Setting up a development financial institution is a good idea, but past errors should be avoided
The Centre is banking on long-term infrastructure creation to sustainably lift India’s economic growth rate. This makes it imperative for the Centre to figure out a way to bankroll the ambitious ₹100 lakh crore National Infrastructure Pipeline. With banks having burnt their fingers on project lending, it appears pragmatic for the country to go back to the idea of a Development Finance Institution (DFI). Naysayers may point out the failed experiment with institutions such as ICICI and IDBI which were converted into universal banks at the turn of the century. But India’s financial markets have grown by leaps and bounds since then, other economies have demonstrated success with DFIs, and policymakers have the luxury of learning from past mistakes. This makes the DFI idea worth exploring again.
Of course, the Centre must also keep in mind that project lending institutions in India tend to be tripped up by factors outside their control, as much as by their inherent weaknesses. In the past, ambitious highway and pipeline projects have been interminably held up by local protests and land acquisition woes, telecom players have been hamstrung by litigation over AGR and retrospective taxes and mega power projects have been stalled by irregular fuel allocations and poor contract enforcement. The success of DFIs is contingent on ironing out such issues and removing on-ground impediments to the ease of doing business.