New Indian DFI Needs Reimagination To Propel Project Finance


Global infrastructure requires an investment of $94 trillion for the period from 2016 to 2040; almost half of it will be consumed by China, India, and Japan alone. India aspires to become a $5 trillion economy by 2024-25, for this to become a reality about $1.4 trillion in investment over its critical infrastructure becomes a prerequisite. Sectors such as energy, roads, urban infrastructure, and railways will be requiring about 70% of the projected capital. It is estimated that by 2030 around 42% of Indian population will reside in urban centers from 31% currently. By 2030 India will bear world’s largest working age population with a median age of 31 years and the industrial services sector will contribute about 92% of the GDP. With ballooning urban-working demography and the services sector, it becomes instrumental to resurrect an enabling environment that can accommodate the potential. It is in this light Development Finance Institutions (“DFI”) become noteworthy.

Where do DFIs fit in this?

DFIs are usually long term lenders for capital intensive projects such as irrigation, transport, oil, and gas etc. with low and stable rates of interest on offer. DFIs function with intent to finance such projects which provide a fillip to social development. DFIs are financed by long term securities subscribed by pension funds, post office deposits, life insurance funds and the like. The governments and multilateral lenders may support such private investment projects through guarantees, ratings, tax incentives, supportive regulations etc. During events like the 2008 Financial Crisis, DFIs continued lending when commercial lenders did not. Unlike the DFIs, commercial lenders function with short to medium term lending with competitive rates of interest and usually do not undertake long term developmental projects with irregular returns as indicated by the ongoing negative credit growth.

The Era of NBFID

The National Bank for Financing Infrastructure and Development (“NBFID”) is a statutory DFI formed under National Bank for Financing Infrastructure and Development Act, 2021 (“Act”) with an authorized share capital of INR 1 lakh crore held fully by the central government which can be reduced to a minimum of 26%. NBFID is mandated to, among others, lend towards infrastructure projects, take over or refinance such existing loans, and enable foreign participation in infrastructure projects. NBFID is financed by central government, the RBI, scheduled commercial banks, mutual funds, and multilateral agencies.

The central government assures a grant of INR 5,000 crores and INR 20,000 crores in equity as initial corpus by the end of first financial year and guarantee NBFID’s borrowing from multilateral agencies and sovereign wealth funds etc. at a concessional rate of 0.1%. NBFID is required to hold an asset portfolio worth INR 3.25 lakh crores within three years from initiation. Foreign exchange fluctuation on borrowing in foreign currency will be hedged by the central government. This DFI is established to aid in financing about 7,400 infrastructure projects under the National Infrastructure Pipeline. Despite such sizeable numbers internal complications remain.

Hindrances before NBFID

While questioning the Finance Minister, a Member of Parliament pointed that the bill has “…no investigating agency, no audit, no external surveillance…”. In this regard, Section 26 while offering scant protection, mandates presenting an audit report before the parliament when called upon do so. The eventuality of the report being reengineered to suit the needs of the government of the day cannot be sidelined. Hence, the need for employing external auditors by an independent observer body and not by the NBFID’s board or on government’s nomination in line with the recommendations of YH Malegam Committee becomes pivotal.

Certain provisions of the law that may require fine-tuning such as Section 20 which stipulates an external performance review of the DFI based on Section 4 objectives once every five years. The catch, however, is that such external agency will be appointed by the Government. Instead, an independent body under the aegis of the Comptroller & Auditor General appointing the external agency in place of the government would nurture transparency. Whilst operating against accountability, Section 37(1) prohibits questioning the validity of loans advanced by NBFID even on non-compliance to laws of lending and Section 35 speaks of availing previous sanction of the central government to initiate criminal inquires against the board of NBFID.

On the flip side, NBFID requires a state oriented approach not a market oriented approach; the former ensures a majority of subsidized capital is from the central government and the RBI but the latter subjects NBFID to raise capital from the uncertain market forces. Continued supply of state side capital would insulate the DFI from market impulsiveness and secure sustained operation. State side financing may be backed by insurance funds from India and abroad which look to invest in infrastructure via the DFI. These funds are required to make investments in high rated infrastructure bonds but NBFID might not receive high ratings.

