Reimagining the DFI: The role has to be thought through creatively

Twenty-three years after IDFC Ltd — the last development finance institution (DFI) — was set up, Finance Minister Nirmala Sitharaman wants the model to be revisited. This time around, “it is for promoting infrastructure funding.” It’s a departure from the DFI’s earlier avatar when, as K V Kamath puts it: “It was for both project finance and infrastructure.”

The ecosystem has since changed, says the former president (and the first) of the New Development Bank of BRICS: “We have pension, insurance and provident funds, which can offer long-term finance for projects.” The move to hike the foreign direct investment in insurance to 74 per cent (from 49 per cent), and allowing direct retail participation in government securities will also help.

But it will take much more for serious money to pour into infrastructure at the ground level. Says Nasser Munjee (the first chief executive of IDFC Ltd): “We will need a trillion dollars over the next five years for infrastructure. Serious investment, both domestic and international, will be possible only if and when we have a well-considered plan over the medium term.” He adds: “This has to be above the proposed DFI providing the policy, risk and sequencing framework for integrated infrastructure development.” 

Simply put, a cohesive, integrated strategy needs to be in place, with all relevant ministries pulling in the same direction, and the approach has to be mirrored at the state level as well. 

So, what of the DFI itself, and how is it to be situated? It is surmised that what may now be needed is something on the lines of a “National Infrastructure Bank”, as articulated in the Nachiket Mor Committee Report (2013): “It will need to diversify its balance-sheet profile and actively manage [the profile] to ensure that it does not end up with high levels of concentration risks.” It had failed as a result.

"We don’t know if the DFI will be a refinancing institution, or if it is to get into direct funding. Frankly, none of the two are really great (models). Refinancing is a better option,” notes S C Garg, former Union finance secretary. He is of the view that the refinancing model has a greater chance of working as otherwise, the pricing of a risk which is long-term (five to 10 years) will not be possible.

“When the argument is being made for the government to exit banks, it doesn’t make sense for it take on the role of setting up a DFI and operating it. Both are essentially the same,” Garg points out.

“The DFI model has to be reimagined if it is to be contextually relevant. If a DFI is to be wholly or substantially owned by the government, and is to remain in the public sector, funding would be a challenge. Unlike banks, pure-play DFIs will have no access to low-cost current and savings deposits. Issuing bonds, as in the past, will be a challenge. One possible alternative is for the Reserve Bank of India to extend a line of credit,” notes M Damodaran, chairperson of Excellence Enablers, who had also headed IDBI Ltd. This aspect had been discussed within the government and the central bank nearly two decades ago.

Another issue that had engaged financial circles, and which will rear its head in discourse, is takeout-financing, where a clutch of banks warehouses the initial round of financing, and the baton is then passed on to the DFI. The problem here, Damodaran explains, is that “this won’t be easy, since banks will resist on the ground that the asset was on their books in the early difficult years. And they see no reason to part with it, once stabilised. At the same time, they have no long-term funds.” So how does one square this circle?

It was clear even when the business blueprint of IDFC Ltd was being drawn up that a model based on a DFI which floated bonds (retail or wholesale) may not work. "You need to take care of not only the lending aspect through the DFI, but address other issues which impact viability, including having a single-window for project clearances, and have a robust dispute resolution mechanism. All these points individually or collectively have a critical bearing on project economics and sponsor returns," explains Vimal Bhandari, executive vice-chairman and chief executive officer, Arka Fincap. 

Bhandari was part of a core team which had gone into the business model for IDFC Ltd, the others on it being Urjit Patel, Shikha Sharma, L K Narayanan and Roopa Kudva (with Munjee steering it). And it could be well be that putting together such a think-tank at the national level — outside of the NITI Aayog — is what Munjee may have in mind when he says: “You need to have a National Commission for Infrastructure, such as in the United Kingdom. This has to be above the proposed DFI, providing the policy, risk and sequencing framework for integrated infrastructure development. The various ministries involved in infrastructure will provide inputs to the Commission and be responsible for execution.”

What is unsaid is that it is of utmost import to have the kind of coordination that was seen during the Atal Bihari Vajpayee years between the Prime Minister’s Office, the minister of state for transport and the National Highways Authority of India for the Golden Quadrilateral project. 

Recall the words of the poet and playwright 

T S Eliot from Four Quartets: “For last year’s words belong to last year’s language. And next year’s words await another voice.” An apt observation indeed.