International Financial Institutions and Choosing a Source of International Finance

Alongside private banks, capital markets and foreign investors, a number of international financial institutions also play a role in providing finance to countries and, in turn, to businesses operating within them. The International Monetary Fund (IMF) provides financial assistance to its member countries, particularly to help address balance-of-payments difficulties and to support broader economic stability, which indirectly supports the environment in which businesses raise and repay international finance. The World Bank Group similarly extends loans and financial assistance to member countries for development projects, and its private-sector lending arm, the International Finance Corporation (IFC), specifically provides finance and investment support directly to private businesses in developing countries, including in India. A fuller account of how these institutions function, and of the other bodies and agencies that facilitate international business, belongs to a later chapter on facilitators of international business, so this section deliberately keeps the point brief: businesses should simply be aware that alongside commercial and market-based sources, these international institutions are an additional channel through which international finance ultimately becomes available.

Given the range of options covered in this chapter -- foreign currency loans and bills, FDI, FPI, ECBs, GDRs/ADRs, and international bonds -- a business rarely has just one obvious choice, and needs to weigh several factors before deciding which source of international finance actually suits its situation. Cost is usually the first consideration: the interest rate or return demanded by lenders/investors, and any additional cost that arises if the foreign currency involved moves unfavourably before repayment. Currency-conversion risk is closely related: any source involving a foreign-currency obligation (an ECB or an international bond, for instance) exposes the business to the possibility that exchange-rate movements will make repayment more expensive in domestic-currency terms than originally planned. Repayment terms and tenure matter too -- how long the funds are available for, and whether repayment is a lump sum or spread over instalments -- since this must match how long the business actually needs the funds for. The degree of control the business is willing to give up is another major factor: raising funds through FDI-type routes (bringing in a foreign partner with a management stake) means ceding some control, which a business seeking only capital, and not partnership, may want to avoi …