Govt to set up new Development Finance Institution: FM Sitharaman

New Delhi: The Finance Minister today announced the setting up of a development financial institution (DFI) to help fund infrastructure projects across their lifespan.

While presenting the Union Budget for FY 2021-2022, Finance Minister Nirmala Sitharaman said a “professionally managed” DFI would soon be set up, and the government would introduce a bill to introduce it in the budget session of Parliament. The DFI is proposed to be capitalized with Rs 20,000 crore and is expected to have a lending portfolio of at least Rs 5 lakh crore within three years time, the FM said today.

Sitharaman said the DFI is part of a three-pronged plan to increase investment in the economy.

The Budget 2021 session schedule notes released earlier showed that a law would be introduced to set up The National Bank for Financing Infrastructure and Development (NaBFID). NaBFID is expected to act as the “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.”

The idea is not new to India. In the late 1940s, a new class of financial institutions called the development financial institutions were set up to cater to the long-term financing needs of the industrial sector. IFCI, the erstwhile Industrial Finance Corporation of India Ltd, was India’s first DFI, set up in 1948. ICICI – Industrial Credit and Investment Corporation of India Limited - established in 1955 by an initiative of the World Bank, and IDBI – Industrial Development Bank of India- set up in 1964 under RBI, were also DFIs that eventually converted into universal banks.

DFIs typically do not accept public deposits. They usually raise capital by borrowing funds from the government and selling their bonds to the general public. DFIs have been government-owned in the past, which helped them lower their cost of funds. They also provide a guarantee to banks on behalf of companies and subscriptions to shares, debentures, etc. DFIs may also provide technical assistance like viability study, project report, and so on.