45113 - Silver

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Summary of Investment Information

Project Number

45113

Company Name

THE FEDERAL BANK LIMITED

Date SPI Disclosed

Jun 17, 2021

Country

India

Region

South Asia

Projected Board Date

Jun 7, 2021

Environmental Category

FI-1 - Significant

Status

Active

Last Updated Date

Sep 13, 2022

Department

Regional Industry - FIG Asia & Pac

Industry

Financial Markets

Previous Events

Approved : Jun 7, 2021
Signed : Jun 16, 2021
Invested : Jul 20, 2021

Sector

Commercial Banking - SME Finance

Project Description

The proposed Project comprises a primary equity investment for a 4.99 percent stake in Federal Bank Limited (FBL or the Bank), the seventh largest private sector bank in India, for approximately US$126 million, by International Finance Corporation (IFC), IFC Financial Institutions Growth Fund, LP (FIG), and IFC Emerging Asia Fund, LP (EAF). The primary equity will strengthen the Bank's Tier 1 capital adequacy ratio, to position itself for post-COVID-19 growth opportunities, particularly in the MSME and climate finance segments. The Project will support the Bank's commitment to financial inclusion (with a focus on MSMEs) and help it operationalize its strong commitment to sustainability and climate finance. The proposed transaction is subject to all required approvals.

Associated Advisory Engagement

To further strengthen the Bank's E&S capacity, IFC will also implement a one-year E&S technical advisory program.

Sponsor / Cost / Location

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan
Equity	43.37

Development Impact

Stakeholders impact: Improved access to finance for MSMEs and climate: The MSME sector is extremely critical for the development of the country by way of production, employment, and exports. However, close to 11 million MSMEs remain either fully or partially excluded from the formal financial system, with an estimated financing gap of ~US$400 billion. The proposed investment will support the Bank in increasing funding to the MSME sector. Further, India requires substantial financing to meet its NDC commitments and grow climate finance. IFC expects that this Project will contribute towards a reduction of the climate financing gap in India by supporting the growth of FBL's climate finance portfolio for renewable energy, climate smart agriculture, green buildings, and waste management projects. The investment will also support FBL in reducing coal exposure. Market impact: Beyond the Project level outcomes, IFC anticipates the investment to promote greater resilience in the market via innovation, demonstration, and replication channels. This approach is expected to demonstrate the viability of MSME lending and inspire other FIs to follow suit.

IFC will provide both financial and non-financial additionality to FBL through this Project. Financial additionality will be provided in the form of: (i) Own Account Primary Equity from IFC and (ii) Resource Mobilization, derived from mobilization of additional funding from its asset management company. With respect to non-financial additionality, IFC will help the Bank in terms of: (i) Knowledge, Innovation and Capacity Building by helping the Bank develop its climate strategy and grow its green lending portfolio, and (ii) Setting standards as IFC assists the Bank to improve its environmental and social (E&S) risk management and environmental, and social governance (ESG) compliance.

E&S Category Rationale / Risks and Mitigation

The proposed Project entails an equity investment in FBL. The Bank is involved in providing long and medium-term financing to corporates, and MSMEs by way of working capital, term loans, and to a lesser extent project and structured finance, and syndications. It also provides several short-term products as well as non-funded products like bank guarantees. Given the Bank's size and diversity of operations, it has exposure to companies operating in high-risk sectors such as infrastructure, chemicals, heavy industries, and large plantations. Some of these sectors and industries, by the nature of their operations, may have high E&S risks and impacts such as those related to Occupational Health and Safety, environment, community health and safety, biodiversity, cultural heritage, involuntary resettlement, and Indigenous Peoples. Hence, the Project has been categorized as FI-1 in accordance with IFC's Environmental and Social Sustainability Policy. The Bank has exposure to coal-related projects and activities (3.5 percent of its portfolio as of March 31, 2021). This exposure will be required to be reduced by 50 percent of the current exposure percentage by 2025 and to be zero by 2030. The Bank has committed to reduce its exposure accordingly and in alignment with its focus on sustainability, agreed to terminate financing of development of any new coal-related assets, including coal-fired power plants once IFC becomes a shareholder in the Bank. In addition, the Bank has agreed to disclose in its annual reports information on Category A projects (the name, location by city, and sector) committed after IFC investment as well as the Bank's exposure to coal related projects as a percentage of its portfolio. The applicable performance requirements to manage the E&S risks of the Bank's activities will be: i) the IFC- FI Exclusion List; ii) the host country E&S laws and regulations; and iii) IFC Performance Standards.

