There has been a growing debate about the need to create a mechanism for financing India’s development aspirations. Because most of the development projects planned by the government are of a long-term nature, it is critical to maintain a property-liability balance.
India has experience with Development Finance Institutions (DFIs) in the past and has converted them into full-time commercial banks to enable them to obtain retail deposits. It is well recognized that India needs DFI once again, but its structure and function are important in determining its role in shaping ‘New India’.
The structure of the newly created National Bank for Financing Infrastructure and Development (NAFFID) is significant. The key to the success of any organization is its governance. A company with sound board, strong governance structures and excellent management consistently performs better. Even companies with weak corporate governance perform well for a while. But in the long run, their value and ability to create wealth is adversely affected by the inherent weaknesses in their management. This is especially true for public sector companies, in which shareholder supervision in private companies is not as strong. Nabfid is intended to have a professional board that is half-filled by unofficial directors, and prominent individuals serve as its members, be it its chairperson or non-official directors, which is a sign to the markets that it is designed to operate in a professional manner.
In addition, the company has been tasked with developing India’s bond market for infrastructure financing. It is expected to play a major role as a bond seller and market maker in the early years of operations. It can seem like a conflict of goals. But there have to be some preconditions for the market to emerge. Nabfid’s role in the development of India’s infrastructure financing market can meet those preconditions by ensuring that there is adequate interest among investors from the outset.
It is equally important to publicly highlight the specific provision of the company’s mandatory performance review once every five years. It ensures accountability and strengthens corporate governance. Furthermore, in the past, salaries for the recruitment of talented persons by such institutions were limited to the level of Central Secretaries of State.
With better-paying private-sector options available to professionals, there would have been significant pay cuts for the decision they made to work in the public sector. Therefore, public sector companies lose competitive talent through salary differences between the public and private sectors. The new company, however, will have attractive performance-oriented incentives in attracting talent, which is key to optimal performance.
Another advantage is that it allows Sovereign Wealth Funds (SWFs) and other companies to buy equity, along with a buy-back option, in Nabfid. SWFs are among the best performing companies in the world and their investment in NABFID helps to improve its overall governance.
While governance is important, its level of activity is equally crucial. In particular, the authorized capital of NABFID will be ₹1 trillion, and the 2021-22 central budget sets out the government’s ambition to have its portfolio ₹5 trillion in three years. Therefore, in many ways, the new organization will serve as an important tool to finance most of the country’s infrastructure investment plans.
However, the success of NABFID depends on its ability to generate sufficient investor interest in its instruments. Careful selection, construction and securitization (or elements thereof) of projects are crucial in attracting the interest of high net worth individuals along with other financial institutions.
It is also important that some of these investments use tax policies that are attractive to investors. The government has already provided a mess by granting incentives such as 10 years income tax leave on its bonds, along with other subsidies and guarantees. These help the hunger of wheat investors.
The proposed organizational design reflects a deeper understanding of the challenges such organizations have faced in the past. In this way, the new organization will learn from the mistakes made by DFI in the past, with the lofty goal of creating a truly world-class financing mechanism for the fulfillment of India’s infrastructure and development aspirations.
The organizational structure of NABFID is in line with the broader objectives of this organization. The policy is aimed at finding a solution to the complex problem of providing financial assistance for long-term infrastructure projects in the country. Pushing for strong governance structures along with strong management of the newly created organization is an example to show how the government has played a big role in meeting the objective of spending. ₹102 trillion on various projects of the National Infrastructure Pipeline.
Vivek Singh and Karan Bhasin are on special duty to the Indian Finance Minister and Independent Economist respectively.