Page 38 - Banking Finance December 2021

ARTICLE

O The gap between banks' assets and liabilities, borrowings, and loans from multilateral agencies.
already increased by bad debts will become Y Specialized DFIs: Specialized project lenders focused on
unsustainable in infrastructure investment, given specific verticals tend to do better at building project
the long funding periods of such projects. appraisal skills and managing risks than 'supermarket'
Y Economic Crisis Triggered By Covid-19 Pandemic lenders who fund any project that comes their way.
O The Covid-19 pandemic has exacerbated inequality, O The Centre must therefore be open to the idea of
the poverty gap, unemployment, and the multiple specialized DFIs modeled on the success
economy's slowing down. of refinancing institutions such as NHB and
NABARD.
O Thus, infrastructure building through DFIs can help
in quick economic recovery. Y Ensuring Good Governance: While freeing a DFI from
Y Achieving the Target of $5 Trillion Economy: The political interference or corny lending is necessary,
government has envisaged attaining the target of merely having private shareholders or professional
becoming a USD 5 trillion economy by2025. managers on board isn't sufficient to ensure good
O However, this goal will depend on world-class governance.
infrastructure across the country. O This has to be backed by a robust system of external
checks and balances such as supervision by RBI and
O NITI Aayog has estimated that US$4.5 trillion will proper due diligence by auditors and rating
be needed by 2030 to fund infrastructure. DFI is a agencies.
step in the right direction towards this goal.
Y Ensuring Ease of Doing Business: In the past,
Y International Examples: DFIs in China, Brazil, and
ambitious highway and pipeline projects have been
Singapore has been successful in both domestic and continually held up by local protests and land acquisition
international markets. woes, retrospective taxes, and poor contract
Y Asset Liability Mismatch: Commercial banks face a enforcement.
maturity mismatch. Commercial banks borrow short O The success of DFIs is contingent on ironing out such
from depositors with a maximum of 10 years for fixed issues and removing on-ground impediments to the
deposits and therefore cannot offer medium and long ease of doing business.
term loans for projects requiring 15-25 years of funding. Y Likely challenges of NaBFID: It is likely to face challenges
O Many commercial banks (both public and private) of intense completion from multiple players. Necessary
are already struggling to cope with rising bad loan condition for the proposed DFI to sustain will be its
and stretched balance sheets. Hence, the sharp ability to
decline in long-term credit witnessed in the last two O Retain low-cost advantage on a continuing basis,
decades has revived the demands for creating new
O Withstand market competition and
DFIs and development banks in India.
O Navigate challenges of asset inflexibility - exclusively
Way Forward infrastructure.
Y Mobilizing Capital For DFI: To lend for the long term, Conclusion
DFI requires correspondingly long-term sources of
finance. While boosting investment in the infrastructure sector is
O DFIs of the earlier era were over-reliant on cheap imperative for sustained growth, the need for the hour is
government funds and today's commercial banks ran to resolve persistent issues in the debt market that impede
into asset-liability mismatches due to their reliance long-term financing flow. Hence, our Govt. need to revive
DFIs concept again to keep societal, cultural, regional, rural
on retail deposits to fund long-term projects.
and environmental concerns intact while sanctioning credit
O Therefore, it may be best for new-age DFIs to focus to long term infrastructure projects. Success of National
on diversified sources of funding. Bank for Financing Infrastructure and Development

O Presently, DFI can be adequately capitalized by the (NaBFID). in imparting bond/debt market vibrancy will be
sovereign-backed funds, alternative routes such as an important and a positive step in continuation of India's
capital gains/tax-free bond issues, external endeavor in developing a robust financial structure. T

38 | 2021 | DECEMBER | BANKING FINANCE