The assurance of sustainable sources of extended-term liabilities and a powerful governance framework will be important for the results of the proposed new improvement finance institution (DFI), business participants and marketplace professionals mentioned. The government will have to play a function not just as a provider of capital, but also as a facilitator of policy tweaks like credit enhancements for projects financed by the DFI. There is also speculation that India Infrastructure Finance Company (IIFCL) may well be merged into the new sovereign-backed DFI.
Before 1992, DFIs enjoyed a set of advantages which produced it simple for them to tap into extended-term liabilities. They had access to funding at concessional prices from multilateral agencies. DFI bonds enjoyed a statutory liquidity ratio (SLR) status, which meant that banks had been a captive supply of funds for these institutions. They also received direct funding from the Reserve Bank of India (RBI) by way of extended-term operations (LTO).
Niranjan Rajadhyaksha, analysis director and senior fellow, IDFC Institute, mentioned of these 3 routes, only the initial nonetheless remains an alternative. “Maybe this DFI with some sovereign guarantee could raise money and then give rupee loans to local infrastructure companies. So we will have to await the details and see if the government comes up with a new rupee instrument to bridge the long-term liability gap,” he mentioned.
Some business executives think that the pre-1992 concessions for DFIs may well have to be brought back to make the structure productive. RK Bansal, who heads Edelweiss ARC and has earlier worked with IDBI, explained that if the older funding advantages are not restored, the bond marketplace will have to be deepened considerably for DFIs to work.
“The government will also need to offer credit enhancement because new infra projects cannot be highly rated. Finally, a high degree of policy support will be required from the government and they must ensure that different departments coordinate among themselves to help complete the projects,” he mentioned.
The practical experience of DFIs globally holds proof that the government requirements to be involved in a hands-on style. Without policy-level handholding from the government, infrastructure projects can’t accomplish fruition and it will be the DFI that will be left holding the can, professionals mentioned.
There is also a view that the new DFI will have to on-board private partners in order to establish a powerful governance framework. Ashvin Parekh, managing companion, Ashvin Parekh Advisory Services (APAS), mentioned, “Apart from raising long-term liabilities to fund long-term assets, the other challenge would be to develop a sound governance framework. That was what distinguished the better-managed private DFIs ICICI and HDFC from the others. If the government can conceive of some measure by which the DFI can raise long-term liabilities, then it could sustain with the help of good governance practices.”
Sound governance practices will also inspire self-confidence amongst prospective extended-term investors such as pension funds and sovereign wealth funds, Parekh added.