{"id":9679,"date":"2020-09-09T22:55:29","date_gmt":"2020-09-09T17:25:29","guid":{"rendered":"https:\/\/triumphias.com\/blog\/?p=9679"},"modified":"2020-09-09T22:55:29","modified_gmt":"2020-09-09T17:25:29","slug":"new-development-bank-for-infrastructure-funding","status":"publish","type":"post","link":"https:\/\/triumphias.com\/blog\/new-development-bank-for-infrastructure-funding\/","title":{"rendered":"New Development Bank for Infrastructure Funding"},"content":{"rendered":"<h3><span style=\"color: #0000ff;\">Relevance: Prelims: Indian Economy<\/span><\/h3>\n<h3><span style=\"color: #ff0000;\">Why in News<\/span><\/h3>\n<p>The government is planning to set up a new\u00a0<strong>Development Finance Institution (DFI)<\/strong>\u00a0essentially to fill the gap in long-term finance for infrastructure sectors.<\/p>\n<h3><span style=\"color: #ff0000;\">Key Highlights<\/span><\/h3>\n<ul>\n<li><strong>Proposed DFI:<\/strong>\n<ul>\n<li><strong>It<\/strong>\u00a0will be used to finance both social and economic infrastructure projects identified under the\u00a0<strong>National Infrastructure Pipeline\u00a0(NIP).<\/strong><\/li>\n<li>In April 2020, the Government released the\u00a0<strong>final report on NIP for 2019-25,<\/strong>\u00a0which had drawn up projects totalling investments of Rs. 111 lakh crore across roads, railways, energy and urban sectors.<\/li>\n<li>The task force on NIP was headed by<strong>\u00a0Atanu Chakraborty<\/strong>\u00a0(economic affairs secretary).<\/li>\n<li>NIP will enable a forward outlook on infrastructure projects which will create jobs, improve ease of living, and provide equitable access to infrastructure for all, thereby making growth more inclusive.<\/li>\n<\/ul>\n<\/li>\n<li><span style=\"color: #ff0000;\"><strong>Role of Government in DFI:<\/strong><\/span>\n<ul>\n<li>The DFI can have two types of character:<\/li>\n<li>Either it should be\u00a0<strong>promoted by the government.<\/strong><\/li>\n<li>Or it should be given a\u00a0<strong>private sector character<\/strong>\u00a0with the government restricting its holding to 49%.<\/li>\n<li>There are clear\u00a0<strong>advantages if the DFI is fully held by the government,<\/strong>\u00a0the most important being<strong>\u00a0fund-raising.<\/strong>\n<ul>\n<li>The securities from the DFI could be made<strong>\u00a0Statutory Liquidity Ratio (SLR)<\/strong>\u00a0eligible. This will encourage banks to subscribe to the securities issued by DFI and fulfil their SLR obligations.<\/li>\n<li>The<strong>\u00a0Reserve Bank of India (RBI)<\/strong>\u00a0requires banks to set aside 18% of their net demand and time liabilities towards SLR.<\/li>\n<li>However, the issue involved in this is that the senior management of the DFI may be<strong>\u00a0hounded by investigative agencies<\/strong>\u00a0such as the Central Bureau of Investigation (CBI), and be<strong>\u00a0subject to the scrutiny<\/strong>\u00a0of the Comptroller and Auditor General (CAG) and the Central Vigilance Commission (CVC).<\/li>\n<\/ul>\n<\/li>\n<li>A\u00a0<strong>DFI with a private sector character<\/strong>\u00a0will require the government to believe and trust the private sector.<\/li>\n<li>This will require the government to maintain some distance from the private sector DFI institution and let it implement and execute projects aimed at improving the quality of life of all citizens.<\/li>\n<li>The institution can also work without fear of the CBI, CVC or the CAG.<\/li>\n<\/ul>\n<\/li>\n<li><span style=\"color: #ff0000;\"><strong>Issues in Infrastructure Funding:<\/strong><\/span>\n<ul>\n<li><strong>Funding Gap:<\/strong>\u00a0Banks are unable to provide long-term finance to infrastructure projects.<\/li>\n<li>Infrastructure financing is currently dominated by bank lending, with\u00a0<strong>outstanding credit to the infrastructure sector touching 15% until FY16.<\/strong><\/li>\n<li>However, due to rising\u00a0<strong>non-performing assets<\/strong>\u00a0in the banking sector driven by declining asset quality in the infrastructure sector, the share\u00a0<strong>has declined to 12% in FY19.<\/strong><\/li>\n<li><strong>Asset\/Liability Management Mismatch:<\/strong>\u00a0In India, most lenders borrow funds with maturity under 5 years. The reason is primarily the absence of a deep bond market to borrow from. As a result, they lend to a project with a maturity of, say 20 years, with funds of 2-year maturity. This leads to a mismatch in the maturities of assets and liabilities for the lender.