Call it a bailout of a struggling India Infrastructure Finance Corporation Ltd (IIFCL) or larger game plan to finance infrastructure, the proposed new Development Financial Institution (DFI) is likely to start its inning with disproportionately high exposure to power and road assets.
The government is considering a merger of 15-year-old IIFCL, which is a government-backed non-banking finance company, into the new DFI.
Let's take the sanctions and disbursement figure of IIFCL. The cumulative gross sanctions under direct lending to road and power are at staggering 87 per cent (Rs 78,408 crore ) out of the total gross sanctions of Rs 90,050 crore till March 2020.
Under the net sanctions where the financial closure is achieved, the power portfolio is around 40 per cent where the rest 60 per cent is shared by over half a dozen sectors like road, airport, port, urban infra, railway, telecommunication, etc. Similarly, under the cumulative disbursement, the power and road have a share of 54 per cent at Rs 39,042 crore, which is half the portfolio disbursement of Rs 71,917 crore. The cumulative disbursements also include amount under refinance schemes and takeout financing.
The gross NPAs of IIFCL are at 19.70 per cent and net NPAs at 9.75 per cent with a very low provision coverage ratio of 50 per cent. Most banks today have a provision coverage ratio of over 70 per cent.
Clearly, the IIFCL has a product concentration in few sectors, especially power and roads, and also very high NPA. This indicates a plan to bail out the IIFCL as the new DFI will have easy fundraising options from the RBI and other means, and also absorb the loan losses of the existing infra financing institution.
The Union Budget 2021-22 has proposed an initial capital of Rs 20,000 crore for the new institution with a loan book of Rs 5 lakh crore in three years. The earlier DFIs from ICICI, IDBI, IDFC have all transformed into retail banks in the last two decades because of asset-liability mismatches
If the idea is to consolidate all infra institutions and create scale at the DFI level, the government certainly needs a plan to diversify the book to a much more balanced portfolio. In the past, the banks have underpriced the credit risk or not focused on risk-adjusted returns. The DFI needs people from areas like risk management, treasury corporate finance, credit, and industry experience. The gross NPAs of 20 per cent at IIFCL show the lackluster performance.
The proposed DFI has to focus on effective monitoring, knowledge-based IT systems, and use of digital to monitor the sector as well as borrowers in a more rigorous manner. The long term lending to infra and other key manufacturing sectors requires project appraisal skills with domain knowledge of the industry.