DFIRENT THIS TIME?

Context: Indian infrastructure needs the new Development Finance Institutions (DFIs) (announced in the Budget 2021), but there should be utmost caution in dealing with such DFIs.

Arguments favouring setting up of new DFIs for Indian infrastructure

• Failure of existing financing institutions: There are development, construction and operating risks in which existing financing institutions have demonstrated their inadequacies.
  • Once the earlier DFIs like the Industrial Development Bank of India (IDBI), Infrastructure Development Finance Company (IDFC) were dissolved, the onus went to the state-run banks.
  • The result: the State-run banking system lies in the ICU after gobbling up more than Rs 3 lakh crore of taxpayer money in the past few years.
• Has ‘developmental role’: as it can develop the bond market for infra financing, provide takeout finance, support infrastructure investment trusts (InvITs), undertake credit enhancement, help in recycling of equity, etc.
  • It can help in the financing of National Infrastructure Pipeline (NIP).
• Has the potential to attract substantial investments: through foreign investments, pension funds etc.
  • Geopolitical realignments, exemplified by the Quad, are expected to facilitate the DFI’s mission to seek low-cost, long-term funds.
• Improved management: GoI commits to a professional board of directors with 50% non-executive directors, mandating adherence to market standards for determining remuneration.

Challenges with the DFIs

• Negative implications on credit rating: because government should provide a guarantee for the bonds of DFI to be attractive, but then the rating companies will club it with the fiscal deficit.
• Abuse of ‘Public-Private Partnership’: Most private entrepreneurs don’t have equity, while Private capital looks for higher returns, not annuities.
• Disastrous performance of private infrastructure projects: in the last two decades, leading to a rise in bad loans.

Way forward: For making the new DFIs successful

• Create a friendly managerial environment: by ingraining Kelkar Committee recommendations in the managerial environment to provide immunity from prosecution.
• Provide fiscal support: Like concessional guarantee fee for sovereign guarantees and provision for hedging costs.
• Create headroom for substantial investments: by seeking the help of pension and insurance regulators.
• Provide government guarantees to domestic savers: rather than to global investors, so that insurance companies, pension funds and individual savers wouldn’t hesitate to buy bonds
  • Enable DFIs to issue tax-free bonds.

Conclusion: The idea of DFIs can be dismissed by some as old wine in a new bottle. But the nation could well savour it if the brew is different.