Development financial institution to fund infrastructure

Banks don’t have long-term funds for projects, bankers said.

August 23, 2019 10:40 pm | Updated 10:40 pm IST - Mumbai

Union Finance Minister Nirmala Sitharaman addresses a press conference in New Delhi on August 23, 2019.

Union Finance Minister Nirmala Sitharaman addresses a press conference in New Delhi on August 23, 2019.

The government’s proposal to set up a development financial institution (DFI) is expected to solve the infrastructure financing needs of the country, since banks do not have the long-term funds to finance such projects, bankers said.

Finance Minister Nirmala Sitharaman announced a host of measures on Friday to boost economic growth that also included increasing capital flows and energising capital markets.

Commenting that there was a need to deepen bond markets, Ms. Sitharaman said, “In order to improve access to long-term finance, it is proposed to establish an organisation to provide credit enhancement for infrastructure and housing projects, particularly in the context of India now not having a development bank and also for the need for us to have a institutional mechanism. So, this will enhance debt flow toward such projects.”

She said the name of the organisation will be disclosed in ‘a day or two.’

“Banks do not have long-term funds. The maturity of our liabilities are five years, on an average. So, funding infrastructure projects is difficult for us,” said a top official from a public sector bank.

Merger with banks

Over the years, some of the major development financial institutions were merged with their banking outfits such as ICICI and IDBI.

Reserve Bank of India had released a discussion paper on wholesale and long-term finance banks in 2017 in which it was observed that there was a decline in the share of the long-term assets, relative to total assets, on the banks’ balance sheets.

The RBI had said that specialised banks could cater to the wholesale and long-term financing needs of the growing economy and possibly fill the gap in long-term financing.

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