DFI likely to be set up with IIFCL's paid-up capital of Rs 10,000 crore

To have lower minimum capital adequacy ratio than NBFCs; IIFCL to clean up its Rs 4,500-crore bad loans

A new government-owned development finance institution (DFI) is likely to be set up with India Infrastructure Finance Company’s (IIFCL’s) paid-up capital of Rs 10,000 crore and an equivalent amount from budgetary support. It may have a lower minimum capital adequacy ratio of 9 per cent, compared to 12-15 per cent for non-banking financial companies.

The Reserve Bank of India (RBI) Act and the Banking Regulation Act may be amended to set up the DFI for enabling it access to a line of credit, according to the draft Cabinet note, said sources.

With an initial capital infusion of Rs 20,000 crore, the government or other investors may infuse up to Rs 1 trillion in the DFI at a later stage. The government’s part will come through the supplementary demand for grants.

Prior to subsuming the infrastructure company with the DFI, it will clean up its books by providing for outstanding bad loans worth Rs 4,500 crore, according to the draft note, added sources.

The note was prepared to introduce the National Bank for Financing Infrastructure and Development (NaBFID) Bill, 2020, in Parliament for setting up a new DFI, namely NaBFID.

The proposal is expected to get Cabinet approval soon, given the government is aiming to introduce the Bill in the current Budget session.

Elaborating on the new configuration, the draft proposes transfer of the assets and liabilities of IIFCL to NaBFID. IIFCL has a total capital of Rs 10,000 crore. The provision for an additional Rs 10,000 crore made in the Budget Estimates of 2021-22 (FY22) towards IIFCL will be utilised for the new institution.

The proposal emphasised that, prior to the transfer, IIFCL shall fully provide for all its outstanding bad assets, so that the new institution will have a clean book. It also said any additional requirement of money will be given through demand for grants subsequently.  

According to the proposed draft, there are multiple benefits of the new DFI, including access to low-cost funds from a priority-sector shortfall and greater headroom for borrowing, compared to other non-banking institutions.

Sources said the legislation — NaBFID Bill — will also have a separate section for setting up a private-sector DFI.

“The Centre will own it initially. However, at a later stage, it can reduce its stake to 26 per cent,” said a source.

Unveiling the Union Budget for FY22, the finance minister had said that a professionally managed DFI would be set up to provide, enable, and catalyse infrastructure financing. She had proposed Rs 20,000 crore to capitalise this institution, aimed at having a lending portfolio of at least Rs 5 trillion in three years. 

The need for a DFI arises since banks face the challenge of an asset-liability mismatch in funding infrastructure projects or other projects with a long gestation period.

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

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