Decoding recent DFI introduction in Indian Infrastructure

 

NABFID – Promise and prudence for India’s new development finance Institution

The meeting to discuss the National Bank for Financing Infrastructure and Development (“NABFID”) set up by an act of parliament, was widely attended by market participants from banks and financial institutions, funds, infrastructure entrepreneurs and professionals. The discussion centred around the themes of (1) why a new institution was required, (2) how it would distinguish itself from previous avatars and (3) industry feedback for sectoral focus, effective funding structures, governance and culture.

Why is this institution needed today, particularly given past experiments

NABFID is an idea whose time has come. It is widely acknowledged that investment in infrastructure will be central to COVID recovery across countries. In India, in particular, even prior to the present health crisis, underinvestment in infrastructure is one of the biggest binding constraints on raising the growth potential of the Indian economy and improving competitiveness.

India has therefore, rightly committed to spending up to INR 111 trillion over the next four years on infrastructure projects as it seeks to recover from the COVID induced economic contraction. It is clear that there is a market failure to fund infrastructure – private credit extended to the infrastructure sector has remained stagnant at approximately INR 1.65 lakh crore over the last six years.

This necessitates a Government of India (“GoI”) funded entity to fill the breach. Banks and NBFCs had been funding infrastructure so far and have had constraints for a range of reasons and a development finance institution was critically required. NABFID will fund projects at the early stage where the risk is high and limited funding is available and has to provide relatively low-cost credit given its own capital structure and the ability to raise funds.

NABFID could be a “Patient partner” and fulfill both its development & commercial objectives – balancing the public good aspect of infrastructure in a financially viable manner. Among its most significant advantages is the ability to allocate risk and structuring - the NABFID could absorb early risk which is critical given that other lenders may not be able to at this stage.

How is this institution different from other past DFIs

Several discussants noted that while there have been previous avatars of DFIs, the NABFID was vastly different in its design, structure and governance model, each of which had set it up for success. The NABFID Act has set up a governance structure for the institution which is vastly different from the other All-India development finance institutions. Significant autonomy has been extended to the DFI personnel as well as protection and immunity from investigation and prosecution.

The governance of NABFID is through the professional and independent board which is embedded in the statute. Government has provided budgetary support for NABFID for a limited amount, and its funding will be through a variety of sources. The statute itself envisages the GOI equity being pared down to 26% over time. Equity participants may be subject to geo-political, strategic considerations. In terms of debt funding the DFI would be funded through SLR, insurance companies and the market supported by the sovereign guarantee which enables fundraising at a reasonable cost, permitting on-lending at reasonable cost as well. The definition of infrastructure has been pegged to the GoI harmonised list, making it malleable and flexible.

Some Industry Suggestions to set up NABFID for success

The discussants had certain specific suggestions about the manner in which the NABFID could function

• The liabilities of NABFID should be kept manageable
• NABFID should provide commercial and not concessional funding, it need compete with universal commercial banks – the race for long terms liabilities funding long term assets may not longer be relevant, as multiple products for refinance, credit guarantee, monetisation through InViTs and REITs
• The GoI guarantee can help reduce the cost of credit
• The credit appraisal model must be robust
• NABFID must work closely with other infrastructure ministries for policy certainty & stability.
• Better contracting structures, model agreements, technical assistance provided will be an additional weapon for the DFI
• Project Finance expertise must be to be built and nurtured not dissipated
• Since infrastructure funding takes time to stabilise additional forbearance and flexibility from RBI may be required
• DFI being on the Committee of Creditors will add heft and expertise
• The DFI must build trust & capacity early

Key Takeaways

• The DFI must have an integrated approach and work closely with infrastructure ministries, have a clear policy direction and predictability and certainty
• Credit must be appropriately priced- it must provide “smart” credit and not cheap credit
• Risk and reward must align, the risk-adjusted return must moderate.
• The DFI must develop new products
• The DFI must be a greenfield project enabler, catalyst, provider
• The DFI’s bond market intervention must complements its lending
• In operational aspects, the DFI must build credibility.
• A credit plus model- including nurturing research, advocacy and consultancy will set it apart
• Nurturing a culture and environment that rewards expertise will develop success
• Credibility in credit appraisal credibility, talent, and the legal backing will be critical to success