The World Bank Catalyzing Private Financing for Sustainable Recovery and Growth (P177985) Program Information Document (PID) Appraisal Stage | Date Prepared/Updated: 17-May-2022 | Report No: PIDA34162 Page 1 of 7 The World Bank Catalyzing Private Financing for Sustainable Recovery and Growth (P177985) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Project Name Parent Project ID (if any) Catalyzing Private Financing India P177985 for Sustainable Recovery and Growth (P177985) Region Estimated Board Date Practice Area (Lead) Financing Instrument Finance, Competitiveness Development Policy SOUTH ASIA 29-Jun-2022 and Innovation Financing Borrower(s) Implementing Agency India Department of Financial Services, Ministry of Finance. Proposed Development Objective(s) The proposed development objective is to catalyze sustainable private sector financing for India’s economy, with the focus on infrastructure and MSMEs. Financing (in US$, Millions) FIN_SUMM_PUB_TBL SUMMARY Total Financing 750.00 DETAILS -NewFin3 Total World Bank Group Financing 750.00 World Bank Lending 750.00 Decision The review did authorize the team to appraise and negotiate Page 2 of 7 The World Bank Catalyzing Private Financing for Sustainable Recovery and Growth (P177985) B. Introduction and Context Country Context India’s ability to rebound from the pandemic and to realize its ambitious growth targets depends on having a deep and efficient financial system, capable of meeting the country’s large investment needs and catalyzing inclusive and sustainable growth. Over the past decade, the Government of India (GoI) has pursued an ambitious reform agenda with the goal of deepening financial inclusion, enhancing the efficiency and stability of the financial sector, and strengthening domestic capital markets to attract long term financing. The GoI has been making efforts to ensure that the financial sector is more efficient and resilient through the restructuring of large Public Sector Banks (PSBs), strengthening the oversight of Non-Bank Financial Companies (NBFCs), and using improved insolvency framework and other measures to address the legacy of Non-Performing Assets (NPAs). The financial sector has remained resilient in the face of COVID-19 and other shocks, both internal and external, with banks and NBFCs being capitalized well above the regulatory threshold. At the same time, a series of ground-breaking initiatives (digital ID, fintech innovations) have resulted in much improved levels of financial inclusion, including for the poor and traditionally underserved. Finally, the ongoing reforms in the capital market space include enabling new financing instruments, streamlining the regulatory environment to enable capital market liquidity, and attracting institutional investors to finance India’s development needs. Notwithstanding this progress, credit growth has been decelerating in recent years, resulting in persistent financing gaps in critical sectors. India has comparable levels of savings to emerging market peers such as Brazil, Malaysia and South Africa, but a much lower level of private sector credit, which means that the financial sector needs to be more effective in intermediating savings to support growth. Moreover, credit growth in India has been on decelerating over the past decade (and particularly since 2019), reflecting the risk aversion among lenders in the aftermath of a twin balance sheet problem and various structural impediments in the financial system. This results in chronic financing gaps in sectors critical for growth such as infrastructure and MSMEs1. The annual infrastructure finance gap in India is estimated at 4 percent of GDP, while the share of private sector finance of infrastructure has been falling, from 37 percent of total infrastructure financing to 25 percent, between 2008 and 2019, and that gap has likely worsened following COVID-19. The financing gap for MSME is estimated between Rs.18-25 trillion, and almost half of all MSMEs do not have access to formal credit, with the situation worsened by the impact of the pandemic. India is one of the most vulnerable countries to climate change. The Global Climate Risk Index 2021 ranks India as the 7th most impacted nation. The country is expected to experience increasing climate variability with hazards projected to increase in frequency and intensity (such as floods, droughts, cyclones, etc.), which will adversely impact human development, economic growth, and resources. In the context of India‘s goal to catalyze private finance and enhance financing for infrastructure and MSMEs, the mounting impacts of climate change pose substantial risks to the financial system's stability and could lead to massive economic losses, including losses incurred by MSMEs and damages to infrastructure. Thus, any investments in enhancing finance for development must account for the impacts of climate change and ensure mitigation of such impacts. The GoI requested the Bank for a US$ 750 million DPL to support the ongoing financial sector reform agenda, with a focus on leveraging private financing to key sectors in the recovery phase, while also enhancing the development of green finance markets. This operation is a result of the Bank’s strong and continued engagement with the GoI, through lending and technical assistance (TA), on building a stronger financial sector than can better meet the financing needs of the economy. 