India sets up a new bank for big infrastructure projects as it aims to raise $41 billion in a few years

• The Indian government has given its stamp of approval to set up a new national bank that will fund the country’s long term infrastructure and development projects.
• According to Nirmala Sitharaman, India’s finance minister, the government is hoping that the Development Fund Institution (DFI) will raise ₹3 lakh crore over the next few years.

India’s Finance Minister Nirmala Sitharaman announced that the Indian government has approved the setting up of a Development Fund Institution (DFI). The new national bank will use the markets to raise capital and put those funds into long-term projects.

These are projects that take as long as 15 to 20 years to be executed. “Both developmental and financial objectives will matter for setting up a DFI,” said Sitharaman during a press conference.

The Union Budget 2021 provides capital infusion of ₹20,000 crore and an initial grant of ₹5,000 crore. According to Sitharaman, the government expends the DFI to raise up to ₹3 lakh crore in the next few years because it can access the market and capitalise on funds that are not otherwise available.

Wooing new investors for risky business
Between 1948 to 1964, three banks were established to provide long-term financing — the Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI) and the Industrial Development Bank of India (IDBI).

Three decades down the line the Reserve Bank of India (RBI) withdrew the concessional funding it was providing in the form of longer-term operation (LTO) funds. As a result, these banks were subjected to market-based rates leading to their inevitable downfall.

“There have been at least three to four attempts in India to have alternative investment funds… We ended up with no bank that could take up the long term risk and fund development,” said Sitharaman.

The new institution is based on the building blocks of the National Infrastructure Investment Fund (NIIF). The Indian Stamp Act has also been amended so as to allow big pension funds, sovereign funds, and insurance funds to put in their money.

The aim is that longer-term funds will be better placed to fund long-term projects, which face higher risk than short-term projects. “The government is also planning to give certain securities with which the cost of funds will come down. I also think this will lead to a positive impact on the bond market in India,” said Sitharaman.

Industrialists have wanted this for a while
This kind of a lending body was one of the demands from the industry for a while. The COVID-19 pandemic brought it to the forefront again as the flow of credit tightened.

Industrialists like Ajay Piramal, owner of the Piramal group — which has interests from glass manufacturing to real estate to financial services — had expressed his desire for a DFI, in an exclusive conversation with Business Insider in October, last year.

According to Sitharaman, there are around 7,000 projects in the infrastructure pipeline. The board will decide which projects will be taken up on priority basis and which ones will get their funding later.

The proposed board behind this new national bank will consist of professionals and at least half of them will be non-official directors. “The powers of the board will be drawn so that it can remove or appoint the full-time directors,” said the finance minister.

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