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Search 16th March, 2021 Spotlight here: http://www.newsonair.com/Main_Audio_Bulletins_Search.aspx
Topic: General Studies 3:
- Indian Economy
In News: The cabinet has approved a detailed proposal for setting up the developmental finance institution (DFI) that was announced in the budget last month, clearing the decks for a dedicated government-owned infrastructure financier.
The National Bank for Financing Infrastructure and Development (NaBFID)
The Composition
There is a suggestion that the Indian Infrastructure Finance Co. Ltd (IIFCL), a government enterprise, be merged into the new DFI.
What Is A Development Finance Institution?
A development finance institution is an agency that finances infrastructure projects that are of national importance but may or may not conform to commercial return standards. In most cases, these agencies are government owned and their borrowings enjoy the comfort of government guarantees, which help bring down the cost of funding.
How is it different from commercial banks?
Objectives of Development Finance Institutions
The Current Need for Development Finance Institutions
The economy needs infrastructure investments more than ever to help it overcome scars left behind by the Covid-19 pandemic. Since few commercial lenders are willing to take on infrastructure risk, particularly after the experience of the last lending cycle, a development finance institution has become necessary
In setting up a DFI, India will return to an earlier experiment with the idea. ICICI, it in original form, and IDBI were both set up as DFIs but were later converted into universal banks as it was perceived that they needed access to public deposits. The earlier generation of DFIs ran into the problem of financing because retail deposit access was cornered by banks and availability of long-term financing without government guarantees was limited.
Today we have a robust capital market so there is access to funds. We have global access, as India is a strong investment proposition. So, we have access there. This development bank could also borrow from multilateral development banks and the government could also give a cover
The DFI is envisaged to play a catalytic role in funding projects under the Rs 111-lakh-crore National Infrastructure Pipeline and help the country turn into a $5 trillion economy by 2025.
Conclusion
India needs wide-ranging institutional and regulatory reforms, and not just a DFI, to bolster the corporate bond market, the size of stands at only about 15-16% of GDP. Nevertheless, the DFI proposal, backed by deft implementation, could be one of the important steps in that direction.
The move to enable the DFI to have access to low-cost funds comes amid realisation that since banks have access to CASA (current account savings accounts) deposits, their cost of funds is going to be cheaper than the DFI’s. So, the DFI has to be granted some flexibilities to stay competitive. Else, as witnessed in the past (DFIs like IDBI and ICICI were forced to morph into banks), it will struggle to stay afloat.
Note: Some important DFI’s (sector specific)
Industry
Universal Bank – Any Financial institution performing the function of Commercial Bank + DFI
IDBI – Industrial Development Bank of India was set up in 1964 under RBI and was granted autonomy in 1976
IRCI – Industrial Reconstruction Corporation of India was set up in 1971.
SIDBI – Small Industries development bank of India was established in 1989.
Foreign Trade
Agriculture Sector
NABARD – National Bank for agriculture and rural development was established in July 1982. It was established on the recommendation of the Shivraman Committee It is the apex institution in the area of agriculture and rural sectors It functions as a refinancing institution
Housing
NHB- National Housing Bank was established in 1988. It is the apex institution in Housing Finance
Connecting the Dots:
