Government plans to revive development finance institutions (DEI) to fund ambitious infrastructure projects

• Recently, government has indicated its intent to modify India Infrastructure Finance Co Ltd (Government owned company to provide long term finance) into a DFI by increasing its equity capital by Rs. 15,000 crore.

• DFI is an institution promoted or assisted by Government mainly to provide development finance to one or more sectors or sub-sectors of the economy.

• In India, DFIs were established mainly to cater to the demand for long-term finance by industrial sector.

• Between 2000 and 2010, DFIs such as ICICI, IDBI and IDFC extended long-term finance to industry and funded greenfield infrastructure projects.

• However, DFIs started facing stress due to: paucity of low-cost funds, high concentration risk, high exposure to stressed sectors (like power generation).

Need to revive DFIs:

• Infrastructure financing is currently dominated by bank lending. However, banking sector is witnessing rising non-performing assets.

• To fund long-term infrastructure projects without the associated asset-liability mismatches.

• According to estimates of NITI Aayog, India would need around US $4.5 trillion for
investment in infrastructure by 2030.

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Mains Paper 3: Economy

Prelims level: Development finance institutions

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