The Union Cabinet on Tuesday gave its nod to a bill for setting up of a Development Finance Institution (DFI) for funding long-term infrastructure financing. Finance Minister Nirmala Sitharaman said the capital infusion will be of Rs 20,000 crore, with initial infusion of Rs 5,000 crore.
The DFI is proposed to be managed by a professional board with at least 50 per cent of the members as non-official directors, along with a tax-holiday of 10 years. The DFI will begin with 100 per cent government stake, which will then be brought down to 26 per cent, Sitharaman said.
“… there have been at least three or four attempts in India earlier to have alternative investment funds. One was IDBI and several such attempts had earlier been taken up but gradually they changed their nature of business for different reasons, we ended up with no bank which could take the long-term risk and fund development because the risk is very high here,” the Finance Minister said after the Cabinet meeting.
“We have acknowledged that both development and financial objectives will matter for setting up a DFI … the Cabinet has cleared setting up of a Development Finance Institution … capital infusion would be about Rs 20,000 crore and initial grant of Rs 5,000 crore will also be made,” she said.
She added that the DFI is expected to raise around Rs 3 lakh crore in the next few years accessing funds from the market.
“With the capital infusion of Rs 20,000 crore, I expect the institution to use it as a level to raise up to Rs 3 lakh crore in the next few years because it can access through the market the funds which are otherwise not available. Also, this institution will have certain tax benefits which are being given to it. Tax benefits which are being given for 10-year long period…we expect even big pension funds, sovereign funds will all come.”
The government is also planning to give it certain securities for which the cost of funds will also come down, she added.
Department of Financial Services Secretary Debasish Panda said once the board of the new entity is finalised, it will decide whether to merge with other institutions like IFCI Ltd and India Infrastructure Finance Company Limited.
The government proposes to set up a new DFI for infrastructure financing through the introduction of The National Bank for Financing Infrastructure and Development Bill, 2021 in the Budget session.
In her Budget speech, Sitharaman had said: “A professionally managed Development Financial Institution is necessary to act as a provider, enabler and catalyst for infrastructure financing. Accordingly, I shall introduce a Bill to set up a DFI.The ambition is to have a lending portfolio of at least Rs 5 lakh crore for this DFI in three years time.”
The proposed DFI will be used to fund social and economic infrastructure projects identified under the National Infrastructure Pipeline (NIP), which was launched with 6,835 projects and has expanded to 7,400 projects.
Around 217 infra projects worth Rs 1.10 lakh crore have been completed. The earlier DFIs, like ICICI and IDBI, later converted into universal banks to get access to public deposits.
But with banks finding it difficult to finance long-gestation projects and given the general decline in long-term infra funding after the collapse of Infrastructure Leasing & Financial Services, a need has been felt to set up a government-backed DFI.