital base in the range of $8-$11 billion.

Globally, banks are regulated on the amount of business (that is, loans and other financing) they can do for a given amount of capital, in the interests of safeguarding the interests of retail depositors. Crucially though, Exim Banks have often been exempted from the stricter norms governing normal commercial banks, because the amount they raise from the public has been relatively low, and because they are often fully backed by their governments. India’s Exim Bank, for instance, has raised just Rs 580 million from retail depositors as on March 31, 2018, barely 0.02 per cent of its balance sheet.

In India, the leverage, or the total amount that the Exim Bank can borrow for every rupee of capital is capped at 10 times the banks own funds. As of 2016, the leverage of the Exim Bank of India was even lower than that amount — at eight times capital. In contrast, that of Exim Bank of China was at nine times. This is seemingly not all that different but for the fact that it had actually soared to above 75 times of capital a few years earlier and peaked to 81 times capital in 2014, before a big infusion of funds from the Chinese government.

Beyond this, regulatory norms limit the amount of loans and exposure that the Exim Bank can take to a single sector or borrower. These are eminently sensible norms for commercial banks in general. But an Exim Bank whose business, almost by definition, is focused on national priorities and a few key export sectors, poses far less systemic risk to the banking system and should thus be arguably less constrained. And in the case of project exports, where the amount of exposure to a single project has necessarily to be higher, such restrictions are all the more crippling.

If India’s project exporters are to really make a dent in global markets, they will need access to the kind of support and financing that only a state - backed entity can provide. Historically, that kind of financial support has been provided by national exim banks or equivalents. If India’s Exim Bank is to play its part it will need a lot more capital as well as a facilitative and appropriate regulatory environment.

And this is the right time in India’s economic history to enable and allow Exim to play its destined role.

The author is chairman of Feedback Infra. Twitter: @Infra_VinayakCh