Development Finance Institutions

In News

Recently, the Cabinet has approved a detailed proposal for setting up a new Development Finance Institution (DFI) in India under the name of the National Bank for Financing Infrastructure and Development (NaBFID).

About Development Finance Institution (DFI)

• These are organizations that are either owned by the government or by charitable institutions to finance infrastructure projects that are of national importance but may or may not meet commercial return standards.
• Categories
  • National Development Banks such as IDBI, SIDBI, ICICI, IFCI, IRBI, and IDFC.
  • Sector-specific Financial Institutions such as TFCI, EXIM Bank, NABARD, HDFC, and NHB.
  • Investment Institutions such as LIC, GIC and UTI.
  • State-level Institutions such as State Finance Corporations and SIDCs.
• Classification
  • Sector Specific Financial Institutions with a focus on particular sectors to provide finance for the project. For example, NHB, EXIM Bank and so forth.
  • Investment Institutions with a focus on facilitating business operations such as capital expenditure financing and equity offerings. For example, GIC, UTI and more.
• Types of Finances
  • Medium (1-5 years).
  • Long term (>5 years).
• Need of DFIs
  • The DFI model had to be revived, as the ability of banks, especially the state-run ones, to fund long-gestation infrastructure projects and spur growth remains severely impaired by a spike in bad loans.
  • Banks’ liability profile is not suited for long-term funding, as they are typically tailored for extending working capital loans with a short tenure. So, even when they fund infrastructure projects, the tenure often remains short to start with, with a rollover facility at a renewed rate of interest.
  • Banks lack the domain expertise needed to comprehend the complex nuances of financing as well as monitoring a wide range of infrastructure projects.
  • DFIs take cognizance of the gaps in institutions and markets in the country’s financial sector.
  • India needs DFIs to boost economic growth, improve long term finances, provide credit enhancement for infrastructure and housing projects and to improve the debt flows towards infrastructure projects.

About National Bank for Financing Infrastructure and Development (NaBFID)

• It will be a dedicated government-owned infrastructure financier which was announced in the Budget 2021-22.
• It will be set up with a corpus of Rs. 20,000 crore & an initial grant of Rs. 5,000 crore from the government.
• It will have a professional board and at least 50 per cent of the members will be non-official directors.
• It will help raise long-term funds and will have a lending target of Rs. 5 lakh crore in three years.
• It will partly fund the proposed USD 1.5 trillion in infrastructure projects over the next few years.
• The DFI will initially start with government ownership of 100 per cent and gradually with time it would come down to 26 per cent, but not below it.
• It will also enjoy some tax benefits for an initial 10-year period and some amendments will be carried out in the Indian Stamp Act, 1899 in this regard.
• Emoluments will be market-driven to attract the best talent, a higher age limit and longer tenure for managing directors and Deputy Managing Directors.
• An eminent person will be appointed chairperson.
• It will start with a clean state and once the board is set up, a decision on mergers and acquisitions will be taken.
  • There is a suggestion that the Indian Infrastructure Finance Co. Ltd (IIFCL), a government enterprise, be merged into the new DFI.
• It will have access to low-cost funds.
  • Since banks have access to Current Account Savings Accounts (CASA) deposits, their cost of funds is going to be cheaper than the DFI’s.
  • So, the DFI has to be granted some flexibility to stay competitive otherwise as witnessed in the past (DFIs like IDBI and ICICI were forced to morph into banks), it will struggle to stay afloat.
• Significance
  • It is expected to bring big pension funds and sovereign funds and also will be provided certain securities by the government so the cost of funds will also come down.
    • Sovereign wealth funds and pension funds, which typically bring in patient capital, are expected to invest in the DFI to take advantage of the incentives.
  • It will be able to leverage initial capital and draw funds from various sources which will have a positive impact on the bond market in India.
  • It is envisaged to play a catalytic role in funding projects under the Rs 111-lakh-crore National Infrastructure Pipeline (NIP) and help the country turn into a USD 5 trillion economy by 2025.
  • Later on, the government will provide for the setting up of such institutions by private entities as well, which will contribute towards deepening the country’s corporate bond market for infrastructure financing.

Source: ET