Dutch development bank FMO increased its investments in the first half of the year, but has told Development Finance it aims to withdraw from investing in infrastructure and manufacturing services after non-performing loans also grew.
The bank’s interim report for 2017 shows it committed €630 million to projects in the first six months, catalysing a further €262 million from other investors. In June, its co-founded facility for renewable energy in emerging markets, Climate Investor One, closed at US$412 million. The facility managed to raise capital from institutional investors seeking commercial, social and environmental returns.
Net profit also increased to €156 million, compared with €57 million in the first half of 2016. The rise was in part due to two timely private equity exits made by the bank from Eastern Europe and Asia, including Cambodian microfinance firm Prasac.
But Jurgen Rigterink, CEO of FMO, told Development Finance the development finance institution’s portolfio in India showed increased risk of non-performing loans.
“That is mainly due to our investments in India and our loans in the non-focus sectors: infrastructure and manufacturing services,” he said. “India is the country with our largest portfolio, but of everything we do in India, roughly 25 percent is in the sick bay. It’s a huge number. It’s quite obvious we’re doing something wrong there.”
Rigterink added that “all new proposals regarding India are getting scrutinised”. He said that although FMO had lacked visibility of the risks on the ground in India, opening an office in a country of such scale would not solve the issue.
He said the size of the country also indicates the range of growing companies with whom FMO has traditionally worked.
“In smaller African economies, its probably easier to cherry pick. In these countries, development finance institutions are targeting mostly blue chip companies. In the Indian economy, because it is such a big country, most of our clients are Tier 2 companies at best. Of course these Tier 2 companies can be bigger in terms of size than Tier 1 companies in Africa, but the relative market position, and the clout they have, is not as strong.”
Rigterink said FMO aims to ramp up efforts to stabilise struggling Indian firms in its portfolio, adding that FMO’s mandate for developmental impact would ensure the number of loans written off would be “considerably lower” than the non-performing loans themselves.
FMO’s updated corporate strategy aligns its investments more closely with the Sustainable Development Goals (SDGs). At its core, the strategy involves limiting the bank’s focus to three sectors: financial institutions, energy and agribusiness.
In its latest half-yearly report, the bank said it would discontinue the use of all debt instruments in non-focus sectors.