DFI: New Development Financial Institution Bill This Parliament Session- NaBFID

The Budget Session of Parliament will consider a new bill to set up a development financial institution (DFI) for the purpose of funding infrastructure projects across their lifespan.

While details of the bill are not yet available, the session schedule notes that a law will be introduced to set up The National Bank for Financing Infrastructure and Development “as a provider, enabler and catalyst for infrastructure financing and as the principal financial institution and development bank for building and sustaining a supportive ecosystem across the life-cycle of infrastructure projects.”

The NaBFID Bill is slated for introduction, consideration and passing this session.

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.

In a recent conversation, Vinayak Chatterjee, chairman of Feedback Infrastructure said 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, Chatterjee said.

Return To The Past

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 believed 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, KV Kamath, who oversaw the transition of ICICI from a DFI into a universal bank, told BloombergQuint in a recent interview.

Kamath said this has changed to some extent and may permit DFIs to succeed. “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,” Kamath said.