Date: 14/12/2022
Relevance: GS-3: Indian Economy, planning, mobilization of resources; Infrastructure financing and Capital markets, role of financing institutions.
Key Phrases: National Bank for Financing Infrastructure and Development (NaBFID), All India Financial Institution (AIFI), Development Financial Institution (DFI), National Industrial Credit Fund.
Context:
- The newly established National Bank for Financing Infrastructure and Development (NaBFID) is about to make its first disbursement for a project in the renewable energy space before Christmas.
- It is expected that the NaBFID will close its first financial year (2022-23) with around ₹15,000 crores of disbursements and at least ₹50,000 crores of sanctions.
National Bank for Financing Infrastructure and Development (NaBFID)
- Background
- NaBFID as the principal Development Financial Institution (DFI) to support the development of long-term infrastructure financing in India was announced in the Budget 2021 by the GoI.
- Consequently the Parliament enacted the National Bank for Financing Infrastructure and Development (NaBFID) Act, 2021 which received assent of the President in March, 2021 and has come into force w.e.f. April 19, 2021.
- About
- It has been set up as a corporate statutory body with authorized share capital of one lakh crore rupees.
- NaBFID is regulated and supervised as an All India Financial Institution (AIFI) by the RBI under the Reserve Bank of India Act, 1934.
- It is the fifth AIFI after EXIM Bank, NABARD, NHB and SIDBI.
- Currently it is headquartered at the Small Industries Development Bank of India’s (SIDBI) office in Bandra Kurla Complex, Mumbai.
- Mandate
- To financing infrastructure and developing long term bond and derivatives markets.
- Funding
- It may raise money in the form of loans or the issue and sale of various financial instruments including bonds and debentures.
- It may borrow money from the central government, Reserve Bank of India (RBI), scheduled commercial banks and multilateral institutions such as the World Bank and Asian Development Bank.
- Initially, the central government will own 100% shares of the institution which may subsequently be reduced up to 26%.
- Management
- It is governed by a Board of Directors.
- A Chairperson and Managing Director to look after day to day affairs at the apex level are appointed by the central government in consultation with RBI.
- Other Provisions
- The central government will provide grants worth Rs. 5,000 crore to NaBFID by the end of the first financial year.
- The government will also provide guarantee at a concessional rate borrowing from multilateral institutions, sovereign wealth funds, and other foreign funds.
- No investigation can be initiated against employees of NaBFID without the prior sanction of the central government in case of the chairperson or other directors, and the managing director in case of other employees.
- Courts will also require prior sanction for taking cognizance of offenses in matters involving employees of NaBFID.
Development Finance Institutions (DFIs) and associated challenges
- After the independence to boost infrastructure creation a special
class of lenders called development finance institutions (DFIs)
were promoted for long term infrastructure project financing.
- For decades, they had access to the low-cost National Industrial Credit (Long Term Operations) Fund which was created out of the profits of the Reserve Bank of India (RBI).
- They also raised cheap money through bonds, backed by government guarantees.
- The first DFI was the Industrial Finance Corporation of India Ltd (IFCI), set up in 1948.
- Later on the Industrial Credit and Investment Corporation of India Ltd (ICICI) in 1955 and the Industrial Development Bank of India (IDBI) was created in 1964.
- Lack of cheap funds led to demise of the DFIs
- In the post liberalization era the DFIs were not able to raise cheap funds and raising money through short term, high cost financing and creating longer maturity assets led to severe asset-liability mismatches.
- Many DFIs were merged into new entities or closed down.
- Even newly set up entities in the post LPG times such as Infrastructure Development Finance Company Ltd (IDFC) also failed and bailed out by either the GoI or the RBI.
- The modern day DFIs are also sailing in shallow waters
- The India Infrastructure Finance Company Ltd (IIFCL) which offers innovative financial tools for the promotion and development of world class infrastructure in India is also facing difficulties.
- Its bulk of the lending amount is flowing into road and power sectors.
- Underdeveloped corporate bond market has increased the woes
- Usually insurance companies, pension retirement funds, mutual funds, and banks are the only ones who are helping the infrastructure through corporate bonds
- Foreign investors are not too excited about investing in corporate bonds.
Efforts to develop the bond markets
- The RBI and the Securities and Exchange Board of India (SEBI) are continuously exploring ways to develop this market.
- As per RBI directions (since 2016) companies with large exposures must
raise one fourth of fresh borrowings from the corporate bond market.
- Also, it mandates a company that plans to raise at least ₹ 200 crore from the bond market to issue electronic instruments.
- The 2019 Budget announced a fresh set of measures including the formation of a Credit Guarantee Enhancement Corporation to help companies boost credit rating and raise cheap money.
- Takeout financing can be useful but it is also not a common practice in India.
What is Takeout financing?
- Takeout financing is a model for providing long duration finance through medium term loans.
- For instance, if a project needs to raise money for 15 years, three potential lenders who are not able to offer loans of more than five years can chip in by successively offering loans of five year maturity each.
- This is done by each lender taking out the previous lender´s loan.
- Benefits
- An internationally accepted way of lending to infrastructure projects.
- Addresses asset-liability mismatches and helps banks maintain exposure to different sectors as prescribed by the RBI.
NaBFID is a complete solution for India's infrastructure woes
- Autonomy and efficient management
- The NaBFID is managed and run by the top professionals who have the requisite expertise. There is no ministerial or government interference.
- The NaBFID employees get market related salary and perks.
- Joining hands with the banks
- It can’t finance all the projects and thus can join hands with banks to provide loans for long term (e.g. 30 years) vis-a-vis banks who restrict themselves to 15-20 year financing.
- Multiple financing options
- It can support infrastructure projects in three ways: by giving loans, subscribing to bonds and picking up equity stakes.
- Long term interest rates
- While banks typically reset the loan rates for projects every year, NaBFID will reset the rates every three and five years in addition to one year.
- Easy resource mobilization
- The NaBFID has the backing of the government so it can easily mobilize capital at cheaper rates.
- Partnership and cooperation with various multilateral institutions will be vital for overall development along with financing infrastructure.
Conclusion
- The NaBFID should use its position to complement others without losing focus on risk-based pricing of loans.
- It has many positives in its kitty such as Asset-light and plug-play models; and abundant resources at its disposal therefore it needs to pitch in the right talent to carry out its operations in the right spirit of achieving its intended goals.
Source: Business Standard
Mains Question:
Q. Autonomy in functioning, abundant resources at its disposal and multiple channels of supporting infrastructure project finance make the National Bank for Financing Infrastructure and Development (NaBFID) a complete solution for India's infrastructure woe, critically analyze. (250 words).
