By Nageshwar Patnaik in Bhubaneswar, March 23, 2021: The significant role of finance intermediation in economic growth is by now widely accepted. Poorly developed financial markets and institutions can hold back economic growth of countries in general and developing countries in particular. Physical infrastructure is crucial for any country to achieve its national goals. It becomes essential for rapidly developing countries like India to have a reliable and adequate cutting-edge infrastructure to propel development.

The Narendra Modi led NDA government has been focusing aggressively on raising funds for supporting national programs. It is scheduled to introduce the much talked about The National Bank for Financing Infrastructure and Development (NaBFID) Bill, 2021 on Monday in Lok Sabha for maneuvering infra plans.

The Bill will establish the new infrastructure lender which will support the development of long term non-recourse infrastructure financing in India, This move is expected to give a big push to infra projects as promised in the Budget 2021. The Bill will provide for development of the bonds and derivatives markets necessary for infrastructure financing and to carry on the business of financing infrastructure.

It will have 13 board members, including a Chairman, four whole-time directors and two government nominees. The remaining will be independent directors. The new institution will have a professional board drawing market linked remuneration and have powers to hire and fire whole time directors. At least half of the board will be non-official directors including persons of eminence.

Through the NaBFID, the government will set up the Development Financial Institutions (DFI) with the aim to support the financing of infrastructure projects. NaBFID will have a corpus of Rs 20,000 crore and the DFI will leverage it to raise Rs 3 lakh crore in the years to come. In fact, these upcoming sovereign institutions will eliminate all the blockades that are there while allocating funds to the infrastructure. More importantly, the Bill also provides for five-year income tax break to private development finance institutions that will come up. State-run NABFID will enjoy tax breaks for ten years.

By 2022, India is expected to become the world’s largest construction market requiring investment worth Rs 50 trillion in infrastructure. Similarly, the World Bank placed India at 44th position out of 167 in its Logistics Performance Index (LPI) in 2018, making India one of the most rewarding markets in the world for investments.

Incidentally, the government had already approved investments up to Rs 6,000 crore in the debt platform of National Infrastructure Investment Fund’s (NIIF) equity in 2020, helping it to raise around INR one lakh crore by 2025 for infra projects. As the country has allowed 100 percent FDIs in the infrastructure, the government is aggressively attracting FDIs in the sector.

Recently, RaSabha has also passed the Insurance (Amendment) Bill, 2021 to raise FDI from 49 percent at present to 74 percent in the insurance sector indicating a vigorous approach to invite foreign investments across sectors.

The need to create a mechanism for the financing of India’s development aspirations has been felt long back because a bulk of the development projects that the government has planned are long-term in nature, which makes managing the asset-liability balance critical. India has had experience with development finance institutions (DFIs) in the past. India’s first DFI, Industrial Finance Corporation of India Ltd., was set up in 1948. It was followed by multiple state financial corporations in 1951, ICICI Ltd. in 1955, IDBI Ltd. 1964 and many more.

They were converted into full-time commercial banks to allow them access to retail deposits. That India needs a DFI once again is well acknowledged but its structure and functioning would be of significance in determining its role in shaping a ‘New India’, which is why the structure of the NaBFID is so important.

The NaBFID has also been given the task of developing India’s bond market for infrastructure financing and is expected to play a major role as both bond seller and market-maker during its initial years of operations.

This may appear to be a conflict of goals. But it is important to note that there need to be certain preconditions for a market to emerge. The role played by NaBFID in the development of India’s infrastructure financing market would allow those preconditions to be met by ensuring that there is adequate interest among investors right from the start.

It is equally important to highlight the specific provision of a mandatory performance review of the institution once every five years that will be presented publicly. This will ensure accountability and strengthen the institution’s governance.

However, the success of NaBFID would depend on its ability to generate adequate investor interest in its instruments. Careful selection, bundling and securitization of projects (or their constituent elements) are matters of detail that could prove crucial in attracting the interest of other financial institutions as well as high net worth individuals.

Also important is the use of tax policies that could make some of these investments attractive for investors. The government has already provided a nudge by granting incentives, such as a 10-year income tax holiday on its bonds, along with other concessions and guarantees. These should help whet investor appetite.

The proposed institutional design reflects a deep understanding of the challenges that such institutions have faced in the past. Thus, the new institution will learn from DFI mistakes that were made in the past, with the overarching objective of creating a truly world-class financing mechanism for the fulfillment of India’s infrastructure and development aspirations.

The push for strong governance structures along with robust management of the DFI will facilitate the government’s ambitious target of spending Rs 102 trillion on various projects of the National Infrastructure Pipeline.