Context: The National Bank for Financing Infrastructure and Development (NaBFID) plans to introduce takeout financing products to help finance projects and allow timely exits for commercial lenders.
What is Takeout Financing
- Take out financing scheme means a long-term lending institution in the infrastructure sector like the NaBFID is purchasing the infrastructure loan sanction given by a commercial bank from its book.
- This will relieve the commercial bank from locking assets in a long-term manner.
- Takeout financing offers a window to the banks to free their balance sheet from exposure to infrastructure loans, lend to new projects and also enable better management of the asset liability position.
- Hence, takeout financing enables financing longer term projects with medium-term funds.
- Union Budget 2021-22 has proposed to set up a development Bank in the form of NaBFID as financier, enabler and catalyst for the National Infrastructure pipeline. NaBFID is expected to reduce pressure on banks, lower the cost of capital and meet investment needs of $ 5 trillion economy.
- Global Examples: China (China Development Bank), UK (Green Investment Bank), Germany (KfW).
- Indian Examples: NABARD (Agriculture and Rural Development), Industrial Finance Corporation of India (Industrial Development), SIDBI and MUDRA (MSME Development), EXIM Bank (Trade Development), National Housing Bank (Housing Infrastructure).
- Note: IFCI was the first ever development bank that was established in 1948. ICICI and IDBI Banks were initially set up as Development Banks but were later converted into Commercial banks based upon the recommendations of Narasimham Committee.
- Ownership: NaBFID will be set up as a corporate body with authorised share capital of one lakh crore rupees. Shares of NaBFID may be held by: (i) central government, (ii) multilateral institutions, (iii) sovereign wealth funds, (iv) pension funds, (v) insurers, (vi) financial institutions, (vii) banks, and (viii) any other institution prescribed by the central government. Initially, the central government will own 100% shares of the institution which may subsequently be reduced up to 26%.
- Source of Funds: Raise money in the form of loans in Indian Rupees and Foreign currencies. NaBFID may borrow money from: (i) central government, (ii) Reserve Bank of India (RBI), (iii) scheduled commercial banks, (iii) mutual funds, and (iv) multilateral institutions such as World Bank and Asian Development Bank.
Assistance Provided By Development Banks
The Development Banks may offer the following kinds of assistance to the companies:
- Extend long term finance at concessional rates to the companies.
- Subscribe/buy the shares of the companies which are involved in financing of infrastructure, industrial or housing projects.
- Partial Credit Guarantee on the repayment of the bonds issued by the companies.
How The Setting Up Of NaBFID Would Benefit Indian Economy?
- Meet Investment Needs: to realise $ 5 trillion by the end of 2024-25.
- Reduce Pressure on Commercial Banks: Banks have mainly relied on short-term deposits for lending to long term infrastructure projects leading to Asset-Liability Mismatch and higher NPAs.
- Lower Cost of Capital: Credit enhancement provided by the development Banks would enable the companies to raise loans at lower rates of interest leading to decrease in the cost of capital.
- Reduce Foreign Currency Exposures: Presently, some of the Infrastructural and housing finance companies borrow loans from overseas markets. The depreciation in the value of Rupee may put additional burden on them and expose them to fluctuations in the exchange rate.
Strategies Needed To Ensure Success Of NaBFID
India’s experience with the Development Banks has so far been a mixed bag. On one hand, some of the development banks were embroiled in controversies (National Housing Bank was involved in the Harshad Mehta Scam). While on the other hand, some of the development banks such as the one established by Karnataka Government provided necessary funding to Infosys company during its initial days, which in turn enabled Infosys to become a global giant. Hence, India has to learn from its past experiences in order to ensure the success of NaBFID.
Independence and Autonomy: Ensure professionalism, autonomy and effective control and audit mechanism. Otherwise, NaBFID’s performance would be lacklustre and similar to that of Public Sector Banks.
Enhance Access to Long-term Capital: Budget 2021-22 has allocated only around Rs 20,000 crores, which is too little for our mammoth infrastructure needs. Enhanced financing can be provided by:
- Long-term credit from RBI to NaBFID through Long-term Repo Operations (LTROs).
- Declaration of Bonds issued by NaBFID as eligible securities for meeting SLR requirements of the Banks. (Encourage the Banks to buy Bonds issued by NaBFID 🡪 Enable NaBFID to raise money from Banks).
- Enable NaBFID to borrow money from International Institutions such as World Bank, ADB etc.
Infuse Competition: Monopoly by NaBFID in infrastructure financing may lead to operational inefficiencies; need to encourage private sector to establish Development Banks so as to infuse competition.
Enhancing Investor Base: Make it easier for the pension fund companies, Insurance companies, mutual fund companies to invest in bonds issued by NaBFID; Tax incentives to the individuals upon investing in bonds issued by NaBFID etc.
Takeout financing is an accepted international practice of releasing long-term funds for financing infrastructure projects. It can be used to effectively address Asset-Liability mismatch of commercial banks arising out of financing infrastructure projects and also to free up capital for financing new projects.