Cabinet approves DFI with capital infusion of Rs 20000 crore

DFI is expected to raise long-term funds for infrastructure development projects

• The Union Cabinet has cleared the proposal of setting up of the “Development Finance Institution (DFI)
• The initial paid-up capital of Rs 20,000 crore so that it can leverage around Rs 3 trillion from the markets
• The DFI will be fully government-owned initially and the promoter’s stake will be brought down to 26 per cent in the next few years

About Development Finance Institution (DFI)

• The Development Finance Institution will be set up in order to raise long-term funds
• There will also be some tax benefits on DFI for a period of 10-years
• DFI would comprise of a professional board in which 50 percent of the members will be non-official directors
• Under it, the initial grant will be ₹ 5,000 crores. Later, additional increments of grant will be made in to effect within the limit of ₹ 5,000 crore
• In the initial phase, new institution will be owned by government while in the later phase, the government’s stake will be cut to 26 per cent
• The government is also planning to issue securities to DFI which in turn will help in lowering the cost of funds
• This will help the institution to leverage the initial capital and drawing funds from several sources
• It will also positively impact the bond market in India. The institution also seeks to raise the funds from global pension and insurance sectors in order to invest in new projects
• DFI would also help the banks to cater the issue of asset-liability mismatch in the bank which are lending to infrastructure

Other procedures for DFI

• To put it in perspective, Rs 3 trillion constitutes slightly less than 3 per cent of the Rs 111 trillion to be spent on over 7,000 projects in the National Infrastructure Pipeline from 2019-20 to 2024-25
• The grant has been provided as tax-saving bonds, said a government official
• The amount will provide for the hedging cost if the DFI borrows from multilateral or bilateral institutions and it will subsidize the guarantee fee
• This will help the entity in shelling out less money, and at the same time the cost of funds would be lower
• The DFI will be fully government-owned initially and the promoter’s stake will be brought down to 26 per cent in the next few years
• At all times, the government will continue to hold 26 per cent in the entity
• The government will also approach the regulators on increasing the cap for investment in the DFI by pension funds and insurance companies

What is “Development Finance Institution (DFI)”?

The Development Finance Institution (DFI) are organizations which are either owned by the government or by charitable institutions to finance infrastructure projects that are of national importance but may or may not meet commercial return standards

Categories of DFIs:

• National Development Banks such as IDBI, SIDBI, ICICI, IFCI, IRBI, and IDFC
• Sector-specific financial institutions such as TFCI, EXIM Bank, NABARD, HDFC, and NHB
• Investment Institutions such as LIC, GIC and UTI
• State-level institutions such as State Finance Corporations and SIDCs

The need for DFIs in India

• To boost economic growth
• To improve long term finances
• To provide credit enhancement for infrastructure and housing projects
• Debt flows towards infrastructure projects would be improved

Classification of DFIs

• Sector Specific Financial Institutions: They focus on particular sectors to provide finance for the project. For example, NHB, EXIM Bank and so forth
• Investment Institutions: They focus on facilitating business operations such as capital expenditure financing and equity offerings. For example, GIC, UTI and more

Policy and Economy