DFI to get direct access to Reserve Bank of India's funding facilities

Govt may guarantee bonds, debentures and loans issued by the new institution

The new government-backed development finance institution (DFI) will get direct access to funding facilities by the Reserve Bank of India, helping the infrastructure lender to raise funds at a cheaper rate. The central government may guarantee the bonds, debentures, and loans issued by the new DFI if the infrastructure lender wants.

The DFI will be able to “borrow money from the Reserve Bank repayable on demand or on the expiry of fixed periods not exceeding ninety days from the date on which the money is so borrowed against the security of stocks, funds or securities ...,” according to the National Bank for Financing Infrastructure and Development Bill, 2021.

The DFI can also borrow from the “RBI against bills of exchange or promissory notes arising out of bona fide commercial or trade transactions maturing within five years from the date of the borrowing”, said the Bill tabled by Union Finance Minister Nirmala Sitharaman on Monday.

It appears the RBI will be providing special finance facilities to the DFI, which is unique, said Madan Sabnavis, chief economist at CARE Ratings.

“This window will help the DFI to manage its cash flows, especially in the short to medium term,” Sabnavis said.

The long-term cost of borrowing for the DFI will be market-linked and will tend to be high, Sabnavis said, adding getting funds from the RBI, possibly at a lower cost, would help to lower the overall cost of funding for the DFI.

Devendra Pant, chief economist at India Ratings, said: “This could be something similar to the special drawing facility of states, against their holding of government securities.”

“However, this facility at best could be for liquidity management to manage short-term asset liability mismatches,” Pant added.

The bigger issue, Pant said, is that infrastructure projects need long-term capital, which will be the DFI’s assets, and the liabilities or borrowing by the DFI should also be long-term.

Govt guarantee

“The Central Government may, on a request being made to it by the Institution, guarantee the bonds, debentures and loans issued by the Institution as to the repayment of principal and the payment of interest at such rate, terms and conditions as may be agreed by the Central Government,” said the Bill.

The DFI will get support from the government through grants or contribution in the form of cash or marketable government securities. The government will infuse Rs 5,000 crore into it through cash or government securities in the first year of the body being incorporated.

The DFI will get government guarantees at a concessional rate of up to 0.1 per cent for borrowing from multilateral institutions, sovereign wealth funds, and other such foreign institutions.

Although government support to the DFI has been enabled through guarantees of bonds, guarantees of loans from international development agencies, and bearing the hedging cost of overseas borrowings, the form and extent of support on these would be the key to the DFI having an advantage over others, said Manish Agarwal, partner, infrastructure advisory practice.

The DFI will be able to lend to or invest in infrastructure projects located in India and outside the country prioritising systemic risk mitigation, credit enhancement, subordinate debt, debt maturities suited to project life spans, and raise long-term finance for the same.

Setting up the DFI will fill the existing gaps in long-term infrastructure financing and enhance lending in infrastructure, said Siddharth Srivastava, partner, Khaitan & Co.

Board of directors

The board will include a chairperson appointed by the government in consultation with the RBI; a MD; up to three deputy managing directors; and two directors appointed by the Centre. The board will have three directors elected by shareholders holding 10 per cent or more, and up to three independent directors.

Protection from prosecution

The Bill protects its key managerial personnel from prosecution by investigative agencies. No investigative agency shall conduct any inquiry or investigation without approval from the central government.

Private-sector DFI

The Bill provides for setting up a private-sector DFI.