NaBFID – Good Ambition but Many Pitfalls. Let’s Innovate Instead

Video Editor: Vivek Gupta
Video Producer: Shohini Bose
Cameraperson: Shivkumar Maurya

I absolutely love and support the government’s ambition to spend Rs 111 lakh crore, or $1.5 trillion, on 7400 projects in the National Infrastructure Pipeline (NIP). But I felt a stab of despair when the same government announced a brand-new Development Finance Institution (DFI), grandly called National Bank for Financing Infrastructure and Development (NaBFID), to take the lead in financing these projects.

Now, my quarrel is not with the ambition, but the failed legacy and design of DFIs.

Here’s a throwback to the 1960s – several DFIs, like IDBI, IFCI, ICICI, were given incredible concessions to harness the country’s savings. But in many cases, their balance sheets bloated up with loans given for a myriad ‘considerations’ – responding to the proverbial ‘phone call from Delhi’, financing cronies, ever-greening duds, gold-plating costs, ending in a messy crash in the 1990s, with most DFIs wound up or painfully transformed into commercial banks.

SOPs for NaBFID

Today, the sops being trotted out for NaBFID are even more terrific (or terrifying, depending on where you stand on the issue):

1. Rs 20,000 crore in equity plus Rs 5,000 crore in grants to provide a risk cushion, as NaBFID is required to run up an asset book of Rs 3.25 lakh crore within three years.
2. Central government to guarantee its foreign liabilities for a minuscule 0.1 percent commission, topped up with reimbursement of all hedging costs – wow, that’s a 5-6 percent interest subsidy!
3. RBI to reopen its special lending window, this time to give cash against short-term collateral.
4. The cherry on the cake – an income tax exemption for 10 years to providers of long-term capital.
5. Finally, no investigative agency to hound NaBFID’s senior management, unless there is central government approval.

Pitfalls Surrounding NaBFID

Now, let me tell you why I am terrified at three pitfalls surrounding NaBFID:

1. Invocations to the moral grandeur of 'nation building'; but beware, such noble axioms could get twisted and used to 'justify' losses on NaBFID’s balance sheet. In my book, NaBFID should strictly earn a profitable/viable return on every investment it makes – if some 'social good/benefit' has to be triggered, let the govt provide an explicit/transparent subsidy rather than 'offshore the loss to NaBFID', as it brazenly did with FCI in the past
2. While it’s delightful that government’s 100 percent ownership will be whittled down to 26 percent, that could take several years. So, NaBFID will acquire all the trappings of a sarkari venture in its critical, culture-defining years.
3. Several pedigreed private/public entities have created sophisticated models of hedging the ultra-long-term risks of infrastructure project financing. So, why create one more institution that will reinvent/recreate an expensive architecture? Also, it’s here, in direct project financing, that all the corruption is possible, from crony financing, to over/under-invoicing, to gold-plating, to ever-greening dud loans. Why tempt fate one more time, as we did for three decades from the 1960s?

Is There an Alternate Architecture for NaBFID?

Finally then, here’s the $50 billion (over Rs 3.25 lakh crore) question: Is there an alternate architecture for NaBFID, that is neither wasteful nor so vulnerable to financial skullduggery?

Yes. Instead of another huge direct lender to projects, we should create a modern, asset-light market-maker for a deep, liquid ultra-long-term bond market:

• With an initial capital base of Rs 3.25 lakh crore, using nanosecond algorithmic trading models to swiftly arbitrage between price quotes of listed bonds, our new-fangled DFI should be able to catalyse hundreds of lakhs of crores of two-way liquidity every day.
• It wouldn't be required to get its hands dirty in lending, collateralising, monitoring, and recoveries. That would be left to experts in private entities.
• Its risk assessment mandate would be limited to individual instruments that are listed and traded on the exchange. It won’t need to negotiate thousands of multi-billion-dollar greenfield projects in a mind-boggling variety of industries. That job would be left to vertically qualified investment shops.
• It won’t need sprawling skyscrapers in many metros, acres of computer farms, or an army of people… just a guerrilla garrison of savvy bond traders!

Oh, how I wish our policy makers thought of new, out-of-the-box ideas, instead of picking up discredited structures from the past.