Mumbai: The National Bank for Agriculture and Rural Development, or Nabard, is set to change its business model by funding infrastructure projects in the power and agricultural sectors on a commercial basis and expanding its role in financing state-government sponsored projects.
Nabard will start funding infrastructure projects in the power and agricultural sectors at market rates by March. The move is part of a restructuring of its business model to boost revenue.
The development organization, which has so far restricted its role to refinancing cooperative banks and regional rural banks, will now start funding big-ticket projects such as construction of cold storages and warehouses at competitive rates, chairman U.C. Sarangi said.
The move follows recommendations by the Boston Consulting Group (BCG), the mandated adviser for Nabard’s business restructuring plan, and will mark the entry of the organization into commercial infrastructure funding for the first time since in its inception in 1982.
“We have decided to begin the funding of infrastructure projects at competitive market rates this fiscal as this would enhance the income of Nabard, which is necessary to support its refinancing and development operations,” Sarangi said. “The business will be rolled out by March under the special projects department.”
Nabard is also considering setting up a separate subsidiary for infrastructure funding over the next one year when the operations scale up, he added.
So far, Nabard has been funding agricultural projects such as irrigation, roads and bridges at subsidized rates from the Rural Infrastructure Development Fund (RIDF), a dedicated fund contributed by banks to meet their shortfalls in priority sector lending. Under priority sector norms, banks have to lend 40% of their total loans to agriculture and weaker sections.
Any shortfall in priority sector lending can be compensated for by proportionate contributions to RIDF.
Nabard has an RIDF outstanding of Rs64,000 crore and has made total disbursements of around Rs1.15 trillion from this fund.
Banks invest in RIDF at 6%, which Nabard lends at 6.5% to state governments to fund agriculture-related infrastructure projects.
The current business restructuring plan is aimed at developing its own funding sources. Nabard is concerned that if banks start meeting their priority sector targets independently over the next few years, the corresponding contribution to RIDF will be reduced, leading to a scarcity of funds for the institution, Sarangi said.
Nabard has been borrowing from the market in the range of Rs15,000-20,000 crore per year after the Reserve Bank of India (RBI) stopped its support from the general line of credit (GLC) in 2007 and from the national rural credit (long-term operation) fund in 1992. It used to receive Rs6,000 crore per year from RBI under GLC until 2007.
Nabard had a balance sheet of over Rs1.36 trillion as of 31 March. Over the last three years, Nabard’s annual disbursements have risen to Rs57,000 crore from Rs29,000 crore.
It hired BCG to devise a new business model early this year.
The entry of Nabard into infrastructure funding at market rates could intensify competition among existing financiers such as Life Insurance Corp. of India and Housing and Urban Development Corp. Ltd.
Analysts said the move will also benefit state governments that want to borrow more from Nabard outside the RIDF allocation to fund development projects. These state governments can borrow part of their requirements at market rates and the rest at subsidized rates from Nabard.
In fiscal 2010-11, Nabard had RIDF fund allocation of Rs.16,000 crore that has already been disbursed.
“Nabard has not done direct financing so far. Hence they will have difficulties in the initial phase,” said Abhishek Kothari, a research analyst with Mumbai-based Way2Wealth Brokers Pvt. Ltd.
“You always face that operational challenge. However, Nabard has expertise in rural financing. Hence, its future prospects look good,” he added.