Will the new DFI boost infra funding?

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Will the new DFI boost infra funding?

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• A new DFI arrives: The govt. has set up a new Development Finance Institution, by putting in Rs.20000 cr of capital, and expecting it to raise upto Rs.3 trillion for project financing. It's a great start.
• Blast from the past: India has had some DFIs from 1950s onwards, which all got converted to universal banks in 1990s (and later). They reverse-merged with their own existing commercial banks, because DFI model had become unsustainable.

1. Financing of DFIs used to be on concessional terms from GoI and multilateral institutions (used later to give term finance
2. Assets were built in infra and mfg. sectors
3. The LPG reforms ended the concessional window, and financing became unsustainable (DFI borrowing cost rose, to lending rates rose, becoming unsustainable for borrowers (> 15%))
4. All DFIs turned into commercial banks!

• Business is not the business of govt.: While the GoI says that it's not interested in running public sector banks, but it knows well that for development finance, no private sector company would be interested in long-term, low-cost funding of projects. Hence, it has launched this 100% govt-owned DFI, that will slowly be divested to a 26% stake. This DFI setting up actually is nationalisation only. 
• Micro issues: Many issues need to be understood for the new DFI.

1. Professional management - While the GoI has assured this, it remains to be seen how appointments happen, and the role of Banks Board Bureau (BBB) 
2. Creating the leverage - Now is the big issue of where this comes from. Will private sector put in money in this new DFI (govt. owned)? Returns will decide. Since projects will be in infra, a minimum gestation period of 3 to 4 years before debt repayment commences, will exist. 
3. 10% return on capital, or less - There are many avenues for quick returns in the market, today. Foreign investors will take time to develop confidence in this DFI. The govt. may be forced to ask other PSUs to invest, those that it is trying to sell off!
4. Cost of raising funds - The best way is to issue bonds with 7-8 per cent returns, tax free. There are alternatives easily available for households,otherwise.
5. Banks' participation - Ideally, this DFI must run independent of banks' support, because it's made to do what they could not! But this DFI’s bonds may be allowed for SLR.

• Business model for DFI: 

1. This DFI must do direct lending for infra projects, and hence will need a vast pool of experts at multiple levels. 
2. The business of refinance must be a part of the mandate. The ratio of direct finance and refinance needs to be decided. Earlier, some DFIs ended up doing only refinance (bad idea). 
3. This DFI must also give additional loans to firms who already have loans from other institutions. this would be a contingent liability format. 
4. Finally it must also be a market maker in bond market (as part of treasury ops). That will address mismatches in maturity and returns. It can also develop the CDS market (credit default swaps)

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