1 The MSME sector contributes around 30 percent of GDP and is the largest non-agricultural employer with over 110.9 million workers. Page 3 of 7 The World Bank Catalyzing Private Financing for Sustainable Recovery and Growth (P177985) Relationship to CPF The DPL is aligned with the key objectives identified in the WBG FY18-22 Country Partnership Framework (CPF). The operation contributes to the Pillar 1 “Resource Efficient Growth� and the Pillar 2 “Enhancing Competitiveness and Enabling Job Creation� by enabling an ecosystem where the critical sectors of Infrastructure and MSMEs will be able to thrive and lead to more employment generation. In addition, the DPL will support the de-risking of commercial investments in sustainable projects, innovative products such as green bonds, and strengthening of ESG frameworks. C. Proposed Development Objective(s) To catalyze sustainable private sector financing for India’s economy, with the focus on infrastructure and MSMEs. Key Results The targeted results of the Pillar 1 (Catalyzing long term private sector finance) are: (i) loans by National Bank for Financing Infrastructure and Development (NaBFID) for the infrastructure sector; (ii) funds raised through monetization of brownfield assets included under the National Monetization Pipeline; and (iii) increase in volume of Pass-through Certificate (PTC) Residential Mortgage-Backed Securities (RMBS) transactions, supporting housing finance. The targeted result of Pillar 2 (Developing the markets for green finance) are: (i) volume of issuance of sovereign green bonds; and (ii) Share of top 1000 listed firm complying with enhanced Environmental, Social and Governance (ESG) disclosures. The targeted results of Pillar 3 (Improving access to credit for MSMEs and women entrepreneurs) are: (i) an increase in volume of guarantee covers under credit guarantee schemes; (ii) increase in volume of guarantee covers under credit guarantee schemes towards loan accounts of women entrepreneurs, and (iii) total lending under the Credit Guarantee Scheme for MFIs (CGSMFI) scheme to women borrowers. D. Project Description The operation supports the GoI’s reform program in three broad areas: i) Catalyzing long-term private sector financing for India’s infrastructure and housing needs; ii) Enhancing the financial sector’s ability to mobilize green financing; and iii) Enabling access to credit for MSMEs, including women entrepreneurs, through risk sharing mechanisms. The DPL is a continuation of the World Bank’s support to the critical sectors provided under the Emergency MSME Response DPL (2020) and the Raising and Accelerating MSME Productivity (RAMP) project (approved in 2021). Overall, the policy package supported by this DPL will be pivotal to sustaining India’s post-COVID-19 recovery, and also ensuring that sustainable financing for infrastructure and MSMEs translates into growth and job creation. Under Pillar 1, prior actions support the GoI in catalyzing long term private sector finance, namely by: (i) Capitalizing and a new national Development Financial Institution – NaBFID, and deciding on NaBFID’s regulatory oversight; (ii) mobilizing private sector financing by launching the National Monetization Pipeline (NMP) as well as allowing Foreign Portfolio Investors (FPIs) to invest in debt securities issued by Infrastructure Investment Trusts (InvITs); and (iii) linking of housing finance companies to capital markets through securitization by issuing revised framework for securitization and launching a multi-originator RMBS platform which can catalyze the large volume of transactions. Under Pillar 2, prior actions support development of the markets for green finance by: (i) supporting issuance of the sovereign green bonds; (ii) enhancement of the Environment, Social, and Governance (ESG) disclosure framework for top 1,000 listed companies, mutual funds, and rating agencies; and (iii) setting up a voluntary national carbon market and trading scheme to promote low-carbon alternatives. Under Pillar 3, prior actions support improving access to credit for MSMEs and women entrepreneurs by: (i) Strengthening the permanent credit guarantee scheme for MSMEs, CGTMSE, by increasing the amount of guarantee cover per borrower and allowing medium enterprises to be included in the scheme; (ii) Revising guidelines for temporary Page 4 of 7 The World Bank Catalyzing Private Financing for Sustainable Recovery and Growth (P177985) credit guarantee scheme in support of MSMEs in sectors worst affected by Covid-19; and (iii) implementation of new credit guarantee scheme for micro-finance institutions. . E. Implementation Institutional and Implementation Arrangements The Department of Financial Services (DFS) of the Ministry of Finance is responsible for overall coordination and implementation of the DPL. The DFS has institutional capacity and is familiar with the World Bank policies and procedures, data requirements and overall monitoring arrangements. Data