IFC will periodically disclose the names, locations and sectors for Category A and/or other sub-projects that qualify for such disclosure that have been indirectly supported by this IFC investment through the financial intermediary (FI), subject to regulatory constraints and market sensitivities. Any qualifying sub-project(s) will be disclosed immediately after receiving information from the FI client within the agreed reporting timeline. No sub-projects met the criteria for disclosure during the 2022 reporting cycle.

No new coal related subproject exposure greater than 36 months has been financed by the bank post implementation of ESMS policy. Any new coal related exposures do not trigger the specific definition included in the PRA. Any new sanctions are all working capital limits of 12 month tenor. The term loans are pre-existing term loans disbursed prior to PRA with IFC.As per the PRA signed the specific definitions are as below:'Coal Related Sub-Project' means (a) the development or expansion of coal-fired power plants, coal mines, transportation assets used exclusively for coal, or infrastructure assets exclusively dedicated to support coal mines and coal transportation, or (b) any Person that, in the prior financial year, (i) generated more than twenty percent (20%) of its energy generation from coal-fired power plants, (ii) had an annual coal production of ten (10) million tons or more, or (iii) had installed coal-fired capacity of 5,000MW or more;'Coal Related Sub-Project Exposure' means the aggregate of all on-balance sheet assets (including equity) and off-balance sheet commitments and contingencies of the Company, to any Person (together with their subsidiaries) undertaking or comprising a Coal-Related Sub-Project, but excluding from such calculation, in respect of paragraph (b) of the definition of Coal-Related Sub-Project, assets, commitments and contingencies in respect of which the use of proceeds is dedicated expressly for a development, upgrade, expansion or acquisition project that does not fall within paragraph (a) of the definition of Coal-Related Sub-Project;Further, in summaryAs part of this equity investment by IFC in July 2021 (IFC/R2021-0134), and in line with the Green Equity Approach, the Bank made a commitment to reduce its long-term project finance and/or corporate finance exposures to coal-related projects to 50 percent by December 2025 (from 2021 levels) and to zero by December 2030.The Bank also agreed on terminating financing of any new coal-related assets, including coal-fired power plants once IFC became a shareholder in the Bank. In addition, the Bank also agreed to reduce its exposure to working capital exposure following the same reduction trajectory as agreed for long-term project finance and/or corporate finance exposures.Accordingly, the Bank has not taken any new exposure to long-term project finance and/or corporate finance for the development of new coal related projects since IFC became a shareholder and the historical exposure stands at Zero percent of the portfolio as of March 2023.The Bank has working capital facilities to companies involved in coal-related activities at the level of 0.57 percent of the portfolio (down from 1.6 percent at the time of IFC's investment in 2021).

Task Title & Description	Actual Due Date	Status	Completion Date
Establish SEMS	08/29/2021	Completed	06/29/2021
Other1 Establish ESMS policy framework	06/30/2021	Completed	06/29/2021
Other2 Recruit qualified E&S specialist	12/31/2021	Completed	12/21/2021
Other3 Initiate implementation of E&S Technical Advisory program	10/01/2021	Completed	09/03/2021
Other4 Approval of the E&S Technical Advisory Program	06/30/2021	Completed	09/01/2021
Other5 Establish E&S division and E&S Committee	07/15/2021	Completed	06/29/2021
Other6 Nominate E&S Officer(s)	06/30/2021	Completed	06/29/2021

https://www.federalbank.co.in/documents/10180/45777/Environmental+and+Social+Management+system+%28ESMS%29+Policy.pdf/d8b4df0b-d6c6-9dfc-ff77-8903886bd541?t=1627993730353

Contacts

For Inquiries About the Project, Contact

Federal Bank Limited
Anand Chugh
Vice President, Marketing & Investor Relations
+91 22 61748715
anandchugh@federalbank.co.in
Aluva Eranakulam, Kerala – 683101
http://www.federalbank.co.in

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