Budget 2021: We. Are. Setting. Up. A. DFI. Words Vinayak Chatterjee Wants To Hear From The Finance Minister

There are essentially two arguments in favour of a DFI. First, the economy needs infrastructure investments more than ever to help it overcome scars left behind by the Covid-19 pandemic. Second, there are few commercial lenders willing to take on infrastructure risk, particularly after the experience of the last lending cycle.

There are an equal number of arguments against it. One, we’ve been there before and experimented with erstwhile ICICI and IDBI, only to convert them into universal banks. Two, the need for implicit or explicit government backing, which will eventually add to the country’s liabilities one way or another.

All considered, Chatterjee is convinced that a DFI is what’s needed right now.

“Many of us, for the last few years, have been advocating a DFI for funding infrastructure with an agenda vastly different from the past,” Chatterjee told BloombergQuint in an interview. “We’re asking for an institution with an agenda for nation building with the perspective of an economic rate of return and not a private sector IIR-based financial rate of return.” The government has bought the idea, Chatterjee, who was a member of a recent committee on a possible DFI, said.

In justifying the need for a DFI, Chatterjee gives the example of projects like Bhakra Nangal Dam, Hirakud Dam, among others, where returns cannot be quantified in private sector terms. Today, for instance, if India were to set up a large irrigation system or plan a border roads project, which has an economic rate of return spread over 30 years, who will fund it, asks Chatterjee.

Existing institutions, including the National Investment Investment Fund and non-bank lenders like PFC Ltd., REC Ltd. or IFCI, cannot support such large nation-building projections. In the case of NIIF, the architecture of the institution includes private investors who would demand a certain rate of return. For the others, market borrowings dictate the cost at which they can lend and the tenor for which they can do so.

The new DFI will fund large nation-building projects that these institutions can’t, said Chatterjee, citing examples such as the China Development Bank. “The China Development Bank is what created the infrastructure we rave about.”

How will the DFI function?

The sovereign guarantee that this institution will enjoy it to have a far lower capital cost than of existing institutions, he said. It should be able to raise 40-year or 50-year money from global development finance institutions at very low rates, such as in the case of the bullet train where 60-year funds have been raised at 0.5% interest and a 10-15 year moratorium.

“India’s recent outreach to countries with large pools of money is among the best in recent history,” Chatterjee said. “Therefore, an institution like this should enable us to pick up long term developmental funds these countries have.”

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.

Watch the full conversation with Vinayak Chatterjee below:

Also read BloombergQuint’s continuing coverage ahead of Budget 2021: