Infrastructure Development Financial Institution – Issue of Sustainability

Abstract

The various newspapers report about the intention of the government to set up an infrastructure-focused Development Financial Institution (DFI) to cater to the demand of the sector. The Prime Minister also called for a target of approximately Rs. 100 trillion for infrastructure investments over the 5-year period 2019-2024.1 India certainly needs this investment as also highlighted by high powered committee on urban infrastructure some years ago. But given the current situation in infrastructure, the COVID-19 impact, and a diminishing headroom for more public expenditure, achieving this target could be daunting, especially in the absence of new avenues of financing these investments. DFIs dedicated to the sector could be considered a panacea for this. The Central Government is already working on the structure of a new DFI – a specialized institution to offer longterm funds to the sector, where borrowers cannot get it from other sources.2 We already have DFIs categorized as All-India or State / regional level institutions depending on their geographical coverage of the operation. Functionally, All-India institutions can be classified as (i) term-lending institutions extending long-term finance to different industrial sectors (some of which turned into commercial banks later on); (ii) refinancing institutions extending refinance to banking as well as non-banking intermediaries for finance to agriculture, Small Scale Industries and housing sector, respectively; (iii) sector-specific/specialized institutions; and (iv) investment institutions. Besides, we have state governments financed DFIs working at state levels. All these DFIs have not been able to meet the specific needs of the infrastructure sector in a self-sustainable manner. Further, the operating model for infrastructure financing, such as Hybrid Annuity Mode, for private investors has undergone frequent changes in recent times, reflecting that developers are unable to sustain for long even when the public sector is taking a majority of the risks.