British band Pink Floyd’s 1978 stylized rock opera, The Wall, commentary on alienation, different families, brutal societies and war, including World War II’s nostalgia’s tweet call: “Does anyone here remember Vera Lynn?” The Government of India is present. Legislative run similarly induces nostalgia, hopefully, ignoring lessons learned from past mistakes.
On March 23, the Lok Sabha passed the National Bank for Financing Infrastructure and Development (NBFID) Bill 2021, seeking to set up a Development Finance Corporation (DFI) to fund infrastructure. It was Finance Minister Nirmala Sitharaman who fulfilled her budget promise. 100% of the proposed NBFID will be initially by the government ₹20,000 crore share capital, then reduced to 26% by selling equity to banks, multinationals, sovereign wealth funds, pension funds and insurers.
The government supports NBFID in raising cheap, long-term finance. Apart from the initial share capital, the government also a ₹5,000 crore grant at the end of the first financial year, to reduce start-up costs; It is committed to guaranteeing NBFID’s loans and bond issuance in the domestic and foreign markets, at a very low cost. In addition, the government underwrites NBFID’s foreign exchange hedging costs.
These are comfort factors for any infrastructure financing agency set up in India. After access to cheap finance dried up, pre-reform DFIs were transformed (or declined) into commercial banks. DFI bonds are pre-qualified by banks to meet their mandatory legal liquidity ratio (SLRR) requirements, so there are paper-ready ones. Once the SLR tag is removed, DFIs can only raise short-term-term finance at market rates. It tore down their core business model. The future of NBFID seems somewhat secure with that calculation.
But there are other concerns. It may be instructive to study the fortunes of two infrastructure finance companies set up in the public sector with direct and indirect government participation: IL & FS Ltd. and IDFC Ltd. IL & FS and IDFC dogging issues look different on the surface, but are similar between them.
Founded in 1990 as a non-banking financial company, IL&FS ‘problems have been well documented since its collapse in 2018. IL&FS took out short-term loans for financial assistance to long-term infrastructure assets and was thrown out of this volatile carousel by slowed economy and political interference that stopped infrastructure borrowers from repaying loans. Also, it has grown exponentially, mismanaged and escaped scrutiny for a long time by giving plum postings to elect officers.
P. Chidambaram July 1996 Budget Speech Announcing the formation of the IDFC to address the long-term infrastructure concept, both the Government and the Reserve Bank of India (RBI) co-operate ₹500 crore each as start-up capital. In 2004, the intervention of Delhi-based bureaucrats provoked an internal revolt; Seven senior officials have resigned, including the then managing director Nazar Munji and chief policy adviser Urjit Patel (who was appointed RBI governor in 2016). Feel familiar? Delhi-Delhi mandarins are upset with the slow rise in infrastructure loans; Officials said the book is growing cautiously due to the lack of banking projects. Reduce to 2021. Originally created to finance infrastructure projects, IDFC has since reduced its project finance book. It transferred its lending business to IDFC First Bank, which halved its infrastructure book. ₹26,832 crore in March 2018 ₹11,602 crore as on December 2020. Former Bureaucrat and current IDFC Limited Chairman Vinod Roy revealed in his 2019-20 Annual Report: “We have consistently pursued our chartered strategic direction of disintegrating non-retail businesses and investing in the growth of our retail businesses. “Ironically, as a government nominee on the IDFC board in 2004, Roy was part of an attempt to turn IDFC Ltd into a subsidiary of State Bank of India because it did not disburse infrastructure loans fast.
Sitharaman’s 2021-22 budget speech referred to the creation of another entity such as acquiring, managing and eventually disposing of the banking sector’s stressful assets. Queue Pink Floyd song again: “Does anyone here remember the Industrial Investment Bank of India?” Launched in 1971 as the Industrial Reconstruction Corporation of India, it was later renamed the Industrial Reconstruction Bank of India and was eventually renamed the Industrial Investment Bank of India. Finally closed in 2012. Nursing is mandatory with sick and vulnerable companies that have collapsed under this heavy burden, which has been deceived by a promotional finance system that favors kidnapping entrepreneurs on a robust settlement process.
The short lesson is this: Fix the distorted demand side before increasing supply. Any number of companies can be started, but cannot be expected to work wonders in a declining system. Bankers at the Mint’s annual banking conclave in February 2020 have a recurring collective concern: banks can set the price for commercial, operational or market risk, but have no control over political risk, which has led to a number of infrastructure projects in India. No financing company will solve this problem.
Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is jjrishisinghal.