The comeback path for DFIs is strewn with strategic challenges

Niranjan Rajadhyaksha of Cafe Economics in this new Mint piece:

Are development finance institutions (DFIs) about to make a comeback in the Indian financial landscape? The first hint was offered by finance minister Nirmala Sitharaman in her July 2019 budget speech. She spoke about the need for a specialist DFI to channel funds to the 1 trillion of infrastructure projects planned over the next five years. Not much happened after that. Then K.V. Kamath, who led the successful transition of the erstwhile ICICI from a development bank to a universal one, said in an interview to Bloomberg Quint in early December that India may need to consider a new DFI.
These statements could be mere straws in the wind. They come nearly two decades after India decided that its financial system was mature enough to do away with the specialist institutions set up after independence to fund large industrial projects. India no longer faced the problem of incomplete financial markets that led to the creation of specialist DFIs in the first place. There was also a lot of hope at the turn of the century that the corporate bond market would reach maturity soon. 
He says the focus is typically on asset side of DFIs. But we need to see the liabilities side.
Much of the discussion on DFIs tends to be focused on the asset side of the lending business—and especially the type of projects they fund. However, the equally important part of the Indian DFI experience, and which remains relevant in case a new DFI is in the offing, is on the liabilities side of the balance sheet. These institutions had a special status in the financial system, which allowed them to borrow at low rates.
First, large DFIs had access to soft loans from international agencies, at a time when Indian companies did not have direct access to dollar funding because of capital controls. Second, DFIs benefitted from financial repression, as the rupee bonds they sold qualified as statutory liquidity ratio (SLR) holdings for banks. Third, the DFIs got direct funding from the Reserve Bank of India under its Long-Term Operations (LTO) kitty, which has since been disbanded.
This extraordinary regulatory largesse helped traditional DFIs raise money at significantly lower interest rates compared to what they would have had to borrow at in the open market, and in effect kept interest rates at the long end of the market relatively low, an incentive for industrial investment. None of these three advantages would be available to a new DFI in the contemporary financial system.
As always food for thought from Cafe Economics…

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