is generally available through the Ministry of Finance (MoF) and the Reserve Bank of India (RBI) websites, as well as through the Ministry of Statistics and Programme Implementation and other government agencies. F. Poverty and Social Impacts, and Environmental, Forests, and Other Natural Resource Aspects Poverty and Social Impacts The proposed project will contribute to poverty reduction by ensuring continued flow of credit to MSMEs, through credit guarantee schemes aimed at preserving flows of finance to MSMEs (PAs 7 and 8). Retrospectively, quantitative analysis2 demonstrated that firms that received credit as a result of an emergency credit guarantee scheme during the Government’s first Emergency Response were less likely to lay off employees or cut their wages. Analysis of the credit guarantee programs also suggests that they were reaching some vulnerable groups. Beneficiaries of the credit guarantee program tended to be less educated (more likely to have less than primary education). Additionally, there is evidence3 that the Emergency Credit Line Guarantee Scheme (ECLGS) increased business income derived from profits for MSME households in the six months following the national lockdown measures. By comparing MSMEs that obtained additional credit before and after the implementation of the credit guarantee scheme, the findings 4 suggest that the expansion of credit guarantees seems to have increased household business profits by 65 percent in August-November 2020. There is also suggestive evidence that the credit scheme prevented pay cuts for MSME employees. The prior action for the CGSMFI scheme (PA9) is particularly impactful for women. Women are disproportionately vulnerable to the impacts of economic shocks in India, particularly those who are elderly, widowed or divorced. Women’s mobility and survival options are affected by entrenched gender inequality, social norms, and reproductive responsibilities. Their adaptive capacity is constrained by lower relative access to capital and economic opportunities, and women have less ability than men to use urban migration as an adaptive strategy. Therefore, ensuring that MFIs continued to have access to liquidity for on-lending meant that their clients, who are almost exclusively women borrowers, were able to continue engage in income-generating livelihoods activities or could borrow to smooth consumption during the income shocks emanating from COVID-19 lockdowns. Environmental, Forests, and Other Natural Resource Aspects The reforms supported under this DPL are expected to have significant positive effects along with possible low negative effects on the country’s environment and natural resources. Pillar 1 is expected to facilitate the mobilization of capital for infrastructure finance in the manner consistent with India’s COP26 and NDC commitments, leading to positive environmental effects. However, there might be indirect negative environmental effects, including on forests, as a result of some of the downstream infrastructure investments that are currently not covered under GoI Environment Impact Assessment (EIA) policy. Under Pillar 2, issuing Indian sovereign green bonds would increase opportunities for institutional investors to support climate-smart investments. Moreover, enhanced ESG disclosure guidelines will enable 2 Eser, E.J., Ng, O., & Olinto,P (2022).� The Impact of Credit Guarantee Schemes to Support MSMEs through the Covid -19 Crisis: Evidence from India� 3 Ibid 4 Ibid Page 5 of 7 The World Bank Catalyzing Private Financing for Sustainable Recovery and Growth (P177985) Indian firms and mutual funds to attract more capital towards sustainable goals. Lastly, the development of carbon markets and trading schemes will provide strategic direction and will play a crucial role in catalyzing low-carbon investments in India. Under Pillar 3, considering the MSME sector compliance with environmental regulations is still moderate (although with the trend for improvement), there might be some low negative environmental impacts. G. Risks and Mitigation The overall risk of the operation is assessed as Moderate. The residual risk stems from a potential weak response of the private sector in meeting the ambitious financing agenda. As the project intends to catalyze private financing for infrastructure, MSMEs, and green projects, the readiness of the private sector to contribute is essential in achieving this objective. The risk will be mitigated by strong commitment, and improved capacity of the GoI to work with the private sector to produce bankable pipeline as highlighted in the Letter of Development Policy (LDP). . CONTACT POINT World Bank Mehnaz S. Safavian, Alexander Pankov Lead Financial Sector Specialist Borrower/Client/Recipient India Implementing Agencies Department of Financial Services, Ministry of Finance. Pankaj Sharma Joint Secretary Jsvig-dfs@nic.in FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects Page 6 of 7 The World Bank Catalyzing Private Financing for Sustainable Recovery and Growth (P177985) APPROVAL Task Team Leader(s): Mehnaz S. Safavian, Alexander Pankov Approved By APPROVALTBL Country Director: Anne-Katrin Arnold 03-May-2022 Page 7 of 7