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World Bank arm IFC holds nearly 5% stake in Federal Bank with Rs 916 crore capital infusion

World Bank arm IFC has become a significant shareholder in the private sector after picking up nearly five per cent stake for Rs 916 crore, and the fund will be utilised for climate-friendly projects, among others. Last month, the board of the Federal Bank had approved to allot 104,846,394 equity shares, equivalent to 4.99 per cent, at Rs 87.39 each to IFC, IFC Financial Institutions Growth Fund, LP (FIG) and IFC Emerging Asia Fund, LP (EAF).

Increased financing for climate-friendly projects as well as more financing for small businesses to help accelerate India’s economic recovery from COVID-19 are expected in the wake of a USD 126 million (Rs 916 crore) equity investment in the bank, IFC and Federal Bank said in a joint release on Thursday.

FIG and EAF are investment funds managed by IFC Asset Management Company.

The investment will also support FBL’s (Federal Bank Ltd) commitment to environmental, social and governance (ESG) standards while strengthening its tier 1 capital adequacy ratio (CAR).

With this, the bank will expand its micro, small and medium-sized enterprises (MSME) and climate finance portfolios — key for growth opportunities as the country recovers from the pandemic, the statement said.

“After the bank’s board approved the issuance of shares to the IFC group to an extent of 4.99 per cent of the bank’s paid-up capital, IFC has become a significant shareholder of the bank. The infusion of quality capital further strengthens tier 1 and overall CAR of the bank,” Shyam Srinivasan, MD & CEO of Federal Bank said.

Federal Bank is expecting to grow and strengthen its ESG portfolio, with increased green portfolio financing for projects, including energy efficiency, renewable energy, climate-smart agriculture, green buildings, and waste management.

India ranks third globally in terms of greenhouse gas (GHG) emissions.

The country needs substantial investments to meet its goals under the Paris Agreement to reduce GHG emissions by 2030.

IFC estimates a total climate-smart investment opportunity of USD 3 trillion in India by 2030, according to the statement.

“This move is in line with IFC’s strategy to support green growth by spurring investments to build back better and greener, seizing the opportunities to help India meet its climate goals and build a greener, resilient future,” said Roshika Singh, Acting Country Manager for IFC in India.

The investment is also expected to create many jobs, with micro, small and medium-sized enterprises gaining access to much-needed financing, which will also help ensure an inclusive recovery, Singh added.

The MSME sector in India was facing difficulty in getting funding even before the impacts of the pandemic. Around 6.3 crore (63 million) MSMEs contribute nearly 30 per cent to India’s gross domestic product (GDP).

However, about 1.1 crore (11 million) MSMEs remain fully or partially excluded from the formal financial system, with an estimated financing gap of around USD 400 billion, the release said.

The COVID-19 pandemic has further squeezed the availability of funding for MSMEs.

The investment also marks IFC’s first in India aligned to the greening equity approach. It will enable Federal Bank, an IFC partner for over a decade, to reduce its exposure to coal and increase its climate lending, it said.

IFC will also consult with the bank on developing a new Environmental and Social Management System (ESMS) that will be applied to its entire portfolio. IFC will also implement an E&S technical advisory programme.

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