Announcement of The World Bank~^!!^s First Loan to India to Improve the Financial Sector on March 24, 1995 : Announcement of The World Bank's First Loan to India to Improve the Financial Sector on March 24, 1995

IA RELEASE The World Bank 1818 H Street, N.W., Washington, D.C., 20433, USA News Release No. 95/60/SAS WORLD BANK TO PROVIDE $700 MILLION LOAN TO IMPROVE INDIA'S FINANCIAL SECTOR WASHINGTON, D.C., MARCH 24, 1995- The World Bank today announced the approval of three loans totaling $700 million to aid in the restructuring of India's financial sector. The loans, through the International Bank for Reconstruction and Development, will be the first in which the Bank will help India implement fundamental reforms and modernize its banking sector, and will be the largest loan to date that the Bank has provided to India. The project will bring about a greater market orientation in the financial sector, upgrade technical competence in the banking system, increase competition in the Indian financial system and stimulate economic gro\wth by contributing to meeting the long-term financing needs of its investors. It will help the Government of India (GOI) sustain financial liberalization, help the institutional development of public sector commercial banks, and increase banks' integration into global capital markets. The project will also help expand private equity ownership in public sector commercial banks and develop foreign currency lending. The expansion of private sector ownership of public-sector banks and the associated change in the composition of their boards of directors will enhance management autonomy and help reorient their business goals and strategies towards achieving profitability and improved customer services. The three loans consist of: * a $350 million currency pool loan for capital restructuring that will facilitate private equity ownership in six public sector commercial banks by making the shares of these participating banks attractive to potential private sector investors in India's capital markets. (Total project costs in this sector are $1,157.2 million.) * a $150 million loan for bank modernization and institutional development. Initiatives under this project will enhance the efficiency and profitability of the six public banks by extending automation and computerization of banking operations and by encouraging modern banking practices. Total project costs in this sector are $197.7 million. * a $200 million loan to be used as a backstop facility to help Indian financial institutions meet the demand for US dollar term loans sourced with private funds. It will assist in meeting the demand from small- and medium-sized companies with foreign exchange earnings and exporters whose direct access to offshore markets is hampered by high issue costs. Archives/Records Center, H 61-001 ( 1) 2 The reinvigoration of competition in financial markets brought about by deregulation of interest rates and the entry of new private banks will reinforce the new business goals and strategies, with tangible economic benefits in terms of narrower interest rate spreads and lower costs for capital. Enhanced access to foreign currency term finance would reinforce the prospect for sustainable export expansion and private capital flows. Efficiency and profitability in banking operations would be encouraged by the adoption of automation and modem banking practices. Since June 1991 India has implemented a program of bold stabilization and structural reforms aimed at promoting rapid and sustainable growth in income and employment, coupled with more effective and efficient public intervention to reduce poverty. The economy has reacted favorably to these reforms with reduced inflation, increased export growth, a declining current accounts deficit, and steady but modest GDP growth. Progress on structural reforms has bolstered foreign investors' confidence in the Indian economy and resulted in large increases in capital inflows from $150 million in 1991/92 to about $5 billion in 1993/94. The liberalization of India's financial system has been one of the main components of GOI's economic reform policy and its comprehensive financial liberalization program has been implemented at pace with its program of fiscal adjustment and macroeconomic stabilization. The broader issues of reform of the overall financial system, the health of banking institutions and the adequacy of the regulatory and supervisory framework have been under discussion with the Bank since 1991. This project will go a long way toward developing a more stable financial system, and enable the GOT to sustain its overall economic reform program. The total cost of the project is about $1,534.1 million with the World Bank providing $700 million, the Government of India providing $618.4 million and participating banks providing $215.7 million. The $350 million loan is provided to the Government of India at the Bank's standard variable rate, repayable over 20 years with five years of grace; the $150 million loan is provided to the Industrial Development Bank of India (IDBI) at the Bank's standard variable rate, repayable over 10 years with three years of grace; and the $200 million loan, also to the IDBI, is repayable over 14 years with eight years of grace. Note: All amounts are in US dollar equivalent. For further information contact: Paul Mitchell or Kerry Smyth World Bank, Washington D.C. Tel. (202) 458-1423 or (202) 458-9031 Fax (202) 477-1245 Internet: pmitchelll@-worldbank.org