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Development finance bodies may return for infra funding

If this happens, institutions like IFCI, IIFCL, SIDBI, NHB and EXIM Bank will have the option to convert into development financial institutions

Vrishti Beniwal New Delhi
Last Updated : Jul 09 2014 | 1:01 AM IST
The finance ministry is considering reviving development financial institutions (DFIs) to meet the long-term financing needs of the infrastructure sector. Talks to reconvert lending institutions such as IFCI into DFIs have begun, almost a decade after IFCI was transformed into a non-banking financial company (NBFC).

If the plan materialises, financing institutions such as India Infrastructure Finance Company Ltd, Small Industries Development Bank of India, National Housing Bank and Export-Import Bank of India will also have the option to convert into DFIs to cater to the needs of their respective sectors — infrastructure, small industries, housing and trade. The move will help borrowers, as interest rates might fall three-four percentage points.

Officials say the Reserve Bank of India (RBI) is opposed to the move, as the Narasimham committee on banking sector reforms had said with banks and DFIs moving close to each other, in terms of the scope of their operations, DFIs weren’t required and should be converted into banks or NBFCs.

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The finance ministry feels now, the situation has changed and there is huge requirement to provide long-term loans to the infrastructure sector. “DFIs are the need of the day. To look into the issue, a committee may be formed with some economists and an RBI representative. A call on setting up DFIs will be taken based on its recommendations,” said a finance ministry official, on condition of anonymity.

Malay Mukherjee, managing director and chief executive of IFCI, said, “We had a discussion with the present government, the previous government and RBI. It looks like the government is thinking on the matter very seriously but the regulator probably feels it will be a step backwards.”

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IFCI, India’s first DFI, had started operations in 1948. It was provided access to low-cost funds through the statutory liquidity ratio (SLR) route and this enabled it to provide advances to corporate borrowers at concessional rates. But now NBFCs such as IFCI have high-cost funds, as they borrow from banks and then on-lend to industry. Banks, which usually get deposits for five years, cannot directly lend to industry for 10-15 years, this will lead to asset-liability mismatches.

“A DFI is eligible to raise bonds on a par with SLR, which are very cheap. So, if I raise bonds at 8.5 per cent, I can lend money at 11-11.5 per cent. But today, I can’t lend below 14 per cent because I am borrowing from banks at 10.25-10.5 per cent. So, my cost becomes 12.2 per cent,” said Mukherjee. He argued when the Narasimham committee had given its recommendations, Basel-III regulations weren’t there. When Basel-III norms were implemented from 2019, banks wouldn’t be able to offer 15-year loans because of risk-weighted averages, Mukherjee said.

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IDBI, ICICI and IIBI also began as DFIs. But through the last two decades, IIBI was folded up, while IDBI and ICICI were converted into banks. Countries such as China, Vietnam, Brazil, Malaysia and Germany continue to have DFIs.

C Rangarajan, former chairman of the Prime Minister’s Economic Advisory Council, had stressed the need to reintroduce DFIs. He had said DFIs were phased out as it was felt India could move to a situation in which banks would provide both short-term and long-term finance.

“But the last two decades have shown banks have certain limitations in providing long-term finance. They have group exposure limits and problems of asset-liability mismatches. The only issue that arises is if they have to raise money purely from the market, the cost of long-term finance will rise. We will have to find some ways by which lower-cost funds are available to them,” Rangarajan, also a former RBI governor, had said.

Guidelines for DFIs to convert into banks were issued in 2001, following RBI’s policy pronouncement on ‘approach to universal banking’.
TIME TO RECALL DFIs
  • DFI’s were phased out after 1990 as their scope of activities was not different from banks
  • IFCI, set up in 1948, was India’s the first DFI, but it was later converted into an NBFC
  • IDBI, ICICI, IIBI also started off as DFIs; IIBI was folded up, IDBI & ICICI converted into banks
  • FinMin is considering DFI tag for some financial bodies to meet long-term needs of infra sector
  • IFCI says the move would bring down its cost of funds and help lend to corporates at lower rates
  • Countries like China, Vietnam, Brazil, Malaysia and Germany have DFIs to assist infra development

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First Published: Jul 09 2014 | 12:34 AM IST

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