Tamal Bandopadhyay has an op-ed about the new infrastructure financing entity, the National Bank for Financing Infrastructure and Development (NaBFID).
NaBFID closed the financial year 2024 with Rs 1 trillion worth of sanctions. Disbursements till March amounted to Rs 36,000 crore. By the end of May, disbursements crossed Rs 45,000 crore. Around 50 per cent of this is long-term loans for 15-25 years. Rai expects sanctions to cross Rs 2 trillion in the current financial year and Rs 93,000 crore in disbursements. Renewable and traditional power generation projects account for a little over half of its portfolio, followed by roads (a little over one-fourth) and railways. It has also ventured into telecom, city gas distribution, and power transmission and distribution as well in a small way so far. Set up with Rs 1 trillion in authorised share capital, NaBFID’s mandate includes financing infrastructure through loans and equity investments and developing long-term bond and derivatives markets… To support fresh disbursements, NaBFID has lined up a Rs 20,000 crore credit line from multiple banks.
I’m not sure that the role of NaBFID that emerges from the above is what was intended. Two things are of concern. One, NaBFID appears to be playing the role of a regular commercial bank, albeit focusing on infrastructure loans. Two, it appears to be largely focused on the de-risked infrastructure sectors - power generation and transportation - that’ll anyways attract lenders.
This goes to the point about clarity on the role of NaBFID. Is it just a bank that focuses on infrastructure loans? Or is it a development finance institution (DFI) that serves as a market maker for infrastructure asset creation? In other words, what’s the additionality offered by NaBFID? How’s it different from the regular commercial financial institution? I have raised this question earlier in the context of NIIF here.
From the article, it appears that NaBFID is yet another bank, competing with and lending to the regular de-risked sectors.
The role of a DFI is different. It should serve as a market-making financial intermediary to serve the unmet needs in infrastructure financing. Specifically, it should de-risk and provide patient capital to infrastructure projects and sectors struggling to attract commercial lenders.
Power generation (and transmission), roads, railways, ports and airports, telecommunications, city gas distribution etc., are among the most de-risked of infrastructure sectors. Apart from projects in remote or difficult areas, these sectors will attract commercial lenders. Yet they constitute almost the entire portfolio of NaBFID.
In contrast, sectors like water and sewerage, solid waste management, urban mass transit, electricity distribution, fishing harbours, irrigation, urban regeneration, schools/colleges, hospitals, affordable housing etc., struggle to attract equity investments and debt. These projects require lower-cost financing, guarantees, and risk-tolerant and patient capital. This can help crowd in commercial investments, set demonstration examples, and de-risk the segments/sectors. This is the role that a DFI has to play. It has to become an infrastructure financing investment bank.
In addition to itself directly lending to specific infrastructure projects, NaBFID has an opportunity to work with regular banks and other financial institutions on the supply side of finance to standardise and de-risk financing sources. For example, as Tamal writes, the insurance companies and pension and provident funds have around Rs 75 trillion and Rs 45 trillion respectively of funds available. NaBFID could take the lead to help institutionalise capital mobilisation from insurance and pension/provident funds.
They could strive to create demonstration examples and derisk for insurance and pension funds to invest an increasing share of their finances directly in infrastructure funds. I would go as far as to suggest that NaBFID should be mandated to raise a pre-defined and rising share of its capital from these investors. It could be considered to even have some regulatory mandate to push these funds to invest a minimum percentage of their capital directly in infrastructure funds.
For this, NaBFID could launch infrastructure funds (including sector-focused funds) that mobilise capital from these kinds of institutional investors with long-term capital. It would help create the domestic market for infrastructure funds (currently this market is dominated by mostly foreign infrastructure funds who also raise the major share of their capital abroad). To derisk the instrument and catalyse the market, NaBFID could partner with Indian fund houses in launching infrastructure funds.
It could also lead on the creation of the various policy and regulatory enablers that allow for such financing to flourish. It should support the Government of India with research and technical assistance on issues like the ongoing debate on the increased risk weights associated with infrastructure lending.
Other examples on the financing side would be the demonstration of success with the creation of guarantee funds, takeout financing consortiums, subordinate lending arrangements etc. Guarantees are the cheapest way to de-risk infrastructure financing. How about a guarantee fund that brings together a coalition of lenders to support projects in specific as-yet not derisked sectors?
Such market-making requires strong infrastructure finance knowledge and skills. In this context, I’m not sure whether two retired bankers from regular commercial banks, however reputed they are, can lead on the achievement of the mandate of NaBFID becoming an infrastructure DFI. One of the common gripes among experts and commentators is that banks do not have the expertise to undertake due diligence on infrastructure projects. So I'm not sure whether retired commercial bankers are best placed to lead institutions that are supposed to undertake due diligence and lend long to infrastructure projects.
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