The new development financial institution (DFI) mooted in Budget 2021 will require substantial upfront investment by the government in order to attract investors, several industry experts told VCCircle. Finance minister Niramala Sitharaman proposed a Rs 20,000 crore outlay to capitalise the DFI, but it wasn’t clear whether this would be an upfront investment or deployed over a period of time.
While the Bill is yet to be tabled, a DFI will be required to meet executional challenges in order to bring in capital that has commercial viability, good returns and can bear the risks of asset quality in the infrastructure sector.
“There are some grey areas on the upfront investment by the Centre, avenues of fundraising, how attractive or low priced it will be for investors…Government needs to see how it will be modelled, if it would be on the lines of the New Development Bank (BRICS Bank) or something else. Most importantly, it should not end up being subsumed like IDBI or ICICI with large bad quality loans,” said a State Bank of India executive, on the condition of anonymity.
The banker said that the Government needs to ensure that it facilitates some upfront money to bring confidence to international investors. We have seen NIIF has (equity) capital commitment of only $4.4 billion (approximately Rs 32,100 crore) over the last five years (across three funds) and IIFCL (India Infrastructure Finance Company Ltd) has seen increasing bad loans.”
The government aims to finance infrastructure projects of national importance through the DFI and aims to create a lending portfolio of Rs 5 lakh crore in three years, Sithraman said in her budget speech on Monday. Under the National Infrastructure Pipeline (NIP), the government has identified around 7,533 projects with a project cost of $1809.21 billion (approximately Rs 132 lakh crore) during 2020-25.
“Infrastructure needs long term debt financing. A professionally managed Development Financial Institution is necessary to act as a provider, enabler and catalyst for infrastructure financing... The ambition is to have a lending portfolio of at least Rs 5 lakh crore for this DFI in three years’ time,” Sitharaman said.
“The needs of this country are such that just one development finance institution set up by the government cannot adequately cater to its requirements. Therefore, we see a future where a DFI which is partly funded by the government and raises capital from the market is also competing with private-sector DFIs,” she added in her speech.
Previously, IDBI, ICICI and IDFC, created with the idea of doing long-term infrastructure financing, were later converted into universal commercial banks to get access to public deposits due to asset-liability mismatches.
Presently, with banks finding it difficult to finance long-gestation projects and given the general decline in long-term infrastructure funding especially after the collapse of Infrastructure Leasing and Financial Services (IL&FS), there has been a need to set up a government-backed DFI.
In December 2015, NIIF was set up as a Rs 40,000-crore fund to enhance infrastructure financing by investing in greenfield (new), brownfield (existing) and stalled projects.
As of September 2020, its equity investment in infrastructure projects has been around Rs 4,689 crore, according to a Press Trust of India report. This works out to less than Rs 1,000 crore per year on average. Its long-term debt investment was at Rs 7,935 crore, taking its aggregate investment to Rs 19,677 crore, the report added.
Meanwhile, India Infrastructure Finance Company Ltd (IIFCL), a state owned company set up in 2006 to provide long term finance to viable infrastructure projects, has seen high gross non-performing assets (NPAs) at 18.80% as of September 2020, for H1FY21, even as it declined (FY20: 19.70%, 1HFY20: 20.7%) and net NPAs to 8.16% (9.75%, 10.90%). As of March 2018, its NPAs were lower at 16.55%, while net NPAs were at 9.67%.
The intent behind setting up a new DFI is to not only spur long-term infrastructure spending, but also to encourage the creation of competing institutions from the private sector.
“One clear distinction is that the proposed model has the backing of the government without tapping a bank as a frontrunner for capital. Government has said it will find avenues to fund that including bonds, getting corporates or private investors. Once the Bill is tabled we would get clarity on the modalities of it,” said Anil Talreja, partner at Deloitte India.
Debt financing through the infrastructure investment trust (InvIT) and real estate investment trust (REIT) routes will be enabled through necessary amendments in the rules.
The SBI official cited earlier said “funds are available in the market as we have seen good response of REITs and InvITs as returns are higher If only this can get channelised well, as the country has immense infrastructure requirements and it can see the success that earlier DFIs have not.”
A bill for the creation of the DFI has already been listed and likely to be tabled in the ongoing parliament session.
It describes the institution “as a provider, enabler and catalyst for infrastructure financing and as the principal financial institution and development bank for building and sustaining a supportive ecosystem across the life-cycle of infrastructure projects".
While such a setup will ease the capital constraints faced by public sector banks, concerns remain about the adequacy of the outlay for recapitalisation, especially in the event of a fresh asset quality review (AQR) exercise by the central bank.
Talreja added that there is always an inherent risk of quality and leverage in any infrastructure funding and hence appropriate due diligence will always be necessary.