June , 2020
Blended finance as part of post-Covid-19 economic revival
23:28 pm

B.E. Bureau

Blended Finance is an approach being promoted by the United Nations Development Programme (UNDP) as a recovery strategy for the post-COVID phase. BE’s Ankit Singh spoke to Karanraj Chaudri, Advisor, SDG (Sustainable Development Goals) Finance, UNDP India.

Q. What is blended finance and how does it help to unlock private capital?

A. Blended finance is an approach that leverages public and philanthropic sources of capital to try and mitigate specific investment risks. When certain transactions are considered particularly risky (potentially due to foreign exchange volatility, lack of liquidity, business model  or implementation risks) a potential provider of concessionary capital, which could be a multilateral institution or an international agency, comes forward and says they will provide support that will help to mobilise more private capital to achieve certain pre-determined investment objectives. Private capital only comes into transaction when the investment risk is commensurate with the expected return. The purpose that blended finance aims to achieve is that there might be certain areas where the expected return is not in line with the risk and therefore, when some  concessional capital is provided, that can help to unlock or channelise more private capital in that transaction.

Q. Could you please provide some examples from India or other developing countries in Asia where blended finance has been successful?

A. The Asia-Pacific region is the new frontier for blended finance. Lot of such transactions are already in the energy and financial services space but we are also seeing more activity in the agriculture, water, sanitation and health. In the Asia Pacific region, there is a platform called Tropical Landscape Finance Facility that has been started in Indonesia which aims to bring long term finance to projects that are working on green growth along with supporting rural livelihoods. This has been developed by UN Environment along with BNP Paribas and ADM capital. 

Q. What opportunities are there in blended finance for Indian entrepreneurs? 

A. In India, there are ample opportunities for entrepreneurs and MSMEs. We can look at instruments like impact link loans which are very specific instruments wherein a loan is given to SMEs and the interest rate is not solely fixed based on the credit rating of the borrower but it also incentivises the borrower to take certain measurable action around sustainable development. So, if they are lending to a SME at 10% based on their credit rating, they can agree to reduce the interest rate to 7% if they take certain actions to become more sustainable. 

Q. What role can blended finance play in our country’s response to the Covid-19 crisis?

A. With major disruptions in the way businesses operate and heightened economic stress because of the pandemic, blended finance can continue to play an important role in terms of the whole narrative of building back the economy. One of the interesting avenues where blended finance can contribute for Covid-19 recovery is around leveraging philanthropic capital to provide guarantees to SMEs and NBFCs. It will allow them to enhance the credit profile of the transactions and then also allow them to further lend out to last mile consumers.

Q. What is needed to scale up the blended finance approach in India? What’s on the horizon?

A. The coming together of different stakeholders is very important so that different philanthropies and commercial investors can think about using their capital as leverage and build a more favourable credit profile for transactions in important areas. Finally, the role of the government in creating a more enabling regulatory environment for structuring blended finance transactions can also help in mobilising a large amount of capital.

Q. How can we make blended finance work for the SDGs?

A. To achieve the SDGs in developing countries, we need a significant scale of investments. We have always known that the financial gap for SDGs has been two to three trillion dollars annually.  This is beyond the capacities of governments alone and will require a broad range of interventions, specifically the crowding in of private and commercial capital. Blended finance can provide a pathway by leveraging different providers of capital.

UNDP launched a global flagship initiative, SDG Impact, which aims to provide the SDG standards and frameworks that could be used in blended finance transactions. In India, we are currently developing the SDG Impact Investor Map that aims to gather and organise intelligence which can be used by investors to understand potential Investment Opportunity Areas (IOAs), that have a strong business case and potential to contribute to the SDGs.

Q. What has been the UNDP’s role in promoting the blended finance approach in India? 

A. In 2019, UNDP together with the Swiss Agency for Development and Cooperation and NITI Aayog established a multi-stakeholder platform called the ‘SDG Finance Facility’, which is aimed at providing technical support for SDG finance initiatives in the country. It is working to explore a range of areas including municipal bonds, pay for success instruments and SDG aligned Exchange Traded Funds.

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