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Context

• The Government wants to increase the capital base of National Bank for Financing Infrastructure and Development (NABFID) to 1 Trillion through support from banks.

Background

• Infrastructure financing in India had seen robust growth until 2014-2015, with financing increasing from ₹2.7 trillion in 2008-2009 to ₹9.25 trillion by 2014-2015, reflecting a significant 250% growth. However, this trend reversed, and by 2020-2021, the growth rate of infrastructure financing by banks had slowed considerably to less than 20% over six years.
• With banks and specialized private institutions like IFCI, IDBI, and IDFC withdrawing from infrastructure financing, and IIFCL struggling by 2018-2019, the need for NaBFID became apparent.

National Bank for Financing Infrastructure and Development (NABFID)

• Finance Minister Nirmala Sitharaman announced the establishment of the National Bank for Financing Infrastructure and Development (NaBFID) during the 2021-2022 Union Budget.
• The aim was to create a major enabler for infrastructure financing, with a target of achieving a lending portfolio of at least ₹5 lakh crore within three years.

Establishment:

• NaBFID was established under the National Bank for Financing Infrastructure and Development Act, 2021.

Purpose:

• It is a Development Financial Institution (DFI) focused on infrastructure financing in India.

Objectives:

• Support long-term non-recourse infrastructure financing.
• Develop bonds and derivatives markets essential for infrastructure financing.
• Enhance credit flow and investment in the infrastructure sector.

Funding

• The government provided equity of ₹20,000 crore and a grant of ₹5,000 crore.

Role:

• Provides specialized financial instruments to address gaps in infrastructure funding and strengthen the economy sustainably.

Performance and Challenges

• As the three-year deadline approaches, NaBFID's performance has been disappointing. By the end of FY2023-2024, NaBFID's loan portfolio stood at only ₹35,342 crore, a mere 8% of the targeted ₹5 lakh crore.
• NaBFID was expected to play a significant role in the National Infrastructure Pipeline (NIP) and the National Monetisation Pipeline (NMP).
• However, NaBFID faced early operational issues. In its first fiscal year (2021-2022), NaBFID did not sanction any loans.
• It began disbursing loans in December 2022, but the progress remained slow, with an outstanding loan portfolio of ₹97.54 billion for 2022-2023. By the end of FY2023-2024, this figure had risen to ₹353.42 billion.

Mandates and Shortcomings

• NaBFID was also tasked with developing a bond market for infrastructure financing. Despite this, the institution has yet to make significant strides in this area.
• There has been a recommendation for NaBFID to introduce a structured partial credit enhancement facility to aid in bond market development.

Future Outlook

• The current government’s revised target for NaBFID is to sanction loans worth ₹3 lakh crore by March 2026, instead of achieving a ₹5 lakh crore portfolio.
• The shift in language from "portfolio" to "sanctioned loans" suggests a more cautious approach moving forward.

Conclusion

• The performance of NaBFID to date has been underwhelming, raising concerns about its effectiveness.
• Given the broader challenges in infrastructure financing, including policy issues and private sector disillusionment, NaBFID’s role as a sole solution is questionable.
• A more comprehensive reform of infrastructure policy and financing mechanisms may be necessary to address the deep-seated issues and create a conducive environment for private sector investment.

PRACTICE QUESTION Q. Discuss the performance of the National Bank for Financing Infrastructure and Development (NaBFID) since its establishment in 2021. Evaluate the challenges faced by NaBFID in achieving its targets and suggest policy measures that could enhance its effectiveness in supporting infrastructure development in India.

SOURCE: THE HINDU