FinMin may soon set up DFI as banks struggle to finance infra projects

Govt has already come out with an pipeline of 6,749 projects which would cost $1.7 trillion in five years

The finance ministry is likely to soon set up a development financial institution (DFI) to take up infrastructure projects, as banks are already running into bad debt problems and their asset-liability has a mismatch for the long gestation these projects involve. 

Finance minister Niramala Sitharaman recently said that work on setting up a DFI was on. The issue being deliberated on is whether it will be a private entity or a government entity. 

“What shape it will take we will know shortly,” the finance minister had said. 

The proposed move assumes importance in the wake of RBI governor Shaktikanta Das saying that industry had to find new ways to fund infrastructure projects because banks, struggling with bad loans, would not be able to give them money.

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 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.

As such, it would be wise to revive the concept of DFI. 

A DFI is a specialised institution set up primarily to provide development and project finance, especially in developing countries.

The source of capital of these banks is national or international development funds which ensures their creditworthiness and their ability to provide project finance at a very competitive rate.

DFI is different from commercial banks as it strikes a balance between commercial operational norms as followed by commercial banks on the one hand, and developmental responsibilities on the other. It is not just simply commercial banks but acts as  partner in the development of significant sectors of the economy.

In India, the first DFI was the Industrial Financial Corporation of India (IFC) 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 the backing of the World Bank. In 1958, Refinance Corporation for Industry, which was taken over by the 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 development banking 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 for the long term. Also, they did not have low-cost deposits in the form of current and savings accounts similar to that of commercial banks.

Currently, there are sector-specific DFIs in the economy such as National Housing Bank (NHB), EXIM bank for import export operations. Other DFIs include Nabard, Indian Renewable Energy Development Agency (Ireda), Small Industries Development Bank of India (Sidbi).