India's New Development Finance Institution May Be Running By Year-End

Construction worker guides a crane carrying lumber.  (Photographer: Bing Guan/Bloomberg).

India's New Development Finance Institution May Be Running By Year-End

India's plan to set up a new development finance institution is expected to take final shape by year-end, even as questions remain around how successful such a lender would be without special dispensations from the government and the banking regulator.

The proposed National Bank For Financing Infrastructure And Development is likely to be operational by December 2021, two people in the know of the matter said on the condition of anonymity.

A DFI is an agency to fund infrastructure projects of national importance that may or may not conform to commercial return standards.

The Department of Financial Services has started the process of hiring the board for the proposed development finance institution, the people said. The Banks Board Bureau will also play a part in hiring the chief executive and other key executives, the second person cited earlier said. Former bankers with experience in project appraisals and those with experience in private infrastructure finance companies would be ideal candidates, the second person said.

Their compensation will be benchmarked to the market, the people cited earlier said.

BloombergQuint had earlier reported that NaBFID will have a board comprising 13 members, including a chairman, four whole-time directors and two government nominees. The remaining will be independent directors.

An email sent to the Finance Ministry on the subject wasn't answered.

Finance Minister Nirmala Sitharaman, at the time of the union budget presentation, said the government will provide Rs 20,000 crore as initial capital for the institution. The institution will leverage that and raise up to Rs 3 lakh crore for lending purposes, Sitharaman had said.

The National Bank For Financing Infrastructure and Development Bill, 2021, was then introduced and consequently passed in March by both houses of the parliament. The NaBFID Act states that the government may guarantee bonds and debentures at the institution's request.

However, it's unlikely the government will give any special guarantee against bonds and loans raised by the Institution, the first person said. To be sure, by virtue of being 100% government owned, NaBFID will have implicit sovereign backing, which will help it raise debt, the first person said.

There is no clarity on whether the Reserve Bank of India would give the institution any special dispensation. Infrastructure sector experts think without the advantage of low cost of funds and easier asset classification norms, which existed in the case of legacy institutions of this nature, it may be difficult for the DFI to succeed, BloombergQuint reported earlier.

Once operational, the DFI will focus on ongoing infrastructure projects of the government, this first person cited earlier said. It will start with evaluating about 40 projects being executed under the public-private partnership model and some toll-operate-transfer projects.

The DFI should prioritise projects, which are of strategic importance like critical trunk infrastructure, road and railway linkages, or evacuation points like ports, airports or logistics hubs for the upcoming industrial corridors like East Coast Economic Corridor or Delhi Mumbai Industrial Corridor.
Arindam Guha, Partner, Leader - Government and Public Services, Deloitte India

To demonstrate early successes and maximise impact, it would be preferable to pick projects which fall exclusively under Government of India's jurisdiction and where issues around land acquisition and "right of way" have been resolved. This would facilitate demonstration of results to financiers and investors in the DFI, Guha said.

The idea of a DFI is not new in India. The country's first DFI, Industrial Finance Corporation of India Ltd., was set up in 1948. It was followed by multiple state financial corporations in 1951, ICICI Ltd. in 1955 and IDBI Ltd. in 1964.

Also read: Government Seeks To Attract EPFO, LIC, PFRDA To Infrastructure Investments—BQ Exclusive

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