India’s youngest infrastructure financier, National Bank for Financing Infrastructure and Development (Nabfid), plans to diversify into equity financing and blended debt.
In the initial phase, the company will have only an equity fund of $500 million, said Rajkiran Rai G., managing director of Nabfid, which was initially set up as a development finance institution to support long-term projects.
A second fund, still on the drawing board, is a blended finance fund of similar size, Rai said in an interview with Mint at the Mumbai headquarters of Nabfid, which was founded in 2021.
“We are (also) likely to launch an alternative investment fund, mainly for the equity side, in the next six months,” Rai said.
Nabfid’s new subsidiary will be like a holding company, under which there will be multiple alternative investment funds (AIF). The first of these is expected by September.
The proposed category II alternative investment fund (AIF) will back infrastructure projects. “For all well-conceived projects, we are seeing a lot of bank sanctioning loans, but then equity is a problem,” Rai said, adding that while debt funding is readily available, equity remains scarce.
“...foreign equity and all that is sought after. Domestic equity is also a possibility. So, we want to enter that space to create alternative investment funds,” he said.
AIFs are pooled investment vehicles that raise capital from investors to invest in assets such as infrastructure, private equity, or startups.
Urban infra
The state-owned institution also plans to invest in underserved sectors such as urban infrastructure, waste management, and smaller healthcare projects, areas where capital is harder to access.
Nabfid's blended finance vehicle is expected to focus particularly on urban infrastructure. “Blended finance comes at a much cheaper rate. It is below the senior debt,” he said.
The model involves combining low-cost international funds, such as green climate finance, with regular borrowing.
“Suppose there is an infra project. Suppose 20% of that project finance happens at 6% and the rest at 9%, the project becomes viable,” he said, explaining how blending cheaper debt with standard loans can make otherwise unviable projects feasible.
“Municipalities need cheap money. So blended finance is specifically meant for the sector,” he said, pointing to areas like sewage treatment and solid waste management.
According to a consultation paper by Gift City regulator International Financial Services Centres Authority (IFSCA) in October, blended finance offers promising potential in closing the developmental funding gap.
Data by Convergence, a global network for blended finance, total capital mobilised till date through this route is $262 billion in developing countries.
Fundraising and growth outlook
To support its expanding balance sheet, Nabfid plans to raise around ₹75,000 crore in the new financial year starting April, including domestic and overseas borrowings.
Foreign currency borrowing could range between $1 billion and $2 billion through routes such as external commercial borrowings, dollar bonds, and credit lines from multilateral institutions.
As of 31 December, Nabfid has borrowed ₹66,892 crore, of which 27% is bank borrowings and the remaining is non-convertible debentures.
Analysts are banking on Nabfid’s role as an infrastructure financier and its government backing as key strengths. Rating agency Icra said on 16 March that Nabfid will continue to benefit from its role as a dedicated, specialised financial institution for the development of the Indian infrastructure sector and will continue to benefit from its sovereign ownership. It rated the company's ₹85,000 crore borrowing programme at AAA.
On the lending side, disbursements are projected at around ₹80,000 crore next year, with the overall loan book inching closer to ₹2 trillion. As of December end, Nabfid’s cumulative disbursals stood at ₹1.09 trillion, with in-principle loan sanction of ₹5.3 trillion.
However, the current global environment, particularly the war in West Asia and elevated interest rates, poses challenges.
“Interest rates have moved up…we are trying to protect our margins,” Rai said, adding that Nabfid is using hedging strategies such as interest rate derivatives to manage risks.
The rising cost of capital, driven by global factors like oil prices and inflation, could weigh on profitability in the near term. “This disruption will likely push up interest rates. It is not good. This year will be a tough year,” he said.