The National Bank for Financing Infrastructure and Development (Nabfid) should aim to become a self-sustaining business and stop depending on "continuous government support", said Reserve Bank deputy governor M Rajeshwar Rao on Thursday.
The development finance institution was set up in 2021 to focus on infrastructure funding.
“Nabfid, over the medium-term, should plan for self-sustainable operations under a business model that is not reliant on continuous government support or else regulatory dispensations would need to be in place,” said Rao addressing a seminar.
The dynamic nature of our times necessitates agile strategies for institutions with focus on sectors prioritized by the government, thereby complementing overall governmental efforts, while retaining the required flexibility to pivot its strategies as per the changing needs of the economy, he said.
An underdeveloped financial system and limited market for infrastructure debt have made the sector reliant on banks and non-banking financial companies for financing, he said.
Rao said high costs and long gestation periods complicate infrastructure financing and lead to asset-liability mismatches. Delays in approvals, clearances, land acquisition challenges and breaches of agreements exacerbate the risks and often result in cost overruns.
He further said the interdependence of infrastructure projects adds another layer of complexity. The success of one project often hinges on the availability of complementary infrastructure, which means that delays or issues in one project can affect others, making the financing process more intricate. Effective infrastructure development requires a holistic approach where projects are viewed as part of an interconnected network rather than in isolation, he said.
“Successful outcomes depend on synchronized financial planning, meticulous execution, and leveraging synergies across projects,” Rao said.
The current budget has made an allocation of Rs 11.11 trillion for capital expenditure, which is 3.4 percent of GDP.
Historically, public capex has been the cornerstone of infrastructure development in our country. However, considering the limits up to which we can depend on public expenditure, the involvement of the private sector becomes crucial in funding infrastructure, fostering industrial competitiveness, broadening access to a diverse talent base, and optimising the use of resources, he said.
“It is in this context that a specialized institution like the Nabfid can play a transformative role in bridging the funding gap to catalyze participation of the private sector,” he said.
Drawing attention to the failed developmental financial institutions of the past like the IFCI (set up in 1948) along with an eco-system of state finance corporations, ICICI and IDBI, which were done in by elevated NPAs coupled with the increased competition from commercial banks, he said there is a need to have a consensus on the definition of infrastructure itself.
The absence of a strong post-disbursal monitoring of credit utilization was perhaps a key design failure in the erstwhile DFIs which resulted in sub-optimal outcomes. There is a need to learn from the past episodes and set up dedicated units tasked with the ongoing monitoring and evaluation of funded projects through comprehensive and frequent surveys and assessments, he said. This will not only enable dynamic appraisals for subsequent disbursements but also ensure that the finance and tangible progress in projects are in sync with each other, he concluded.