Bonds issued by the body to be tax-free, qualify for SLR tag
The government and Reserve Bank of India (RBI) have held talks to make low-cost funds available to the development finance institution (DFI) proposed in the Budget 2021-22, as raising cheaper resources for lending to infrastructure projects at reasonable rates remains critical to the DFI’s success.
Sources told FE that the DFI may be allowed to float tax-free bonds frequently to raise money from retail investors. The government and the regulator are also exploring a proposal to permit the institution to issue bonds that would qualify for SLR (statutory liquidity ratio) investment by banks.
Besides these steps, the feasibility of extending a credit window by the RBI, along the line of the long-term operations funds that the central bank used to make available to DFIs at concessional rates earlier, is also being discussed. The DFI could also tap multilateral agencies for resource mobilisation.
If finally approved, the options are to feature in a Bill that the government is planning to introduce in Parliament for setting up the DFI. “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 obtain low-cost funds and stay competitive. The government and the RBI are seized of the matter,” said one of the sources.
Initially, the DFI will be wholly owned by the government, which has announced a capital infusion of Rs 20,000 crore. But the government is willing to dilute its stake to 26% once long-term investors come on board, financial services secretary Debasish Panda had said after the Budget. Given its experience in project financing, state-run IIFCL would be subsumed by this DFI, he had added.
However, the new institution will have ambitious developmental goals and, unlike extant institutions like IFCI or IIFCL (the latter is now an NBFC), its role will stretch well beyond the realm of mere project financing.
The National Bank for Financing Infrastructure and Development (NaBFID), as the DFI will be known, will facilitate project structuring, help in financial closure, foster innovation in financial products and play a catalytic role in financing projects under the `111-lakh-crore National Infrastructure Pipeline.
Given that one DFI can’t satiate the voracious appetite of the infrastructure sector, the government will provide for the setting up of such institutions by private entities as well. Ultimately, such an eco-system will contribute towards deepening the country’s corporate bond market for infrastructure financing.
The DFI model was revived, as the ability of banks, especially the state-run ones, to fund long-gestation infrastructure projects and spur growth remains severely impaired by a spike in bad loans. As such, banks’ liability profile isn’t suited for long-term funding, as they are typically tailored for extending working capital loans with a short tenure. So even when they fund infrastructure projects, the tenure most often remains short to start with, with a rollover facility at a renewed rate of interest.
Still, without access to low-cost funds, the DFI would struggle to compete with banks, given that some of these institutions (IDBI, ICICI, etc) were earlier forced to morph into banks after the steady supply of cheaper resources, then backed by both the regulator and the government, was discontinued.
With the initiation of financial sector reforms, the operating environment for DFIs had changed substantially in the 1980s and 1990s. For instance, the RBI had set up the National Industrial Credit (Long Term Operations) Fund for making loans and advances to eligible financial institutions and the DFI were the beneficiaries of it. This fund tap was effectively turned off from 1992-93. Similarly, they were earlier allowed to float ‘SLR bonds’ that were subscribed to by banks and insurance companies. These were subsequently phased out.
The gradual abolition of low-cost fund facilities forced the DFIs to raise resources at market rates. On top of that, they had to face competition from banks, which had access to low-cost CASA deposits, in term-finance. Coupled with high accumulation of non-performing assets due to a combination of factors, the change in the operating environment caused serious stress to the financial position of the DFIs.
The government, the sources said, is mindful of these realities and will come out with a piece of legislation that will address these structural issues. Plus, as finance minister Nirmala Sitharaman has said, the IDBI experience will be utilised for better results.