The Finance Ministry of India’s Treasury Department has proposed and recommended the ministry to tag the India Infrastructure Finance Company Limited (IIFCL) as a Development Finance Institution (DFI) to support the long-term financial needs of infrastructure projects in the nation.
IIFCL was established in 2006 as a government-owned body. It is also the only state-owned financial institution that does the infrastructure sub-sectors’ financing and lending.
With this proposal, the Department of Financial Services (DFS) is set to put up a cabinet note in the Parliament for approval and be introduced as a Bill in the system with necessary significant changes to give DFI status to IIFCL.
In lieu of further development of IIFCL in the previous year, the government had approved equity funds of Rs 15,000 crore, out of which Rs 5,300 crore has been already imbued in the form of recapitalization bonds in the company in March 2020. After the said infusion of funds, the IIFCL’s paid-up capital is Rs 9,999 crore, and its cumulative gross sanction of loans is Rs 1.36 trillion for 605 projects as of March 31, 2020.
Earlier in 1948, the Finance Corporation of India (FCI) was operationalized as the first DFI set up in India. Now, which is classified as one of the systemically significant non-banking financial companies in India. Apart from these, many other DFI’s are formed in India, namely ICICI, IDBI, NABARD, SIDBI, NHB, etc. However, post liberalization, out of the majority of the institutions, has been converted into commercial banks, e.g., ICICI and IDBI. Thus, declining the role of DFI’s. From then on, the DFI’s evolved in India along with the Non-Banking finance sector, and the Banking sector started lending to infrastructure firms in the last two decades, making DFIs more and more unfeasible and unviable.
However, the DFIs’ role in industrialization and developmental finance until the onset of liberalization cannot be denied and crucial in realizing the larger infrastructure development. So, nowadays, the commercial banks are often labeled as the universal banks as they provide all types of financial services to all the sectors, including infrastructure.
However, going further while looking at the brighter picture, converting IIFCL into a DFI is a beneficial move that is expected to reduce the cost of borrowings for long-term infrastructure projects. Also, this step at the same time may reap benefits for the sector and sub-sectors especially, when the government has projected infrastructure investments worth Rs 111 trillion in the name of National Infrastructure Pipeline projects in the time period of 2020 to 2025 in lieu of future infrastructure development in the country.