DH Deciphers | Have we found the golden goose of infra projects?

Parliament has passed a bill to set up the National Bank for Financing Infrastructure Development (NaBFID). The Lok Sabha passed it on March 23 and the Rajya Sabha two days later.

The NaBFID hopes to raise Rs 5 lakh crore over the next few years to provide long-term finances to infrastructure projects. The Opposition says the idea was "tried, tested and rejected" and that the NaBFID will have no external oversight or surveillance. Let's dig deeper:

What is the NaBFID?

The NaBFID will be the principal Development Financial Institution (DFI) for funding infrastructure projects that require patient capital but do not give short-term returns. A DFI is usually owned by the government and finances development projects on a non-commercial basis. Unlike banks, a DFI does not accept deposits from the public but raises funds from markets, pension funds, sovereign funds and multi-lateral agencies. A DFI would spare the promoters of infrastructure projects the need to approach commercial banks for funds. Financing infrastructure projects poses risks that are beyond the acceptable limits for commercial banks and ordinary financial institutions.

Were there no such institutions earlier?

In 1948, the Constituent Assembly set up the first DFI in the form of the Industrial Finance Corporation of India. In 1964, the Industrial Development Bank of India (IDBI) was set up through an act of Parliament. Both the institutions played a crucial role in implementing the government's industrial policy.

Also read: Parliament passes Bill to set up National Bank for Financing Infrastructure and Development

In 1955, the Industrial Credit and Investment Corporation of India (ICICI) was formed through an executive order and in collaboration with the World Bank to fund projects primarily in the private sector. The National Bank for Agriculture and Rural Development (NABARD) and the Small Industries Development Bank of India, too, were formed through acts of Parliament for specific purposes.

In 1996 and 2006, the Infrastructure Development Finance Company and the India Investment Infrastructure Finance Company were created under the Companies Act.

Finance Minister Nirmala Sitharaman said a new institution was required because the Indian corporate bond market was not sufficiently developed to meet the country’s infrastructure financing requirements.

What projects will the NaBFID finance?

India needs lots of money to develop infrastructure beyond the usual roads and bridges. The government has identified more than 7,000 projects under the national infrastructure pipeline that must be taken up at the earliest. The NaBFID would fund some of them. The infrastructure projects cover diverse sectors such as telecommunications, sanitation, education, healthcare and commercial infrastructure.

Where will the money come from?

The NaBFID will have an authorised capital of Rs 1 lakh crore, of which the government will provide Rs 20,000 crore as equity and Rs 5,000 crore as grants. The shares of NaBFID may be held by the central government, multilateral institutions, sovereign wealth funds, pension funds, insurers, financial institutions, banks or any other institution prescribed by the Centre. Initially, the central government will fully own the institution but may subsequently reduce its stake to 26%.

The NaBFID may raise money in the form of loans or otherwise both in Indian rupees and foreign currencies, or by issuing and selling financial instruments such as bonds and debentures.

Who will run the NaBFID?

The government will appoint the NaBFID chairperson in consultation with the RBI. Persons of eminence and heft would be appointed to its board of directors, which will have the powers to appoint and remove whole-time directors. The NaBFID will hire the staff at market salaries to attract the best talent. The managing directors and their deputies will have longer tenures and higher age limits for retirement.

Will the NaBFID be beyond oversight?

Prior sanction will be required before any investigation is launched against the staff of the NaBFID. Sanction from the central government will be necessary for any investigation against the chairperson or directors, while such permissions would be required from the managing director in case of other employees. Courts will also require prior sanction for taking cognisance of the offences in matters involving the employees of the NaBFID.