Union Cabinet clears DFI with capital infusion of Rs 20000 crore

Highlights:

  • The Finance Minister, Nirmala Sitharaman, announced on March 16, 2021 that the Union Cabinet chaired by Prime Minister, Narendra Modi, has cleared the proposal of setting up of the “Development Finance Institution (DFI) with the capital infusion of rupees 20,000 crore. 
  • This proposal was approved in a bid to boost the infrastructure development in country.
  • The announcement for this legislation was made by the finance minister during the Union Budget 2021-2022 speech on February 1, 2021. 
  • After the announcement, some 7,000 projects have been identified under National Infrastructure Pipeline (NIP). 
  • The government has projected the investment of Rs 111 lakh crore for the period 2020-25.
What is DFI ?
  • A development finance institution also known as a development bank or development finance company is a financial institution that provides risk capital for economic development projects on non commercial basis. As of 2005, total commitments of the major regional, multilateral and bilateral DFIs totaled US$45 billion.
  • The Development Finance Institution will be set up in order to raise long-term funds. 
  • There will also be some tax benefits on DFI for a period of 10-years. DFI would comprise of a professional board in which 50 % of the members will be non-official directors. 
  • Under it, the initial grant will be Rs.5,000 crores. 
  • Later, additional increments of grant will be made in to effect within the limit of Rs. 5,000 crore. 
  • In the initial phase, new institution will be owned by government while in the later phase, the government’s stake will be cut to 26%.
Significance of DFI:
  • The government is also planning to issue securities to DFI which in turn will help in lowering the cost of funds. 
  • This will help the institution to leverage the initial capital and drawing funds from several sources. 
  • It will also positively impact the bond market in India. 
  • The institution also seeks to raise the funds from global pension and insurance sectors in order to invest in new projects. 
  • DFI would also help the banks to cater the issue of asset-liability mismatch in the bank which are lending to infrastructure.