NaBFID has a huge mandate ahead of itself; can it succeed?

In the late 1990s, the newest development finance institution, or DFI, IDFC Ltd, had the herculean task of guiding private investments into the infrastructure segment that was grappling with policy uncertainty, evolving regulations, and a lack of long-term finances. Back then, the telecom sector was still in its infancy, as were private power producers, who were dealing with uncertainty in fuel linkages, and loss-making electricity distribution companies. The infrastructure-focussed IDFC Ltd. was the newest addition to the ranks of erstwhile ICICI Ltd and IDBI Ltd, which were set up to finance industrial projects, but later converted into commercial banks. IDFC, too, followed suit in 2014, by converting into a banking entity.

The earlier DFIs did serve their purpose of industrial financing in the ’80s and ’90s, by supporting many of the core industries that came up in India during the time. Now, the government is counting on the National Bank for Financing Infrastructure and Development (NaBFID)—set up in April 2021 and operationalised in Q1FY23—to revisit the infrastructure space with new innovations and business models. The question now, is whether it can scale up to meet the growing funding needs of a fast-growing economy.

To start with, the upfront equity injection of Rs 20,000 crore by the government will aid NaBFID in quickly ramping up its assets book. In fact, NaBFID—which has sanctioned Rs 25,000 crore in less than a year of its operations—is targeting a disbursement of Rs 60,000 crore in FY24. The aim is to reach Rs 1 lakh crore in terms of sanctioned amount by FY24. Clearly, NaBFID’s scale is a big differentiator.

Second, the erstwhile DFIs as well as the commercial banks were a little ahead of their time for infrastructure financing, as the policy was still evolving. But today, the road sector, especially with HAM (hybrid annuity model) projects—where the concessioning authority shares a portion of the total project cost during the construction phase—has negligible non-performing assets. The earlier build, operate and transfer (BOT) model of road financing—where revenues depended on traffic volume—had resulted in a lot of pain for the lending institutions.

The National Highways Authority of India (NHAI) has also responded with better concession agreements that have improved enforceability and termination clauses. “We feel the time is right for a lot of public infrastructure investments. We see a lot of traction in the transportation sector, especially the roads, energy, and renewable sectors,” says Samuel Joseph Jebaraj, Deputy MD, Lending and Project Finance, at NaBFID.

He adds that the improving depth of the bond market has also allowed NaBFID to successfully mobilise long-term bonds worth Rs 10,000 crore, at an attractive rate of 7.43 per cent, with a 10-year tenure. There is now a growing life insurance and pensions industry to provide a constant flow of long-term funds.

Which brings us to the question: Are banks open to innovations like takeout financing (loans taken out from the loan books of one lender to another)? “Now that NaBFID has entered the picture, it could be possible to do long-term, 20-25 years’ financing [with takeout financing],” reasons Jebaraj.

The banking sector has also achieved scale through consolidation, with the merger of public sector banks creating large banks with balance sheets of over Rs 10 lakh crore. “Even if we have to grow at 10 per cent, the amount of lending required will be quite high,” says a public sector banker, requesting anonymity.

While NaBFID is well stocked with capital for the next three years, given its growth plans, the bank can raise additional capital through bonds in the form of debt, to augment its capital base. But such a plan can wait as any additional capital raised before exhausting its current corpus would unnecessarily add to its cost of funds. “Most of the infrastructure investment trusts (InvITs) in the road sector are rated Triple-A. The capital consumed by these higher-rated assets is low,” says Jebaraj. In terms of leverage, NaBFID is allowed to borrow 10x its equity capital. This means, the bank can mobilise up to Rs 2 lakh crore. Although the NaBFID Act, 2021, provides for equity dilution, it is not required immediately.

Even as raising capital is not a concern for NaBFID, it is moving very cautiously with a balanced portfolio of completed projects (refinancing route), brownfield expansion, and greenfield projects, as a lopsided focus on greenfield projects—that carry high risks—could take a lot of time to ramp up the bank’s balance sheet.

“We are also looking at credit enhancements. If we have to deepen the bond market and also catalyse investments in infrastructure, then instead of NaBFID financing, the bank could provide partial guarantees to a lender and enable them to raise money from the market,” says Jebaraj. A project that is A-minus rated could achieve a double A rating with a partial credit enhancement facility.

NaBFID is also exploring a larger role in the infrastructure segment and not just financing, with the objective of playing a catalysing role in developing infrastructure and the entire ecosystem. For instance, it is looking at project advisory roles in railways and transportation infra projects that are stuck, or that have not moved at the required pace.

Despite all this, will NaBFID, as a thought leader and financier in the infra-financing space, be able to deliver on its mandate of pushing infrastructure spending? Only time will tell. 

@anandadhikari