DFI to deliver long term-economic returns

As a development finance institution (DFI), the National Bank for Financing Infrastructure and Development (NaBFID), will facilitate cheap capital for public works programmes and projects, says Vinayak Chatterjee, Chairman, Feedback Infra Group & Chairman, Confederation of Indian Industry (CII), National Council on Infrastructure. Like the DFIs created by policymakers in the 1950s for making industrial capital accessible, the new body corporate will provide easy access to funding for infrastructure projects critical to nation-building.

How do you see NaBFID rollout impacting the infrastructure sector?
The NaBFID is a little bigger than other infrastructure sector funds, in the sense, that it has been created for taking up massive public works programmes. The other way of defining it is in terms of financial returns. Now, let me explain how both mean the same thing. For instance, look at Nehruvian-era projects like the Bhakra Nangal or Damodar Valley Corporation. Those in their time were major public works programmes, which delivered multiple benefits to the nation. Those were also projects that don’t normally give the usual return to private investors typically looking for 18-20 per cent of the hurdle rate. A very basic point behind DFI is that we need to get the Indian economy and the nation-building process off to a very good start by investing with a very large bank of projects such as coastal economic zones, river linking, irrigation works, remote connectivity, water for all schemes and other such stuff that might give returns over 30 years. It is not about one more financier competing with private sector investors, but rather a standalone entity investing in projects that help build the nation as well as provide long-term economic returns.
In your last interview with the magazine, you had clearly indicated that the proposed DFI could be a game-changer for the country. How?
If you take existing institutions, most of them were not designed to fulfill the task of nation-building or remit economic returns. By having a special set of dispensations under an Act of Parliament, with easy access to cheap funds, the NaBFID will be able to leverage itself better. Since the entity will be focused not on financial but on economic returns, it will be able to invest in large public work programmes or projects of national importance, where private capital won’t come.
Since you were part of a committee that made certain recommendations to the Ministry of Finance and the Central Government, your views on its structure?
NaBFID is a peculiar animal in that it is created as an Act of Parliament. It is not bound by any leveraging norms in the 1:9 ratio. As a sovereign entity, it can leverage itself many times over that. The DFI of China had leveraged itself 60 times! Thus, the NaBFID will have a lot of liberal rules, which the banking sector and non-banking financial companies (NBFCs) don’t enjoy. This will allow it access to cheap capital and lend that at far lower rates towards nation-building.

Do you see it as playing a role very similar to what the Franklin D Roosevelt administration did in the US in the 1930s to pull their beleaguered economy out of a debilitating recession?
You’re referring to the New Deal. Similarly, you also had the Marshall Plan in Europe in the aftermath of World War II. However, in both cases, they had deployed multiple strategies. Of course, the DFI will play a key role in helping the Indian economy make a V-shaped recovery. What I’m also saying here is that we already have a parallel in history. After independence, India had an acute shortage of industrial capital and to adequately address that need the leaders of the time created three major DFIs: IDBI, IFCI and ICICI. Between the mid-1950s and the late 1980s, these three DFIs practically created a new industrial class in the country. Many of the projects and companies that you see today doing very well on the stock exchanges are products of that system. They helped create a new generation of Indian entrepreneurs when industrial capital was scarce. Today, industrial capital comes in so many ways into the industry. So, you once again have the economic history repeating itself when the nation required a DFI for raising capital for public works and infrastructure.

What kind of an impact do you see NaBFID having over the next 20 to 30 years?
How I see that happening is that today we do not have a method of financing large public works programmes. For example, if I tell you that I want to do a very major irrigation project, you will not know how to finance it. We have financed the bullet train with DFI capital. The Japan International Cooperation Agency (JICA) has given a Rs 900 billion loan for 60 years at 0.5 per cent interest, with a 15-year moratorium on development capital. So, it will have an impact by creating India’s first high-speed train with many multiples and demonstration effects. Then even Delhi Metro was created with developmental finance from Japan. What we are trying to do is now is replicate that instead of restricting ourselves to an isolated project here and there.
What are the segments that are most likely to benefit within the infrastructure space from this new institution?
The segments would relate to major irrigation projects, water supply in rural and urban areas, transportation networks in remote areas that may not be immediately viable, an extension of railway lines and urban transportation projects like suburban railways that are normally subsidised. These are broad examples of areas where private capital usually hesitates to chip in.
Since this will be a first of its kind DFI what are some of the things that policymakers need to bear in mind?
The two important points are that the political class must not impose on the institution include projects which are unviable or purely populist. Areas like education, healthcare, etc., should be prioritised, but the fear is that they often end up becoming hostage to politicians trying to win brownie points by pressurising the management to look at projects that need not be done at all in the first place. Therefore, the next point that follows is that the DFI will be professionally managed. This means while it is a 100 per cent entity of the nation, 50 per cent of the board will consist of eminent professionals. The operating management, which would include CEOs from various verticals, would be provided special immunity from any kind of prosecution on collective decision-making. These are things that we need to be alive to.
Due to the coronavirus pandemic and the subsequent nationwide lockdown, 2021-22 fiscal was sluggish for the economy and the infrastructure sector. What is your outlook for the current fiscal?
If you take the fourth quarter of 2019-20 fiscal and index that to 100, I expect the economy to return to that level in the fourth quarter of 2021-22. The economy shrunk by 24 per cent in the first six months of 2020-21. It again shrunk by 9 per cent in subsequent months. So, 100, at its worst, came down by 26 points to 74. However, from 74 we have to again start climbing up. While you may say the economy is growing at 10 per cent, but if the economy has already fallen on an index of 100 to 74, the 10 per cent is on that base.


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