HOW TO PLAY THE BILLS
Anew development finance institution (DFI) is in the works to fund the government’s ambitious Rs 100 lakh crore-plus National Infrastructure Pipeline (NIP) announced earlier this year. In end-July, Union finance minister Nirmala Sitharaman had been quoted saying “work is on [to set up a] development finance institution. What shape it will take, we will know shortly.” Sources say an expert panel, instituted by the Centre to study the need for long-term finance and to recommend the structure and required flow of funds through such institutions, has submitted its suggestions. The finance ministry is reviewing the panel’s recommendations, which include a balance sheet size of Rs 10 lakh crore for the DFI.
The DFI has been proposed at a time when the Centre has lined up a number of large infrastructure projects but knows it will be extremely difficult to finance them, given that revenue collections in the first quarter of this fiscal year have been dismal as a result of the Covid-19 pandemic and the lockdowns imposed to contain the virus. Revenue collections were down 41.7 per cent during the quarter, while expenditure went up 11.3 per cent. In December last year, the finance minister had announced Rs 111 lakh crore worth of infrastructure projects, to be implemented over the next five years as part of the government’s spending push in infrastructure. These projects
are on top of the Rs 51 lakh crore the Centre and the states have spent during the past six years. As per the plan, the Centre will account for 39 per cent of the projects in this pipeline, the states another 39 per cent, while the remaining 22 per cent is proposed to be handled by the private sector. These projects span several sectors, including power, railways, urban irrigation, mobility, education and health. Further, in April this year, the government had also targeted the construction of Rs 15 lakh crore worth of roads over the next two years.
“A DFI for infrastructure is probably the only plausible and practical measure that can be taken in the present circumstances,” says an expert, preferring not to be named. “In a situation in which private investors, both domestic and foreign, do not have the appetite to invest in greenfield projects, and where the central and state governments are completely cashstrapped, the only practical solution will be to set up a DFI through an Act of Parliament.”
Opinion is divided, however, on the ownership structure of such a body. Some argue that a DFI should be at least 51 per cent privately owned so that it does not fall under the regulation of the Comptroller and Auditor General of India—audits by this agency could lead to delays in fund disbursement and thus delay projects. Others say the opposite, that it should be entirely owned by the government. “The DFI has a sovereign function—it is responsible for nationbuilding activity—and its outlook should be based on the economic rate of return. However, if it is owned by the private sector, it will focus on the financial rate (emphases added) of return,” says the expert quoted above.
India has a long way to go in terms of infrastructure development— whether in power, bridges, dams, roads or urban infrastructure. In the World Bank’s Logistics Performance Index 2018, India was ranked #44 out of 167 countries. A major problem is the lack
Even DFIs in India will find it difficult to secure funding for long-term projects, effectively putting the onus of financing them or providing a guarantee for loans on the government
of funding for such projects. Banks and non-banking financial companies (NBFCs) have been reluctant to lend to infrastructure projects, as they have to grapple with issues like asset liability management (ALM) mismatch. In a nutshell, this problem arises because lenders themselves borrow the money that they then offer as loans; however, their borrowing is typically short term, usually less than five years. If they are issuing loans to a project that has a gestation period of 15-20 years, there is a mismatch in the maturity period of their assets (the loans they grant) and their liabilities (the money they borrow).
‘The average maturity [of borrowings] would be about two years for a typical lender,’ writes Hemant Manuj, an associate professor with the SP Jain Institute of Management & Research in Mumbai, in a media article. ‘The primary reason is the absence of a deep bond market to borrow from. Other than insurance companies and pension funds, the other financial institutions [in India] do not have access to long-term funds. As a result, they lend to projects with a maturity of, say, 20 years, with funds of two-year maturity... After two years, when the existing liability matures, it must be refinanced because the asset has not yet matured. The lender, therefore, suffers a refinance risk on its liabilities in such a case.’ He notes that even DFIs in India will find it difficult to get funding for long-gestation projects, since there is no long-term bond market in India. This will effectively put the onus of financing on the government, requiring it to provide a guarantee for funds.
The first DFI in India was the Industrial Finance Corporation of India, launched in 1948. Some others set up over the years include the Industrial Development Bank of India, Unit Trust of India, National Bank for Agriculture and Rural Development, Exim Bank, Small Industries Development Bank of India and National Housing Bank, to name a few. Some of these morphed into banks over time. ■