The Cabinet on Tuesday cleared a Bill to set up a government-owned development finance institution (DFI) and create an enabling ecosystem to draw patient capital and fund long-term infrastructure projects.
The government expects the DFI to raise as much as Rs 3 lakh crore over the next few years, leveraging the proposed initial capital of Rs 20,000 crore, finance minister Nirmala Sitharaman said after the Cabinet meeting.
Initially, the government will fully own the DFI but, as more investors join in, it is willing to dilute its equity to 26%.
The Bill is expected to be introduced in this session of Parliament for clearance.
Given that raising cheaper resources for lending to infrastructure projects at reasonable rates remains critical to the DFI’s long-term viability, the government will grant it certain tax benefits for 10 years. The Indian Stamp Act will also be amended to extend certain other incentives. On top of these, the DFI will likely have sovereign guarantee to garner resources (possibly from multilateral agencies).
“All this will help the DFI leverage initial capital and draw funds from various sources…It will also have positive impact on the bond market in India,” Sitharaman said.
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. The government hopes this will ultimately help deepen the country’s corporate bond market for infrastructure financing.
Analysts, however, have said India needs wide-ranging institutional and regulatory reforms, and not just a DFI, to bolster the corporate bond market, the size of stands at only about 15-16% of GDP. Nevertheless, the DFI proposal, backed by deft implementation, could be one of the important steps in that direction, they concur.
The move to enable the DFI to have access to low-cost funds comes amid realisation that since banks have access to CASA (current account savings accounts) deposits, their cost of funds is going to be cheaper than the DFI’s. So, the DFI has to be granted some flexibilities to stay competitive. Else, as witnessed in the past (DFIs like IDBI and ICICI were forced to morph into banks), it will struggle to stay afloat.
The DFI is envisaged to play a catalytic role in funding projects under the Rs 111-lakh-crore National Infrastructure Pipeline and help the country turn into a $5 trillion economy by 2025.
The finance minister assured that the National Bank for Financing Infrastructure and Development (NaBFID), as the DFI will be known, will start with a “clean slate” and be governed by a “professional board”. Its chairman is likely to be an eminent professional and at least half of the board will comprise non-official directors. Its board (and not the government) will have powers to even remove whole-time directors. Also, the board will decide whether to subsume state-run IIFCL, given the latter’s long experience in project financing, financial services secretary Debasish Panda said.
To draw the best available talents, the government is planning to offer market-driven emoluments to the top executives of the DFI. At the same time, the tenure of the managing director or deputy managing director could be longer and the age limit may also be enhanced to attract established professionals with substantial experience in the field to join in.
The DFI will have ambitious developmental goals and, unlike extant institutions like IFCI or IIFCL (the latter is now an NBFC), its role will stretch well beyond the realm of mere project financing.
Given that one DFI can’t satiate the voracious appetite of the infrastructure sector, the government will provide for the setting up of such institutions by private entities as well. Ultimately, such an ecosystem will contribute towards deepening the country’s corporate bond market for infrastructure financing.
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. As such, banks’ liability profile isn’t 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.
Also, unlike a DFI, banks lack the domain expertise needed to comprehend the complex nuances of financing as well as monitoring a wide range of infrastructure projects.