Revival of Development Finance Institutions to Fund Infra
The Central government is working on a strategy to give a fresh lease of life to development finance institutions (DFIs) for funding infrastructure projects. As a first step, the government has indicated its intent to modify India Infrastructure Finance Company (IIFCL) into a DFI by increasing its equity capital by Rs 15,000 crore. To facilitate this goal, suitable governance and regulatory reforms that enables IIFCL will be developed as DFIs are being examined by the government. The government has also sanctioned funds in the Budget for capitalisation of infrastructure NBFC of the National Investment and Infrastructure Fund (NIIF) as part of efforts to build up the capacity of banking and financial institutions to provide long-term infrastructure finance. The government will start an exercise to review the role and functioning of the existing central public sector DFIs, such as the Power Finance Corporation (PFC), the Indian Renewable Energy Development Agency (IREDA), National Housing Bank (NHB), the Housing and Urban Development Corporation (HUDCO) and State DFIs to encourage these sector-specific DFIs to diversify into new avenues that have potential for growth. Between 2000 and 2010, DFIs such as ICICI, IDBI and IDFC extended long-term finance to industry and funded greenfield infrastructure projects. However, after achieving critical mass, these transformed into universal banks as they did not have the advantage of low-cost liabilities to de-risk their business models Some of the major DFIs have amalgamated with their banking outfits (like ICICI and IDBI) while some others have been reclassified as systemically important non-deposit taking NBFCs (such as IFCI). The government’s policy managers acknowledge the need to have access to long-term finance (most likely from long-term bonds from capital markets) at competitive cost so that funding of long-term infrastructure projects could be done in an economically viable manner and without the associated asset-liability mismatches. A differential licensing system with an enabling regulatory framework to encourage setting up of DFIs in the infrastructure sector with domestic or foreign capital is also on the table. Some of the existing DFIs could also be capitalised with the help of multi-lateral agencies such as International Finance Corporation, Asian Development Bank and New Development Bank, and also seek equity investment from local and global pension funds.
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