New DFI to support speedy infra development in India

New DFI to support speedy infra development in India
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New DFI to support speedy infra development in India 

Highlights

An initial capital infusion of Rs 20K cr is being made in NaBFID

Development finance institutions were the drivers of infrastructure growth for many years after independence. The government created several such entities, the first being the Industrial Finance Corporation of India (IFCI), followed by the Industrial Credit and Investment Corporation of India (ICICI) and the Industrial Development Bank of India (IDBI).

These were the premier DFIs right up to the time of economic liberalisation in 1991. Loans were provided on soft terms for creating infrastructure projects like huge thermal and hydel power plants as well as fertilizer and engineering projects.

The funds were sourced at the time both from the central bank as well as from global financing agencies. The situation has now altered dramatically. The original DFIs were either transformed into normal commercial banks or as in the case of the IFCI, downsized into a non-banking financial company (NBFC).

Other specialised DFIs, however, continue to operate such as the Power Finance Corporation, the Small Industries Development Bank of India, NABARD and the National Housing Bank. These provide funding for specific segments of the economy.

Basically a DFI can be described as a financial institution that provides risk capital for economic development projects on a non-commercial basis. One of the key characteristics is that the majority stake in these entities is owned by the government though there is a provision now for private DFIs too.

This enables the institutions to provide credit guarantees as well as to raise funds more easily. The initial set of DFIs faced problems in financing projects at low rates of return and ended up with huge defaults.

It was also increasingly felt after liberalisation that the normal commercial banks were capable of funding infrastructure projects and there was no need for a separate set of financial institutions for this purpose.

In recent years, however, there has been a revival of interest in DFIs. These have played a significant role in financing development projects both in emerging economies as well as in the developed world.

One study says there are as many as 250 such institutions currently operating throughout the world. The role of development banks in countries like China, Brazil and the East Asian economies have apparently been pivotal to economic growth. The government's decision to create another DFI is thus timely since there is an urgent need to invest in large infrastructure projects and kick start economic growth.

The new bank will be called the National Bank for Financing Infrastructure and Development (NaBFID). According to details released by Finance Minister Nirmala Sitharaman, it will be fully owned by the government initially but the equity stake can be brought down to 26 per cent.

However, this level of government equity stake will be retained for the institution at all times. An initial capital infusion of Rs 20,000 crore is being made in the institution and it is expected to leverage this to fund projects valued at about Rs 3.25 lakh crore. Government's grant of Rs 5000 crore will also be given in the form of tax saving bonds to the DFI.

The aim is to attract financing from overseas pension and sovereign wealth funds. It could also rely on multilateral agencies. A ten year tax exemption is being given on funds invested in it as an added incentive.

Operational efficiency, however, needs to be the hallmark of the new DFI. It should not go the way of the previous institutions that had to be transformed into other entities. There may have to be less stringent NPA norms and perhaps reduced governmental controls to enable it to function effectively.

It has to be recognised that one of the reasons for creating a DFI is that there is need to bridge the gap in funding for large infrastructure projects that give low rates of return. So the institution needs to be given adequate support but without being constrained in functioning like a normal public sector enterprise.

If this kind of freedom is given, it should be possible to ensure that the DFI is professionally managed and performs efficiently. DFIs in the past lost large amounts of finances due to default by promoters.

Though there are critics who feel the new institution could well go the same way, as the earlier ones, it is more likely that the experience of the past will make the management more cautious in its outlook.

With the formation of the new DFI, it looks more likely that the projects envisaged in the National Infrastructure Pipeline will be implemented more quickly. The pipeline had laid a road map for 7,671 infrastructure projects costing Rs 111 lakh crore from 2019-20 till 2024-25. So far work has been initiated in only about 1700 projects in the pipeline.

Media reports suggest the government is expecting DFIs to be set up in the private sector and is even considering providing a five year tax holiday to such institutions.

This is lower than the ten year tax holiday for the government-owned institution and thus may not be enough of an incentive to lure private sector into this area. The aim is obviously to ensure that there a larger eco-system for funding infrastructure which is badly needed in the country.

There continues to be some concern over whether the new DFI will go the way of the earlier ones like IFCI and ICICI. It is felt that the experiment of creating DFIs did not turn out well in the long run.

But one cannot forget that ultimately it was these institutions than enabled the setting up of projects that can only be described as nation-building in the years after independence.

At this juncture, with the economy in a downturn, it is essential to invest heavily in infrastructure and the DFI is the right medium to provide long-term financing. It can only be hoped that with a professional management, it fulfils the potential of being a support to faster development of the economy.

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