<\/li>\n<li>Asset\/liability management is one of the\u00a0<strong>main tools for evaluating financial risk<\/strong>\u00a0and for periodic testing and preparation of financial policies.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<div class=\"border-bg\">\n<p><span style=\"color: #ff0000;\"><strong>Development Finance Institutions<\/strong><\/span><\/p>\n<ul>\n<li><strong>DFIs provide long-term credit<\/strong>\u00a0for capital-intensive investments spread over a long period and yielding low rates of return, such as urban infrastructure, mining and heavy industry, and irrigation systems.<\/li>\n<li>DFIs often\u00a0<strong>lend at low and stable rates of interest<\/strong>\u00a0to promote long-term investments with considerable social benefits.<\/li>\n<li>DFIs are also known as<strong>\u00a0Development banks.<\/strong>\u00a0They are<strong>\u00a0different from commercial banks<\/strong>\u00a0which mobilise short- to medium-term deposits and lend for similar maturities to avoid a maturity mismatch-a potential cause for a bank\u2019s liquidity and solvency.<\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><strong>DFIs in India<\/strong><\/span><\/p>\n<ul>\n<li>Soon after independence, the institutional framework for development banking began- IFCI (1948), IDBI (1964), IIBI (1972),\u00a0<strong>NABARD<\/strong>\u00a0and EXIM Bank (1982), SIDBI (1990), etc.<\/li>\n<li>However, in the past few years, DFIs such as ICICI, IDBI and IDFC have transformed into universal banks as they<strong>\u00a0did not have the advantage of low-cost funding for long term projects.<\/strong><\/li>\n<li>Currently,\u00a0<strong>DFIs are sector-specific,<\/strong>\u00a0such as Rural Electrification Corp. Ltd (REC) for the power sector, National Bank for Agriculture and Rural Development (NABARD) for the agriculture sector, and Indian Railway Finance Corp. to fund rail infrastructure among others.<\/li>\n<\/ul>\n<\/div>\n<h3><span style=\"color: #ff0000;\">Way Forward<\/span><\/h3>\n<ul>\n<li>If India has to grow 8-10% continuously, credit growth for infrastructure must be 12-14%. Since, infrastructure projects require long-term funds, and given the scale of investment required, a large DFI is a good idea.<\/li>\n<li>Compared with banks, a DFI provides long-term finance for social and economic infrastructure. However, DFIs involve higher risk than what the ordinary financial system may be willing to bear.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"color: #0000ff;\"><strong>For more such notes, Articles, News &amp; Views Join our Telegram Channel.<\/strong><\/span><\/p>\n<p><a title=\"Telegram link\" href=\"https:\/\/t.me\/triumphias\" target=\"_blank\"><span style=\"color: #ff0000;\"><strong>https:\/\/t.me\/triumphias<\/strong><\/span><\/a><\/p>\n<p><span style=\"color: #0000ff;\"><strong>Click the link below to see the details about the UPSC \u2013Civils courses offered by Triumph IAS.<\/strong><\/span> <span style=\"color: #ff0000;\"><strong><a style=\"color: #ff0000;\" title=\"Courses available\" href=\"https:\/\/triumphias.com\/pages-all-courses.php\">https:\/\/triumphias.com\/pages-all-courses.php<\/a><\/strong><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Relevance: Prelims: Indian Economy Why in News The government is planning to set up a new\u00a0Development Finance Institution (DFI)\u00a0essentially to<\/p>\n","protected":false},"author":1,"featured_media":6714,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[123,42,43],"tags":[392],"class_list":["post-9679","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs","category-general-studies-iii-technology-economic-development-bio-diversity-environment-security-and-disaster-management","category-indian-economy","tag-union-public-service-commission-upsc"],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/9679","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/comments?post=9679"}],"version-history":[{"count":1,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/9679\/revisions"}],"predecessor-version":[{"id":9680,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/9679\/revisions\/9680"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media\/6714"}],"wp:attachment":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media?parent=9679"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/categories?post=9679"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/tags?post=9679"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}