Bill in the works to have two sets of DFIs: Govt and private

Currently, some entities are working as a kind of DFI in their niche areas such as Indian Railway Finance Corporation, National Bank for Agriculture and Rural Development, and Small Industries Develop

There are likely to be two sets of development financial institutions (DFIs) — one, fully-owned by the government, and the other, by private sector entities. The legislation to this effect is being prepared by the finance ministry.  

The government-owned DFI will be completely owned by the Centre initially, and it can reduce its stake eventually to 26 per cent.

“So, there are two things – one, this is initially a government DFI, and over a period of time here also, some private partners should come. Second, the new legislation does not stop any private person or entity to set up a DFI. So, not only the government but also private entities can establish a DFI. If any bank or institution wants to set up a DFI, the new legislation will have the provision,” economic affairs secretary Tarun Bajaj told Business Standard. 

These provisions will be part of the legislation which the ministry is going to put out, Bajaj said.  

He did not rule out the possibility of subsuming India Infrastructure Finance Compamy (IIFCL) into the new government-owned DFI. “There is a chance that IIFCL is subsumed to be a DFI,” he said. 

In that case, the capital of IIFCL, at Rs 10,000 crore, will also be subsumed. This could take the total capital to about Rs 25,000 crore-Rs 30,000 crore, Bajaj added. 

The legislation, the National Bank for Financing Infrastructure and Development (NaBFID) Bill, will have a separate section for setting up a private sector DFI, a key source said. This will contain the broad framework for setting up such an institution, which will be regulated by the RBI, he said. 

The need for DFIs arises since banks face the challenge of asset-liability mismatch in funding infrastructure projects or any other projects which have long gestation period. 

A DFI is different from commercial banks as it strikes a balance between commercial and operational norms as followed by commercial banks, and long term capital needs of projects. 

At present, there are a few financial institutions working as a kind of DFI in their niche areas of infrastructure projects. They include Indian Railway Finance Corporation, National Bank for Agriculture and Rural Development, and Small Industries Development Bank of India.  

The government has already come out with an infrastructure pipeline of 6,749 projects which would cost $1.7 trillion in five years. The Centre, states and the private sector are set to share the capital expenditure in a 39:39:22 formula. The funding requirement of such big projects raises the issue of DFI.

The RBI had also specified, in 2017, that specialised banks could cater to the wholesale and long-term financing needs of the growing economy and possibly fill the gap in long-term financing.

In India, the first DFI was Industrial Financial Corporation of India (IFCI) that was set up in 1948. After the passage of the State Financial Corporations (SFCs) Act, 1951, state-level small and medium-sized financial corporations were established. It was succeeded by the establishment of Industrial Finance Corporation of India (IFCI). In 1955, the first DFI in the private sector, the Industrial Credit and Investment Corporation of India (ICICI), was set up with backing of the World Bank. In 1958, Refinance Corporation for Industry, which was taken over by Industrial Development Bank of India (IDBI), was established. In 1963, Agriculture Refinance Corporation was established.

After 2000-2001, the prominence of development banking started to decline as many firms from this space had quit post liberalisation. 

During 2002-2004, ICICI and IDBI were turned into commercial banks. The government found that the DFIs failed miserably to provide credit to the small-scale and rural farm sectors in the long term.