Govt wants its strongest banks to help their rival–the country’s youngest infra lender

The government wants to increase the capital base of the National Bank for Financing Infrastructure and Development, or NaBFID, to ₹1 trillion through support from banks, two officials toldMint. The infra lender’s total capital as of 31 March was ₹28,560.8 crore.

Although the discussions are not centred around any particular state-owned infrastructure lender, the move is expected to benefit NaBFID as it is the only development finance institution (DFI) created to fund long-term infrastructure, the officials said.

In March, NaBFID outbid State Bank of India, the country’s largest lender by assets, for a ₹9,000-crore loan to National Highways Authority of India’s infrastructure investment trust, making banks that typically dominate such projects take notice.

But NaBFID’s lending capacity is limited by the rules governing it.

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The government’s plan comes at a time when the nation is attempting to upgrade its infrastructure at an eye-watering pace, investing trillions of rupees into building bridges, tunnels and waterways.

In its 2024 interim budget announced in February, the government earmarked ₹11.1 trillion for capital expenditure, or capex, 11.1% higher than the 2023 outlay. The finance ministry will present its full budget for 2024-25 on 23 July.

“Infrastructure lending during the construction period is a concern and DFIs are not able to lend; with the increase in capital of DFIs, they will be able to lend during the construction phase, where banks are not willing to lend," said a senior government official, who did not want to be identified.

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The official added that the plan is to ask banks with high capital adequacy ratio to invest in NaBFID. Discussions are on at various levels of the government on the percentage ownership of banks in NaBFID, which is currently wholly owned by the government, the official said.

An email and a message sent to Vivek Joshi, secretary, department of financial services, and emails sent to spokespeople of the finance ministry and NaBFID did not elicit any response.

NaBFID’s lending limits

Per the ownership rules approved for NaBFID, banks, multilateral institutions, sovereign wealth funds, pension funds, insurers, financial institutions, and any other institution prescribed by the Union government can own a stake in the institution. The government’s stake, as per the NaBFID Act, cannot go below 26%.

“The additional capital would allow NaBFID to take higher exposure in infrastructure projects," said a person aware of the plans but not directly involved in the discussions.

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He pointed to a Reserve Bank of India circular from September that specified exposure limits for all-India financial institutions (AIFIs). Apart from NaBFID, these rules are applicable to EXIM Bank, National Bank for Agriculture and Rural Development (Nabard), National Housing Bank (NHB), and Small Industries Development Bank of India (Sidbi).

“NaBFID cannot lend over 20% of its capital base to a single borrower, and 25% to a group of connected borrowers. Since its net worth is about ₹28,000 crore, it cannot take an exposure of over ₹7,000 crore to a group of connected borrowers," said this person.

For public banks, a role reversal

The proposed dilution of the government’s stake in development finance institutions comes during a phase touted to be the best for Indian banking in decades, as shrinking bad loans leave lenders with more headroom to lend.

Even small banks have reported strong capital strength. At 17.4%, state-owned Bank of Maharashtra topped the capital adequacy ratio table in 2023-24, followed by Indian Overseas Bank (17.3%), Punjab and Sind Bank (17.2%), and UCO Bank, Union Bank of India and Bank of India at 17% each.

Their larger peers are further down, with India’s largest lender State Bank of India reporting the lowest capital adequacy among public sector banks, at 14.3%, as per data from Capitaline.

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Banks are supposed to maintain a minimum capital adequacy ratio of 9%, as per RBI regulations.

The plan to have banks buy stakes in NaBFID is a role reversal of sorts for public sector lenders, who have for long depended on the Union government for hefty capital infusions.

The NaBFID advantage

Set up in 2021 with an initial capital of ₹20,000 crore, NaBFID’s advantage comes from its ability to raise market debt at just 15-20 basis points over sovereign securities. It can also extend cheaper loans, since the government offered it a ₹5,000-crore grant to subsidize lending rates.

Experts said development finance institutions in India have always focussed on areas where it is difficult to secure bank funding, potentially including new forms of public-private partnerships or projects where promoters do not have a concrete track record and good visibility on revenues.

“DFIs also put in longer-term debt than banks and have been useful for long-gestation projects," said Deepto Roy, partner (infrastructure, energy and project finance and banking), at law firm Shardul Amarchand Mangaldas. “They also bring a lot of technical expertise to the table, given their ability to evaluate projects."

According to Roy, with the increased infrastructure push of the Union as well as various state governments, one would need a source of finance for several projects. “The current strength of bank earnings has ensured lenders have quite a bit of cash which can be used to buy stakes in entities from which they can indirectly gain."

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