Development Finance Institution or DFI—this was one of the most important phrases used in the Union Budget presented by Finance Minister Nirmala Sitharaman earlier this year. In just over six weeks since the Budget proposal was made, the Cabinet has approved the setting up of this DFI.
As India seeks to build public infrastructure at a rapid pace, the country is perennially short of infrastructure capital. By definition, infrastructure capital is patient in nature, not seeking either short-term repayment or long-term financial returns in line with commercial internal rate of returns (IRR) on the projects funded.
Public infrastructure can only be built by putting in capital that is happy with economic rate of return and can wait for cash flows to start accruing. This may require a long wait and endurance. And this is where the proposed DFI comes in. The government proposes to bring a National Bank for Financing Infrastructure and Development (NABFID) Bill to set up this DFI under an Act of Parliament.
DFIs have played a key role in nation-building in developing countries. The National Bank for Economic and Social Development (BNDES) in Brazil has been a very effective DFI. The China Development Bank has similarly bankrolled an infrastructure glitz that has been a global talking point for several years.
India had DFIs in the past, but they were aligned more to industrial projects and not to the cause of nation-building. These were in the form of public utility projects, which are critical for defence, productivity enhancement and citizen convenience, but may not have a real commercial model. This is the gap NABFID proposes to fill.
The single biggest advantage that NABFID will enjoy is that it will borrow at a very low cost of capital. It will get the benefits of being a quasi-sovereign body. The structure of NABFID will have many firsts. It will have development objective front and centre in terms of its constitution. The DFI will develop a corporate bond market for its fundraising. It will mainly take in non-recourse long-term finance, including that from sovereign wealth funds as well as multilateral and bilateral institutions, with an option for exit or buyback.
NABFID provides for a professional board, with domain experts driving its working. The board will be able to appoint and remove whole-time directors, thus ensuring that there are no ‘lifetime jobs’. The bank will stick to market remuneration for its staff, thus retaining the ability to attract the best talent. The bank will have longer tenures for managing directors and deputy managing directors as well as higher age limits for retirement.
The DFI will use a variety of financial instruments to run its operations. It will deploy the best-fitting instruments to fund specific stages of the project lifecycle. These will include credit enhancement, pass through certificates (PTCs), securitisation and working with InvITs. The Bill will build in enabling provisions to provide support for hedging costs to ensure access to funds in foreign currency is available with exchange rate management through maturity.
The size of NABFID itself is quite significant. The initial authorised capital will be `1 lakh crore and it will be raised to `5 lakh crore in the next three years as was announced in the Budget. The government has baked in several enabling provisions to attract eligible investors. The bank will have an income tax exemption for 10 years. The government will charge a concessional fee of 0.1% to provide sovereign guarantee for the funds borrowed. The Bill provides for government grants as well as contributions in the future.
The bank will be allowed to directly borrow from the RBI for up to 90 days. It can also borrow from the central bank for a longer duration but against bills of exchange maturing within five years. The pension and insurance regulators will classify NABFID bonds as approved investments. In turn, the RBI will also make separate provisions against the statutory liquidity ratio (SLR) calculations for institutions holding these bonds.
All in all, the government has already planned for a range of measures that will help NABFID become an attractive destination for infrastructure and development capital. With the extensive global outreach of Prime Minister Narendra Modi over the last few years, India will also be able to attract overseas funds from aging economies, which primarily seek principal protection and a small but assured rate of return just over their local low inflation rates.
India has in the past had a tryst with All India Financial Institutions (AIFI)—a collection of DFIs. But these DFIs did not have the range of facilitative levers available to NABFID. Also the clear focus on infrastructure building for this NABFID is a big differentiator in itself as it sets the tone for both the type of investments to be tapped as well as style of operation.
Setting up NABFID is a turning point in building Indian infrastructure for the next few decades. India already has a National Infrastructure Pipeline (NIP) defined with projects worth `120 lakh crore to be executed over the next five years. Given the fiscal constraints under which the Central and state governments are placed right now, the DFI will fill the critical gap of financing this NIP. With the financing option now defined, the government can focus on defining the projects to be executed under the NIP.
Once both the Houses of Parliament approve the NABFID Bill, the institution will come into force. This heralds new and unique opportunities for India to embark on building high-quality, predictable and high-impact physical infrastructure.
Aashish Chandorkar
Director, Smahi Foundation of Policy and Research. Author and columnist
(Tweets @c_aashish)