Why the World needs National Development Banks? (though India did away with NDBs…)

I don’t know but quite a few ideas which were rejected by Indian policymakers are making a comeback in global policy.

I blogged about how BIS is advising EME central banks to engage in forex markets. Now Stephany Griffith-Jones and and Jose Antonio Ocampo in this piece advocate national development banks, again an idea which took shape in India. Post-independence, we had development banks such as IFCI in 1949, ICICI in 1955 and IDBI in 1964. This was followed by NABARD in 1982, IDFC in 1997 and so on. In India, we called them Development Financial Institutions or DFIs.

Griffith-Jones and Ocampo say NDB’s offer following advantages:

In a recent book, we analyzed NDBs in seven countries – China, Germany, Brazil, Mexico, Chile, Colombia, and Peru– and concluded that these banks tend to be successful overall. They have been broadly efficient instruments of national development strategies in their respective countries, and they have helped to overcome major market failures in a flexible way.

Our research identifies five crucial functions of NDBs in the development process: providing counter-cyclical finance; encouraging innovation and structural transformation; enhancing financial inclusion; supporting infrastructure financing; and promoting environmental sustainability, in particular by combating climate change.

NDBs were strongly counter-cyclical in the wake of the global financial crisis. According to World Bank data, NDBs increased their lending from $1.16 trillion in 2007 to $1.58 trillion in 2009. This 36% increase was far greater than the growth in private bank credit in the same countries over that period.

NDBs have been innovative, notably in supporting new activities. China’s CDB, Germany’s KfW, and Brazil’s BNDES have financed technological advances, for example, while others, including Chile’s CORFO, have supported entrepreneurship. Such banks have also introduced guarantees and established new equity (including venture capital) and debt funds. Furthermore, they have developed new programs to increase financial inclusion, such as “correspondent” stores and post offices that provide financial services from one or more banks.

In addition, NDBs have been prominent supporters of important new sectors, such as renewables and energy efficiency. For example, KfW was initially the sole lender to private companies investing in solar energy in Germany; private banks got on board later. In China, CDB helped to design policies to encourage investment in renewable energy – particularly solar – and provided significant initial funding. As a result, Germany and especially China have been major global promoters of solar power, helping to make it increasingly competitive relative to fossil-fuel energy.

To be clear, we favor “good” development banks: well-governed institutions with highly professional staff and clear mandates that fulfill their functions well. Such banks should maximize their development impact rather than profits, while ensuring some minimal level of return.

Countries that already have NDBs should aim to expand their role, while others should consider establishing them. Doing so would help to create a financial system that better serves countries’ economic and social needs.

India obviously converted its NDBs into commercial banks barring IFCI and NABARD. The authors should study the Indian experience as well.

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