In an interview with the Economic Times of India, Lars H Thunell, Executive Vice President & CEO of the IFC, the private equity investing arm of the World Bank, answered questions while traveling in India about the IFC’s investing strategy for India given the current uncertainty of global economic climate. He emphasized the importance of the IFC playing a role in continuing to expand access to financial services to those at the base of the economic pyramid despite the issues the Indian microfinance sector has faced over the past two years. Given the challenging economic climate, Thunell emphasized the need to be a counter-cyclical investor in new investments and support existing investees to ensure they can emerge from the economic storm in a position for continued growth. Furthermore, he recognized the need for the IFC to invest more in low-income states and decentralise operations in order to find investment opportunities that other investment firms would neglect.
With the global economic prospects uncertain, the World Bank’s private equity arm IFC is geared up to play its traditional counter-cyclical role. In India, the market where it has its largest portfolio exposure of more than $3.7 billion, IFC is looking at possible investment avenues in agri-businesses and infrastructure, says Lars H Thunell, its Executive Vice President & CEO, who is in India to engage with lawmakers and companies on how this organisation can contribute. Here are edited excerpts from a phone interview with ET.
What according to you is the current situation globally for investments?
The economic situation is very fragile around the world, with the European situation as well as all that’s happening with the US super committee (a Congressional debt reduction panel). The interdependence in the world economy is very high. At a time of perceived high risk, those correlations in the market, whether it’s through funds, trade or banking systems, have increased dramatically. In most countries, the economic forecasts are being reduced and therefore it’s very important for countries like India to see what they can do to promote domestic growth and consumption.
And this also fits in with the IFC focus. Because we want to bring in inclusive growth, which means focussing on getting products at the base of the pyramid and getting smaller entrepreneurs and SMEs to grow as much as possible.
What’s your agenda during the trip?
I come to India because India is the largest exposure that we have, from a portfolio point of view. I met up with a number of ministers and I had very good discussion about how IFC can contribute. We talked about what we do in the renewable energy side and also on inclusive growth, water, which is very important, as well as education.
We help Indian companies with technical skills and business models. And help Indian companies really becoming emerging multinationals. That’s been the purpose of the trip.
We have had a very interesting transaction with Sewa (Self Employed Women’s Association). We have worked with them over the years, helping them with the logistics chain and establishing the stores. Now, we are also working on how to increase the financial capability for their members through a kind of a bank, which is one possibility. Then we have a special project where we are looking at financing through a very innovative way stoves and solar lamps, two important things for a household.
We have decided to do this concept of developing a very good stove, which will be manufactured here in India locally. With these manufacturers, we can then aggregate and get a discount on the stove. We hope to do a batch of 300,000 stoves.
IFC has traditionally been a counter-cyclical player. So what role do you see for IFC in the year ahead?
We are looking at a number of things. First of all, it is important to support our existing clients and help them to weather the storm, so to say. Or use this, as in any crises you also have opportunities. For example, what we see now is that some of the European banks are pulling back. And that’s an opportunity for Indian banks to step in into the syndicated credit market, which is a very exciting possibility.
So we are trying to support the banks and the financial system and minimise the negative effect. Trade finance, for example. Earlier this year, I signed an agreement with Exim Bank in India on trade finance. Those are the types of transactions we very much like to do now.
But then there are other areas where you actually can continue in a counter-cyclical kind of mould to do more investments. Again, the high food prices are a real problem for many people. The only good news with that is there are lot of possible good profitable businesses, because prices of food are higher. So that’s an area where there could be more investments.
Infrastructure, of course, is often used in a stimulus package. And here in India with all the need for infrastructure, we are very much there. And it’s an area where both the growth aspects and the climate aspects come together. We are focussing a lot on renewables. Water is part of the climate change agenda and the infrastructure agenda.
At the same time, as India is gearing up for more domestic consumption, you also see opportunities in the manufacturing side. So this is an area where we have been working but we would like to do even more, whether it is components for the automotive industry or agricultural equipment like we have done with Jain Irrigation.
Are there any agri-business segments in particular that interest you?
Food is all the way from farm to fork. Especially, we can make major contributions in the kind of infrastructure related to the agri business – like cold chains. For example, we made an investment into a company called Snowman (into frozen foods business) last year in Punjab. These are the types of things we should do more of. They are in high demand.
And with the cost now, if you have 40% of food produce which never actually reaches the marketplace, it’s kind of a no-brainer that it’s an opportunity to make money and that investments will occur.
Would India continue to be your No. 1 destination in terms of equity exposure?
India is our largest portfolio. We hope to continue to do a lot of investments. Geographically, we are trying to diversify it and get more and more into the low-income space. Because that’s where we can make the biggest developmental impact and the biggest difference.
A couple of years ago you had said that though IFC is investing a lot in India, it’s not yet much in rural areas. Is that shift already happening?
Yes, we have put a special team in for the low-income states. We have opened an office in Kolkata. These things are happening. We now have a significant branch network, with branches in Chennai, Kolkata, Mumbai and Delhi. There’s a small office in Jaipur. Over the last couple of years we have also developed our relationships at the state sovernment level, for example in Rajasthan and so on. We will continue to do that.
So the decentralisation moves will be deepened further?
I think so, because that’s where we can have the biggest difference. And we try to have the demonstration effect, where our presence can bring in other investors. When I looked at it a couple of years ago, only 1% of foreign direct investment went into the low-income space. And even if it’s a little higher now, its share is extremely low.
You got big variations within India, it’s one of the issues here. So the more we can help, the better.
You have a widespread presence in clean energy. But there’s at a macro level a failure to come up with a global framework to deal with climate change. Is that hurting the space?
I came from a big conference in Bonn, Germany, one of the conferences before the Rio Plus 20 conference (the agenda-setting meet next year). And the agreement is that climate change is happening independently of economic cycles. So we need to focus on it. But obviously as people have less money, the more we can work in parallel on the economic issues and on the climate change issues the better off we are.
Which means focussing on issues such as energy efficiency (which try to address the problems in the cheapest ways possible). We are also seeing that some of the renewable energy technologies – for example, solar – are becoming very competitive. Governments won’t have monies to subsidise them.
Are there any learnings from India that you employ world-wide in your other microfinance projects globally?
In general, there have been similar types of issues over transparency in other parts of the world. And having credit bureaus – which keeps a track of whether people are borrowing from several different institutions – is a very important part of it. There are some learnings and also trying to reduce the hype that you sometimes see around MFI institutions and having a debate around what’s the right level of interest rates.
You also have to recognise that putting caps on interest rates means you are not going to have a viable business. So finding the right balance, that’s happening. In general across the world, there’s a push for financial literacy which is important.