Development Finance Institution: Old product in a bright, new packaging?

A DFI is basically an organisation, either owned by government or charitable institutions to finance infrastructure projects that are of national importance without expecting the standard commercial return.

Already, there are similar institutions such as national development banks — Industrial Development Bank of India (set up in 1964, granted autonomy in 1976 and converted into a universal bank in 2003), ICICI, and IDFC; financial institutions like National Bank for Agriculture and Rural Development (established in July 1982), and HDFC; and investment institutions like LIC, and UTI.

They finance medium-term (1-5 years) and long-term (more than 5 years) projects.

DFIs have evolved in India in three phases — from Independence (1947) to 1964; from 1964 to mid-1990s; and after 1993-94, when development banking declined with the coming of the liberalisation era.

The major reason is, of course, to boost economic growth followed by the requirement to improve long-term finances and provide credit enhancement, apart from improving debt flows towards infrastructure projects

The target of the proposed NaBFID is to lend Rs 5 lakh crore over three years. The institute will enjoy tax benefits for up to 10 years.

The Centre has also proposed an amendment to the Indian Stamp Act to attract big pension and sovereign funds to invest in DFI, on the lines of the National Infrastructure Investment Fund.

Debt financing through the infrastructure investment trust (InvIT) and real estate investment trust (REIT) routes will be enabled through necessary amendments in the rules.

Sitharaman said that with the help of initial leverage and funds the DFI will able to “reach out, and support long term projects”.

India needs infrastructure financing, that too from financiers who can take long-term risk. But banks have been proved inadequate in giving money for building roads, ports and other infrastructure.

With the government’s increased emphasis on social infrastructure schemes over the past few years, the need to fund them is acute. DFI may give the government the much-needed muscle.