The NEW KID Kid On The INFRASTRUCTURE Financing Block

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If you watch National Bank for Financing Infrastructure and Development (NaBFID) Managing Director Rajkiran Rai closely, you will find a spring in his steps these days. The new animal that he has been shepherding for infrastructure financing in one of the world’s fastest-growing major economies is getting ready to make its first disbursement for a project in the renewable energy space before Christmas.

If things move according to plan, NaBFID will close financial year 2023, its first year, with around Rs 15,000 crore of disbursements and at least Rs 50,000 crore of sanctions. Rai, former Union Bank of India boss, took over this assignment in August 2022.

K V Kamath joined the institution as chairman in October 2021, eight months after Finance Minister Nirmala Sitharaman announced the setting up of NaBFID in her Budget speech.

Currently, it is housed at the Small Industries Development Bank of India’s office at Swavalamban Bhavan, Bandra Kurla Complex, Mumbai. Its 28 employees are busy sifting through reports of dozens of projects for renewable energy, roads, airports, ports, urban infrastructure and data centres, and discussing the way forward with representatives of multilateral agencies such as the International Finance Corporation, Asian Development Bank, New Development Bank and European Investment Bank.

By April 2023, when the new financial year starts, around 50 employees will be on its payroll. It is likely to complete raising around Rs 10,000 crore through infrastructure bonds before the financial year ends.

For the time being, resources are not a constraint. It has Rs 20,000 crore capital and Rs 5,000 crore grant from the government in its kitty. It’s also adopting an asset-light model. Even for technology, it does not want to spend upfront. Instead, it’s opting for the plug-and-play model — hiring and not owning it.

Set up in March 2021 with Rs 1 trillion authorised share capital, NaBFID’s mandate is financing infrastructure and developing long-term bond and derivatives markets.

Infrastructure financing has had a chequered history in India.

A special class of lenders called development finance institutions (DFIs) were promoted for long-term project financing, particularly for infrastructure, after Independence. For decades, they had access to the low-cost National Industrial Credit (Long Term Operations) Fund, 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. The Industrial Credit and Investment Corporation of India Ltd (ICICI) followed in 1955 and the Industrial Development Bank of India (IDBI) was created in 1964.

The DFIs had to die as the window for cheap money closed when reforms gathered pace after liberalisation in 1991. Raising money through short-term, high-cost financing and creating longer-maturity assets, they suffered from severe asset-liability mismatches.

Both ICICI and IDBI were merged with the banks floated by them even as IFCI turned into a non-deposit-taking, non-banking financial company with a tiny balance sheet.

Post-liberalisation, the Infrastructure Development Finance Company Ltd (IDFC) was set up in 1997 primarily for project finance and mobilisation of capital for private sector infrastructure development. But this, too, failed, although for different reasons. The RBI rescued it by granting it a banking licence.

Yet another experiment on this turf is India Infrastructure Finance Company Ltd (IIFCL). Its vision is to offer “innovative financial tools for the promotion and development of world-class infrastructure in India”. Till September 2022, it has lent just Rs 37,800 crore, the bulk of it flowing to the road and power sectors.

This is the story of infrastructure financing through institutions even as the corporate bond market is yet to acquire the depth. There are just a few investors in corporate bonds — mostly insurance companies, pension retirement funds and mutual funds, apart from banks. Foreign investors are not too excited about investing in corporate bonds.

The 2006 Union Budget appointed a high-level expert committee to look into the legal, regulatory, tax and market design issues in the development of the corporate bond market, but nothing much has happened in terms of increasing liquidity. This is despite the RBI and the Securities and Exchange Board of India continuously exploring ways to develop this market.

In fact, since 2016, the RBI has been insisting on big corporations raising a part of long-term borrowings from the corporate bond market. Companies with large exposures must raise one-fourth of fresh borrowings from there. The regulations also ask every company that plans to raise at least Rs 200 crore from the bond market to issue electronic instruments.

The 2019 Budget announced a fresh set of measures to deepen the corporate bond market, including the formation of a Credit Guarantee Enhancement Corporation to help companies boost credit rating and raise cheap money.

Yet another instrument in the financial toolkit is take-out financing, but this also hasn’t gained traction. Take-out 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.

An internationally accepted way of lending to infrastructure projects, this instrument addresses asset-liability mismatches and helps banks maintain exposure to different sectors as prescribed by the RBI. The banks cannot hold exposures of more than a certain percentage of their entire portfolio in any given sector.

The take-out financing model has been in existence since 2006 when IIFCL, the special purpose vehicle for infrastructure financing, was set up. But the first such transaction took place in October 2010.

NaBFID is positioned as a complete solution for India’s infrastructure woes.

It’s driven by the board, not the government. The Financial Services Institutions Bureau recommends professionals for the top slots, but it’s the board — and not the government — that approves them. Its employees also get market-related salary and perks.

Financing infrastructure apart, NaBFID is also expected to play a developmental role. Since it cannot finance all projects alone, it will have to join hands with the banks. While the banks restrict themselves to 15-20-year financing, NaBFID can go up to 30 years, based on the profile of the projects.

It can support infrastructure projects in three ways: By giving loans, subscribing to bonds and picking up equity stakes. 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.

Since the playing field is vast, it shouldn’t act as a disruptor. Instead, it can complement others without losing focus on risk-based pricing of loans. Unlike banks, generating long-term resources should not be a problem for NaBFID — the government backing will make the job easy.

Creating an active secondary market for corporate bonds and credit enhancement tools is tough, but the biggest challenge before NaBFID is tapping the right talent for project assessment and monitoring.

Its business plan envisages a loan book of Rs 3 trillion by FY25 and Rs 5 trillion by FY27. Multilateral institutions, sovereign wealth, insurance and pension funds as well as banks and financial institutions can pick up stakes in NaBFID, but the government will always hold at least 26 per cent of its shares.

Here’s the catch. Hope it doesn’t go the IDFC way and offer stakes to impatient investors. If that happens, it will be caught in the crossfire of building infrastructure and offering handsome returns to the investors, missing its mission and losing viability.

Infrastructure is a game of patient capital. Will NaBFID be able to hit the bull’s eye? Let’s wish it success.

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