The National Bank for Financing Infrastructure and Development (NabFID), headed by veteran banker KV Kamath, is set to commence operations from next month. Its task is cut out: to be the overarching player in funding 7,000 projects worth ₹111 lakh crore in the National Infrastructure Pipeline over the next few years. Large development financial institutions (DFI) are back in business; they were dissolved and turned into universal banks some two decades back, after being inefficient and supportive of cronyism. Therefore, the entry of NabFID gives rise to two questions: why the need for such a body now and where is the assurance that the errors of the past will not recur.

Infra funding requires low-cost long-term finance bundled with project appraisal, governance and monitoring skills. It should also be immune to business cycles. It is not easy for any avenue of finance to tick all these boxes. The infra lending sources of the post-universal DFI era — banks, sector-specific DFIs, private NBFCs and other sources such as equity capital and internal reserves of companies — have fallen short in qualitative and quantitative terms. Post 2004, banks aggressively lent to infra projects in power, telecom and roads after the demise of DFIs. But they did so without due regard to governance or project appraisal and monitoring, while they had access to low cost funds. These projects turned into NPAs, and banks turned risk-averse. The sector-specific DFIs filled this gap to some extent. These cannot really be faulted for project appraisal, but they lacked access to low cost finance. Meanwhile, NBFCs such as IL&FS, Srei and DHFL joined the party but they were neither prudent in lending nor known for their governance standards. Besides lending to ‘related parties’, they ran into serious asset-liability mismatch problems. As for other sources, such as equity, external borrowings and internal reserves of the corporate sector, these are pro-cyclical. NabFID is likely to source finance at concessional rates, not least because the RBI will open a window for infra lending — a return to the past. This had been discontinued on the recommendation of the Narasimham Committee which had called for a level playing field between DFIs and other players.

For NabFID to vindicate its existence, it should learn from the past. The erstwhile DFIs, such as IFCI and IDBI, were seen to be hand-in-glove with corrupt managements, instead of being objective lenders and investors at the same time. It is, therefore, crucial that NabFID staff are active directors on the boards of the companies concerned. That said, there are some ecosystem advantages that did not prevail earlier. The IBC provides a ready tool to sack incumbent managements. A now-consolidated banking system can provide a source of inexpensive capital, without much asset-liability mismatch. As the National Bank for Financing Infrastructure and Development Act, 2021, says, NabFID is supposed to act as a coordinating body. It can synergise the lending and execution of projects. To do that, NabFID needs to stick to the basics of sound governance, good appraisal skills and follow-up monitoring.