To help fund infrastructure projects across their lifespan, Finance Minister Nirmala Sitharaman on Monday said a development financial institution (DFI) would be set up.
The FM said a “professionally managed” DFI would soon be set up, and the government would come out with a bill to introduce it in the budget session of Parliament, CNBC-TV18 reported.
She said that the DFI is proposed to be capitalised with Rs 20,000 crore and is expected to have a lending portfolio of at least Rs 5 lakh crore within three years time, adding that it is part of a three-pronged plan to increase investment in the economy.
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The previously published Budget 2021 session schedule notes showed that a law will be introduced to create the National Bank for Financing Infrastructure and Growth (NaBFID), which 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.”
However, the proposal is not entirely novel in India as in the late 1940s, a new class of financial institutions called the development financial institutions were created to help the long-term financing needs of the industrial sector. Set up in 1948, IFCI, the erstwhile Industrial Finance Corporation of India Ltd, was India’s first DFI.
The ICICI, Industrial Credit and Investment Corporation of India Limited, which was established in 1955 by an initiative of the World Bank, and IDB, the Industrial Development Bank of India, created in 1964 under RBI, were also DFIs eventually converted into universal banks.
Typically, DFIs don’t accept public deposits and they generally raise capital by borrowing funds from the government and selling their bonds to the general public. In the past, DFIs have been government-owned, helping them lower their cost of funds.
They also provide a guarantee to banks on behalf of companies and subscriptions to shares, debentures, etc., and may also give technical assistance like viability study, project report, among other things.
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