Governance structures, liability key to DFI success

The assurance of sustainable sources of long-term liabilities and a strong governance framework will be crucial for the success of the proposed new development finance institution (DFI), industry participants and market experts said. The government will have to play a role not just as a provider of capital, but also as a facilitator of policy tweaks like credit enhancements for projects financed by the DFI. There is also speculation that India Infrastructure Finance Company (IIFCL) may be merged into the new sovereign-backed DFI.

Before 1992, DFIs enjoyed a set of benefits which made it easy for them to tap into long-term liabilities. They had access to funding at concessional rates from multilateral agencies. DFI bonds enjoyed a statutory liquidity ratio (SLR) status, which meant that banks were a captive source of funds for these institutions. They also received direct funding from the Reserve Bank of India (RBI) through long-term operations (LTO).

Niranjan Rajadhyaksha, research director and senior fellow, IDFC Institute, said of these three routes, only the first still remains an option. “Maybe this DFI with some sovereign guarantee could raise money and then give rupee loans to local infrastructure companies. So we will have to await the details and see if the government comes up with a new rupee instrument to bridge the long-term liability gap,” he said.

Some industry executives believe that the pre-1992 concessions for DFIs may have to be brought back to make the structure effective. RK Bansal, who heads Edelweiss ARC and has earlier worked with IDBI, explained that if the older funding benefits are not restored, the bond market will have to be deepened significantly for DFIs to work.

“The government will also need to offer credit enhancement because new infra projects cannot be highly rated. Finally, a high degree of policy support will be required from the government and they must ensure that different departments coordinate among themselves to help complete the projects,” he said.

The experience of DFIs globally holds proof that the government needs to be involved in a hands-on fashion. Without policy-level handholding from the government, infrastructure projects cannot achieve fruition and it will be the DFI that will be left holding the can, experts said.

There is also a view that the new DFI must on-board private partners in order to establish a strong governance framework. Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services (APAS), said, “Apart from raising long-term liabilities to fund long-term assets, the other challenge would be to develop a sound governance framework. That was what distinguished the better-managed private DFIs ICICI and HDFC from the others. If the government can conceive of some measure by which the DFI can raise long-term liabilities, then it could sustain with the help of good governance practices.”

Sound governance practices will also inspire confidence among potential long-term investors such as pension funds and sovereign wealth funds, Parekh added.