'Let NaBFID function as Version -2 DFI' | Economic Times

With the enactment of National Bank for Financing Infrastructure and Development (NaBIFD)Act in the last week of March 2021 the focus now shift from the need of a development financial institution for infrastructure development to making NaBFID structurally and operationally efficient and efficacious.This is important particularly in the background of experience of the DFIs like IFCI and IIIFCL which failed to deliver as expected.Infrastructure projects continue to languish for shortage of funds - debt as well as equity. Out of 6835 projects identified in December 2019 under National Infrastructure Pipeline (NIP), only a few ,about 225, have been completed and the remaining face, among other things, funding issues. The NaBFID has a tall order - as set by the finance minister - mobilisation of Rs 3 trillion over next 3 years and making that available while functioning professionally, to a large number of projects across the country and in different sectorsThe factor that failed most the DFIs in the past was the fact that these were not structured and enabled them to govern and manage themselves to act as provider ,enabler, and catalyst for financing infrastructure development .The DFI in its new incarnation as NaBFID is Version -2 of DFI, learning from the past experiences. It however still falters in one important aspect that casts doubt on the efficacy of NaBFID . The government has the ability - de jure as well as de facto - to interfere and intervene in its governance and management.On the positive note the role of NaBFID goes beyond financing and extends to coordination with central and state governments, regulators, financial institutions, institutional investors and other stakeholders within and outside india to support infrastructure financing including domestic bonds and derivatives markets.One DFI alone - whatever be its size -may not suffice for financing the need for infrastructure development across the country . Universal banking business model of commercial banks is not compatible with infrastructure financing which requires domain expertise of the sector and lending at lower rates for tenure of 20-25 years and more. The NaBFID Act facilitates setting up of more DFIs including in the private sector with the approval of RBI . This also paves the way for existing infrastructure finance companies, set up as NBFCs, to expand and grow by converting themselves into a DFI and enjoy benefits available to a DFI or a bank.Over the years these measures would create a much needed network of sector specific DFIs ,akin to commercial banks, throughout the country .On the liability side ,NaBFID would have the ability to raise ,with the support of government guarantee, long term funds for on-lending and refinancing, from domestic sources such as RBI, central government, pension funds ,banks and bond markets ,and international markets including multilateral institutions. To begin with it will have equity of ? 10000 crores fully owned by the government which would be expanded through dilution of government stake up to 26%.The success or failure of NaBFID like any other PSU /PSB would however largely depend upon the extent to which it is able to enjoy autonomy in its governance and upon professionalism it is able to display in policy formulation and laying risk based systems and processes.The NaBFID Act , while seeks to distance the government from appointment and fixation of remuneration of wholetime directors, officers and employees/. It gives strings of control on these matters in its hands . The government has the power to appoint the chairman of the board and its nominees, and has the ability to influence appointment of other whole time directors selected through the Bureau of Bank Board or similar other agency .The government also has the power to terminate the term of office of chairman ,MD, and other whole time directors albeit in consultation with RBI .Unusually, the directors appointed by the government ,which is the only shareholder, are treated as independent directors.Further as in the case of PSUs ,the government has omnibus power to prescribe or approve rules and regulations on various matters including in regard to salaries and allowances of whole time directors and employees ,and ,fee payable to independent directors.NaBFID, as per the Act,will remain outside the purview of the 3Cs,namely, CAG, CVC and CBI, for bonafide commercial decisions taken. For the first time ,the law provides such an immunity to officers and employees of a bank/FI enabling faster decision-making and should help in bringing professionalism in the functioning of NaBFID.NaBFID as a DFI Version: 2 and attendant provisions in the NaBFID Act provide for a strong foundation for a new era of development financing in India. The efficacy of the concept and design of NaBFID would however hinge upon the restraint that the government exercises and avoids political interference in its governance and management. Less the interference. more effective would NaBFID be. This also holds the key for government’s plan to dilute its equity up to 26% over the years,in favour domestic and international investors.Ashok Haldia is former MD and CEO of PTC India Financial Services Ltd.