India's new DFI will help achieve big development targets

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India's new DFI will help achieve big development targets

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• Financing for development dreams: The debate over the right mechanism to fund India's development dream has been a regular one, and as India dreams up new infrastructure projects (that are long-term in nature), the asset-liability mismatch problem becomes glaring. 
• DFIs of yesteryear: India had established DFIs (Development Finance Institutions) in 1950s, but by 2000s, in order to access cheaper retail deposits, all turned into commercial banks. Today, again the need is felt, as "New India" is being built!
• NABFID has arrived: The govt. has created the National Bank for Financing Infrastructure and Development (NABFID), as a DFI. 

1. Its structure and governance has to be designed very carefully, with a strong Board and strong Executive Team being a must
2. Firms with weaker structures may do well in the short term, but will eventually wither away. This happens more with PSUs than in private sector, as supervision is less intense.
3. Govt. has claimed that NABFID will have a professional board, and at least 50% posts filled by non-official directors, and some eminent people also.
4. Markets are being told that a professional body is taking shape.

• Bond market for infra financing: NABFID will also work to deepen the bond market for infrastructure funding. It will both act as bond seller and market-maker in initial years. It will thus attract investors to the bond markets. 
• Five yearly performance review: The NABFID will be performance-reviewed every 5 years, publicly. Salaries for top executives will be linked also to performance incentives, to attract the best talent even from private sector. 
• Who can buy equity: Various Sovereign Wealth Funds (SWFs) and other institutions will be allowed to purchase equity in NABFID, along with a buyback option. If SWFs do come, their reputation will help improve NABFID's governance as well.
• Scale of ops: All this is fine, but the real game is scale of operations. 

1. NABFID will start with an authorized capital of Rs.1 lakh crore
2. GoI wants it to have a portfolio of Rs.5 lakh crore in five years
3. If it happens, then most of infra financing will happen via NABFID only

• The key to success: NABFID has to attract investors in its key instruments. For that, it has to carefully select and bundle projects, and securitize them. Then, FIs and HNIs will arrive. Right tax incentives will help, as the 10-year income tax holiday on bonds announced already. 
• Past is the future: GoI has learnt from mistakes of the past, and present design reflects it. The proposed structure of NABFID is being made keeping in mind the desire to build a world-class financing mechanism for large infra projects. 
• NIP: The ultimate goal is to make the National Infrastructure Pipeline (NIP) successful, which is targeting a total spend of Rs.102 lakh crores on infra projects in years to come.

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