NaBFID-One more infrastructure-finance institution takes wing

Parliament passed the National Bank for Financing Infrastructure and Development or NaBFID Bill, 2021, giving birth to a new infrastructure financing institution somewhat on the lines of the erstwhile Industrial Development Bank of India (IDBI). IDBI, which was created through a similar Act in Nehruvian times (in 1964), was converted into a commercial bank by the Vajpayee government through repeal of the 1964 Act in 2003—it was felt India had progressed in reforming the financial sector, capital markets were more mature and had acquired risk appetite, and the attention must shift to bond market development. The creation of the NaBFID for raising long-term resources for funding infrastructure projects therefore marks failure to develop a vibrant bond market. Ironically, the institution itself is tasked to fulfil this objective!

Besides IDBI, other development finance institutions (DFIs) were also created in specialised spaces, e.g., former ICICI, IFCI, amongst others. Not just India, DFIs were also set up in Europe, Japan, the US, other Asian countries in the post-World War II period to build or rebuild infrastructure; most countries channelled long-term household savings (e.g. pension, insurance, postal, etc) for financing such projects; once basic infrastructures were built and private markets developed, most DFIs were either wound up or adapted. India then had low saving rates, underdeveloped financial sector, foreign exchange constraint—features that necessitated government guarantees, capital commitments including from RBI along with direct and indirect central bank financing to meet these needs. Bank nationalisation (1969) immensely spread banking services and access, deposit mobilization and lifted saving rates. But these increasingly financed government deficits enabled by financial repression (viz.
high SLR, CRR, administered interest rates, selective credit controls) to reserve resources and keep costs low, bringing banks into the overall public balance sheet fold for national development. These features, plus unrestrained monetary expansion resulting there from, coupled with other factors eventually culminated in the 1991 BoP crisis.

This was the backdrop of financial sector reforms thereafter. The blueprints drawn by Narasimham, Khan committees, amongst others, focused as much upon the role, structure, ownership, restrictions and deregulation of financial institutions as upon the monetary-fiscal interfaces and associated macroeconomic implications with requisite reforms for their rectification. In the scheme of things, there was recognition a lot had changed since the sixties where DFIs were concerned; there was universal agreement to gradually phase these out, cede way to market forces and sources of finance—DFIs either were to transform into banks or close if any couldn’t.

The recreation of a DFI, the NaBFID, does not transpire merely in this longer historical context but also within more contemporary developments: inter alia, the challenge of long-term funding for one of the riskiest activities worldwide (infrastructure), sporadic emergence and collapse of private sector participation, failure of private infrastructure markets to develop, depleted resources for public investment, and inabilities of successive governments to significantly free resources, all of which justify its creation.

That said, the NaBFID bill, whose rules are not yet framed nor notified, raises a number of fiscal and monetary concerns.

Monetary
The NaBFID Act permits 90-day, secured borrowing from RBI (repayable on demand/ expiry); and up to five years against bills of exchange or promissory notes. This no doubt increases the fiscal-monetary interface, setting back to an extent the deliberated separation of central bank…