India gets a new Development Finance Institution (DFI)- National Bank for Financing Infrastructure and Development (NaBFID) after the Cabinet Committee on Economic Affairs (CCEA) approved a bill to implement one of the budget announcements.
What are DFIs?
DFI’s are institutions that fund development projects and focus on making profits as well as fulfilling developmental objectives. Given that they overcome the risk and liquidity mismatch between the assets and liabilities, these institutions generally have the appetite to finance high fixed cost investments that have a long gestation period (time period between investment and the start of income generation), are critical to economic growth and increase overall welfare.
Brief history of DFIs in India
DFI’s are not new to India. India’s first DFI was set up in 1948 to provide long term industrial financing. ICICI started in 1955 with funding from the World Bank. IDBI was established in 1964 as a RBI subsidiary. Sector specific DFIs like NABARD and EXIM Bank continue to operate in India. The protected economy and access to state funding meant that DFIs raised low cost funds and lent at attractive rates.
Economic liberalisation and reduced government funding, forced DFIs to raise funds at market rates, making their business model unviable. By the early 2000’s, major DFIs like ICICI and IDBI merged with their commercial banking units. Most banks in India engage in both commercial banking and development financing. However, due to asset liability mismatch, these banks are unable to meet demand in the market, thus making space for a new DFI.
Future-looking
The new DFI- NaBFID will get a 10 year tax exemption along with benefits through amendments to the Indian Stamp Act and government securities to bring down the cost of funds. The institution is expected to use the base capital and other benefits as a lever to raise three lakh crores from the market through sources such as large pension funds and sovereign funds.
With a capital infusion of ₹20,000 crores and an incremental grant with a limit of ₹5,000 crores, the government will have 100% ownership, which it expects to bring down to 26% over the years.
NaBFID will have a professional board with persons of eminence and at least 50% non-official directors. There is a focus to hire professional human resources with market driven emoluments. The bank will start with a clean slate and will have freedom to choose its investment portfolio. However, it is expected that priority will be given to the 6,000+ projects in the National Infrastructure Pipeline.
NaBFID will certainly be an enabler of long-term growth in India through investments to create physical infrastructure which improves access and drives growth. However, the institution must use its unique position to drive sustainable investments keeping in line with the UN Sustainable Development Goals (SDGs).
What considerations, do you think, NaBFID should have while choosing its investments? Let us know in the comments!
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