Is NaBFID The Answer To India’s Infra Woes?

From his cabin on the 15th floor of The Capital building at Mumbai’s Bandra Kurla Complex, KV Kamath, chairman of the National Bank for Financing Infrastructure and Development (NaBFID), is within touching distance of the headquarters of ICICI Bank Ltd, which he headed until 2009. For six years thereafter, until 2015, he was the chairman of the bank, with which its parent, ICICI Ltd, had merged.

He may feel nostalgic for those days when a project finance institution had no choice but to merge with a bank to survive. But as chairman of NaBFID, he now enjoys a ringside view of infrastructure financing in the world’s fastest-growing economy, steered by its managing director (MD), Rajkiran Rai.

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.

Former MD of Union Bank of India, Rai took over this assignment in August 2022. Kamath had 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. The first disbursement was made in December 2022 for a tunnel project in Jammu and Kashmir, run by Quazigund Expressway Pvt Ltd.

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.

The bond market has always been a sore point in India’s financial market architecture. The 2006 Union Budget appointed a high-level expert committee to address critical issues in developing the corporate bond market, but little progress has been made in increasing liquidity. Since 2016, the Reserve Bank of India (RBI) has insisted on large corporations raising part of their long-term borrowings from the corporate bond market.

NaBFID’s paid-up capital is Rs 20,000 crore. Additionally, there is a Rs 5,000 crore grant. Last year, it raised Rs 19,500 crore in two tranches of 10- and 15-year money, primarily from domestic insurance firms and pension funds.

To support fresh disbursements, NaBFID has lined up a Rs 20,000 crore credit line from multiple banks. Talks are also ongoing with a few multilateral agencies for long-term funds, including green climate funds to support solar, wind power, and urban infrastructure projects. It is finalising plans to raise external commercial borrowings in the last quarter of the current year.

Infrastructure financing has never been easy in India. After Independence, a special class of lenders called development finance institutions (DFIs) were promoted for long-term project financing, particularly for infrastructure. They worked well as long as they had access to the low-cost National Industrial Credit (Long Term Operations) Fund, created from RBI’s profits. They also raised cheap money through bonds backed by government guarantees.

The first DFI, Industrial Finance Corporation of India Ltd, was set up in 1948. ICICI followed in 1955 and the Industrial Development Bank of India in 1964. Life became tough for them when the cheap money tap closed in the 1990s, leading to severe asset-liability mismatches in their books.

The Infrastructure Development Finance Company Ltd was set up in 1997 primarily for project finance and capital mobilisation for private sector infrastructure development. However, it, too, did not succeed. Another experiment in this field 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.” Born in 2006, IIFCL’s outstanding loan book as of March 31, 2023, was Rs 42,271 crore. In FY24, it sanctioned Rs 42,309 crore and disbursed Rs 33,356 crore.

Around 100 employees work at the 23,000-square-foot NaBFID office,?attempting to create?a new chapter in infrastructure financing, a key to India's growth story. While top-end employees are on contract, at the entry level, NaBFID is hiring CAs, MBAs, and post-graduate engineers on its payroll to create a cadre.

Along with financing, it is building a project assessment team for transaction advisory services, which will conduct technical studies of upcoming public-private partnership (PPP) projects. It has already signed an MoU (memorandum of understanding) with the International Finance Corporation for this. The idea is to help develop the pipeline of infrastructure projects. It also aims to create a data repository for the infrastructure sector, complementing the national infrastructure pipeline.

Even though earlier attempts in this space had failed, NaBFID should succeed as the ecosystem is changing. From investors’ perspective, infrastructure projects are a new asset class that offers healthy returns. I am not talking about the greenfield infra projects. Those projects that have been completed and are going for asset monetisation can even attract retail investors beside foreign funds and private equities.?

In October 2022, Union Minister for Road Transport and Highways Nitin Gadkari rang the bell at Bombay Stock Exchange to ceremoniously mark the retail entry through the listing of NHAI InvIT (National Highways Infra Trust) non-convertible debentures (NCDs). One-fourth of the NCDs were reserved for retail investors. Round 2 of InvIT, which offered an 8.05 per cent return per annum, was subscribed almost seven times within seven hours of its opening.

InvIT, or infrastructure investment trust, is like a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a portion of the income as return.

A new class of investors is willing to treat infra as an asset class as all the constituents — government, financiers, and corporate India — have learned from past mistakes. Everything that could go wrong went wrong in the project financing space early last decade with environmental clearance not forthcoming, courts stalling projects, companies playing truant and lenders piling up bad assets. The four stressed sectors that contributed the most to banks’ bad assets are telecom, power, EPC (engineering, procurement and construction), and steel.

The regulator forced banks to clean up their balance sheets through a unique asset quality review over six quarters between December 2015 and March 2017. Consequently, the banking system is now resilient, with 26 listed banks having less than 1 per cent net non-performing assets; the industry posted Rs 3.2 trillion net profit in FY24, the highest ever. The Insolvency and Bankruptcy Code, established in 2016, has weeded out crony capitalists from the system, and the government has become proactive in allocating iron ore and coal mines and clearing project hurdles. Land acquisition and environmental clearance now happen before any investment in a project.

The financing structure is also changing. The huge corpus of insurance and pension and provident funds —?could be?around Rs 75 trillion and Rs 45 trillion, respectively — is looking for long-term investments. Additionally, money can be raised from the market. The banking system will no longer be the only source of financing. NaBFID, the bond market, and the flow of long-term foreign and domestic funds will create blended financing for infrastructure, reducing risks for the banking system.

While announcing the formation of NaBFID in her February 2021 Budget, Sitharaman had said, “The ambition is to have a lending portfolio of at least Rs 5 lakh crore for this DFI in three years.” It’s lagging far behind the target, but that was an unrealistic ambition for an institution positioning itself as a complete solution for India’s infrastructure woes.

Will it succeed? It’s too early to say. Meanwhile, the RBI’s draft prudential framework for projects under implementation, released in May, may queer the pitch for all infrastructure lenders, including NaBFID.

This column first appeared in Business Standard

The author writes Banker's Trust every Monday in Business Standard.

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