By promulgating consistent insurance investment regulations after reviewing the existing ones with a view to streamline processes and to foster enforcement of contracts may optimize such ratings. With large sums of public money at NBFID’s disposal, it becomes crucial to hire a talented pool of individuals and not retired bureaucrats. Personnel from the private sector, who have under their belt domain expertise with an incorruptible track record, and who are sufficiently distant from the political fraternity should be preferred. NBFID ought not to be interpreted as a pure DFI rather it can strive to attain a decent return on investments without shunning its ‘social benefit’ principle.

The gains can be amplified if hedging costs on foreign exchange fluctuation under Section 23 and the guarantee rate on borrowings of NBFID limited at 0.1% under Section 22 are revamped. The costs and the guarantee commission must be measured with pragmatic thresholds on a case to case basis instead of a blanket award. Covering all the foreign exchange fluctuation costs and receiving a tiny guarantee commission is a sell-off and is equivalent to issuing around 5-6% subsidy on such advances. NBFID can also be made cost-effective if a portion of its aspired first three year corpus of INR 3.25 lakh crores is calculatedly invested in tax free bonds under swift arbitrage models rather than to fixate only on lending.

By doing so, the sluggish bond market can be reinvigorated and hedging costs on behalf of the government after the initial term can be paid off. If the RBI treats all sorts of infrastructure as a priority sector other than renewable energy, MSMEs, and social infrastructure, NBFID funds sourced from retail savings which are largely underused at cheaper rates become useable. By converting the infrastructure finance companies over a period into infrastructure banks which further can be maneuvered to finance projects under guarantee by NBFID in line with Usha Thorat Committee Report may inflate NBFID’s purse.

It is instrumental to ensure that the current government ownership of 100% is diluted to 26% at the earliest, if not, the same old conflicts of interest, and the political debauchery may remerge. Indian debt finance market is evolving with increasing competition from commercial banks in debt refinance and buyout sectors. Earlier DFIs suffered with rigid lending behavior with minimal scope for adjustments against long term pressures of infrastructure projects, this DFI needs to stand out with low cost and flexible operation to dodge the challenges posed by the competition.

In this respect, long term projects with agreed terms of financing at implementation may not find it viable to continue per those terms at commencement and the project may require refinancing for working capital and other contingencies. By incorporating a repricing mechanism with suitable premiums while considering viability may minimize competition from commercial banks. Implementation costs based on weighted average period of the project on case in point basis not on the formerly agreed date of maturity/implementation for financing will infuse flexibility. NBFID ought to have the ability to enforce not only the physical assets of project entity as security but its cash flows as well on par with other lenders in the consortium.

Way Forward

The rampant cost overruns in about 1,687 infrastructure projects and delays of more than a year in 20% of those projects necessitates addressing certain circumstantial hassles such as halted environmental clearances, supply and off-take issues, land acquisition delays, frivolous litigation, and political risks. By operating in a public private partnership (“PPP”) structure under the Hybrid Annuity Model (“HAM”) where the state becomes an investor alongside the private entity and shares financing risks in return for operational risks may accelerate approvals. Hence, the expansion of the HAM model to various infrastructure projects is the need of the hour. The ECB may be amended to allow for refinancing of domestic debt, which frees additional liquidity for projects along with relaxation of its end-use mandate. Promotion of financing by Infrastructure Investment Trusts which are supported by investors and subscribers of its units can finance projects of long term at all stages of project life cycle and productively impact project financing. Therefore, a combination of regulatory and systemic reimagination will augment NBFID in reaching its zenith.


(This post has been written by Subramanya VM. He is a graduate of LL.M. in Corporate & Financial Law specialty from Jindal Global Law School and also holds a Post Graduate Certificate in Project Finance from the Association of International Wealth Management of India.)

Cite As: Subramanya VM, ‘ New DFI Needs Reimagination to Propel Project Finance’ (The Contemporary Law Forum, 11 August 2021) <> date of access. 


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