- Government has announced the setting up of a new dfi. The new dfi is expected to build a portfolio of ₹5 trillion in the next three years.
- The development finance institutions (dfi) are usually owned by the government or public institutions. Dfis provide funds for infrastructure and large-scale projects. Large scale banks are often not interested in lending for such projects due to viability issues.
- The prime objective of dfi is the economic development of the country via financing infrastructure activities.
- Their cost of borrowings also reduces because of the attached government guarantees.
- In india, the first dfi was operationalized in 1948 with the setting up of the industrial finance corporation (ifc).
- Dfis in india like industrial development bank of india (idbi), industrial credit and investment corporation of india (icici) and ifci did play a significant role in aiding industrial development in the past with the best of the resources made available to them.
- However, after 1991 reforms, the concessional funding they were getting from reserve bank of india (rbi)and the government was no longer available in the subsequent years.
- As a consequence, idbi and icici had to convert themselves into universal banks.
- While these dfis disappeared, a new set of institutions like idfc (1997), iifcl (2006) and more recently, national investment and infrastructure fund (niif) (2015)emerged to focus on funding infrastructure.
- In budget 2021, with the initial capital base of ₹20,000 crore as committed by the government, the new dfi, assuming a leverage of around 7 times, can lend up to ₹1.4 trillion
Need for dfi:
- Infrastructure building:inadequate and inefficient infrastructure leads to high transaction costs, which in turn stunts an economy’s growth potential.
- Therefore, dfis makes sense as the centre government envisages mobilizing nearly ₹100 lakh crore for the ambitious national infrastructure pipeline.
- International precedent:irrespective of the level of development, countries across the world have set up development banks to finance key infrastructure and manufacturing projects.
- For instance, the european investment bank (eib) acts like a dfi for europe.
- Lack of finance for infrastructure:although india has a long-term debt market for the government securities and corporate bonds cut, it is still out of reach of retail investors and unable to meet the large infrastructure financing needs.
- Economic crisis triggered by covid-19 pandemic:the covid-19 pandemic has exacerbated inequality, the poverty gap, unemployment, and the economy’s slowing down.
- Thus, infrastructure building through dfis can help in quick economic recovery.
- Mobilizing capital for dfi:to lend for the long term, dfi requires correspondingly long-term sources of finance.
- In this context, the government may allow equity investment by institutions having a long term horizon like insurance companies, pension funds to augment the capital.
- Further, dfi can be adequately capitalized by the sovereign-backed funds, alternative routes such as capital gains/tax-free bond issues, external borrowings, and loans from multilateral agencies.
- Administration of dfi:the ownership and organisation structure are critical and require greater clarity as this would have bearing on the functioning, flexibility, governance of the institution and its long-term sustainability.
- Functionality of dfi:it is critical to hire experts with a good understanding of infrastructure, policies, financing and risk management to work with the institution by offering market-driven lending packages.
- Reaching out retail investors:the government needs to set up institutions and network platforms to reach retail investors and incentivise and structure the bonds/instruments so that they are attracted to invest long-term in those instruments.
- Periodic review of dfi:periodic reviews are necessary to ensure that the dfi remains relevant by taking into account changing priorities of the economy and making consequential adjustments in the role.
Question-development financial institutions (dfis) are important intermediaries for finance required and economic growth. Discuss.