India’s New DFI Will Help Achieve Big Development Targets

Context: Analyzing the scope and role of Development Financial Institution (DFI) in shaping a ‘New India’.

About DFI

• Need: Bulk of development projects that the government has planned are long-term in nature, which makes managing asset-liability balance critical.
• Newly created entity: National Bank for Financing Infrastructure and Development (NABFID)
• Objective: Creating a truly world-class financing mechanism for the fulfilment of India’s infrastructure and development aspirations. Authorized capital of Rs.1 trillion.

Significance of DFI

• Ambitious target: Union budget for 2021-22 laid out government’s ambition for it to have a portfolio of Rs.5 trillion within three years.
  • In line with the target of spending Rs. 102 trillion on various projects of National Infrastructure Pipeline.
• Professional Governance structure: To have a professional board that will be half-filled by non-official directors and that people of eminence will serve as its members.
• Developing India’s bond market for infrastructure financing: Major role as both bond seller and market-maker.
• Accountability provisions: Specific provision of a mandatory performance review of the institution once every five years that will be presented publicly.
• Attractive performance-based incentives: To help attract talent.
• Strengthens equity market: Allowing sovereign wealth funds (SWFs) and other institutions to purchase equity, along with a buy-back option.

Way Forward

• Generate adequate investor interest: by careful selection, bundling and securitization of projects.
• Expand use of tax policies: For E.g. Government already provided incentives, such as a 10-year income tax holiday on its bonds.