Illustration: Panju Ganguli
Illustration: Panju Ganguli

Will DFI make it happen this time?

The new DFI should follow the path marked out for it
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The Central government will soon introduce in Parliament the National Bank for Financing Infrastructure & Development (NaBFID) Bill, which has already been cleared by the Cabinet of Ministers. First announced in Budget 2021-22, the institution will aim to provide a supportive ecosystem across the financial lifecycle of infrastructure projects.

The government has set the ball rolling. It already has some experience in the setting up of the National Investment & Infrastructure Fund, a fund manager anchored by the government of India. It will infuse Rs20,000 crore in the DFI, which, in turn, will use that capital to further raise funds (up to Rs3 lakh crore) over a period of time. The government’s shareholding in the DFI will be brought down from 100 per cent to 26 per cent, as and when new investors partner in the institution. The parent will also revisit capital infusion in tranches of Rs5,000 crore each, as and when necessary.

To attract investors, the DFI will have tax exemptions over a 10-year period, and the Indian Stamp Act is being amended to attract global pension and sovereign wealth funds. Such large, global funds have access to ‘patient capital’ – the sort that is needed to counter the risk linked with long gestation projects. Once set up, the DFI will have the option to acquire other existing DFIs like IIFCL or IFCL, based on commercial considerations. There is a dearth of capital and related finance for infrastructure projects. The National Infrastructure Pipeline all by itself is a list of as many as 7,000 items – all green and brown-field projects that await funding for taking off.

The DFI concept is not new to India. ICICI, IDBI and IDFC were all set up in the past with a similar purpose – and all of them, at some point, decided to shift track and turn into or be acquired by subsidiary banks themselves. NABARD and SIDBI are two DFIs that were also formed by Acts of Parliament, which continue to remain that way. But, some of India’s best bankers have repeatedly claimed to have funds available for any project as long as they are financially viable. The new DFI will have to thus make happen that which India’s well-entrenched bankers and the banking system have been not able to.

Infrastructure financing itself is not a new concept to India. The Life Insurance Corporation of India has regularly stepped in to buy loans from India’s public sector banks, ultimately purchasing IDBI bank itself. While most banks look to offer five-year renewable loans, similar tenure to that of a fixed deposit, globally, DFIs like the World Bank or the Japan Investment Corporation take the risk that is paid back over 50 years. The new DFI will thus have some advantages that run-of-the-mill commercial banks do not.

The government’s shareholding in the DFI will be brought down from 100 per cent to 26 per cent, as and when new investors partner in the institution

But India has seen large projects before. The gigantic Indian Railways was built more than 150 years back, by issuing bonds bought by the lay public in India and the UK, much before the DFI concept set in. The electricity lines that crisscross the country today were also possible with similar efforts. Long-term financing for such projects was possible, because it was backed by contracts that were based on, and stuck to, legal principles – and courts that worked speedily.

Financiers have, for instance, long lamented slow government clearances that extend the lifecycle of a project. A road project, for instance, could get stuck because of last-mile hiccups. If a project were to fail, too, the resolution remains a long drawn process.

Getting funds is never a problem. There is always plenty floating around, as long as the terms and conditions to access such money are met. For starters, the government has said that the DFI will have a professional board with half as non-official directors. It will have a professional ‘character’ with the board having the power to appoint and remove whole-time directors. The emoluments for professionals will be market-driven to attract the best of talent. The government is also considering people with a higher age limit as well as longer tenures for the managing directors and deputies.

That is a good start. But other DFIs in the past would have had a chance to be successful, if their contracts were based on legal principles – and, if they had provided enough capital for the risk that was taken. Should the same bottlenecks remain, the new DFI may well turn into one more institution added to a list that changes track every other season.

Business India
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