Those who forget history find themselves condemned to repeat it – I was in my 20s when this truism was seared into my memory over the blood-curdling scream, ‘Hayo Rabba’ (O God), in Tamas, the epic tele-serial on India’s partition.
Over the years, I’ve found myself muttering it under my breath every time our economic rulers have repeated the same failed statist policies, over and over and over again. So, I felt another stab of despair when the government announced a brand-new Development Finance Institution (DFI), grandly called the National Bank for Financing Infrastructure and Development (NaBFID). Sigh, one more acronym added to the failed string of IDBI, IFCI, ICICI, IDFC, and IIFCL.
Now now, please don’t get me wrong. The objective is excellent. India must strain every sinew to set up an efficient ecosystem for ultra-long-term financing of infrastructure projects.
The country has set an ambitious goal of investing Rs 111 lakh crore (USD 1.5 trillion) over the next five years in roads, deep-sea ports, power projects, and what not among a breathtaking array of 7400 projects in the National Infrastructure Pipeline (NIP).
This could help create the escape velocity that our economy needs to jump out of the middle-income trap.
My quarrel is not with the ambition, but the failed legacy and design of DFIs.
Sops to DFIs Have Historically Created Inefficiency & Corruption
Here is a throwback to the 1960s when the Indian State was ‘in command’ of our economy. Several DFIs were given incredible concessions to harness the country’s savings. The RBI gave a statutory colour to their bonds, besides opening a special window for long-term funds. DFIs could take soft loans from international agencies in an era where Indian companies could not directly access overseas capital.
Predictably, their balance sheets bloated up with loans given for myriad ‘considerations’ — responding to the proverbial ‘phone call from Delhi’, financing cronies, ever-greening duds, gold-plating costs, ending in a messy crash in the 1990s, with DFIs wound up or painfully transformed into commercial banks.
Today, the sops being trotted out for the NaBFID are even more terrific (or terrifying, depending on where you stand on the issue):
- Rs 20,000 crores in equity plus Rs 5,000 crore in grants to provide a risk cushion for the mandated leverage of 12x, as NaBFID is required to run up an asset book of Rs 3.25 lakh crore within 3 years
- Central government to guarantee its foreign liabilities for a minuscule 0.1 percent commission, thereby ensuring a continuous flow of hard currency into the balance sheet. This generosity is being topped up with a real sweetener, ie the reimbursement of all hedging costs — wow, that’s like a 5-6 percent interest subsidy!
- RBI to reopen its special lending window, this time to give cash against short-term collateral, that is, providing working capital pretty much on tap
- And here’s the cherry on the cake — an income tax exemption for 10 years to providers of long-term capital, thereby ensuring a steady inflow of domestic household and institutional savings
- Finally, no investigative agency to hound NaBFID’s senior management for bad loan calls, unless there is a specific central government approval
Terrifying Pitfalls Created by ‘Terrific’ SOPs
Once again, I love the sweeping ambition to finance infrastructure at such scale. But I am terrified at three pitfalls surrounding NaBFID:
- Invocations to the moral grandeur of ‘nation-building’. Sample this sentence from the editorial page of a leading pink daily: “Large public works and development projects may not necessarily provide a financial rate of return in the short and medium term, but have huge multiplier impacts and ‘economic returns’ to the country”. For heaven’s sake, such noble axioms should not be used to ‘justify’ losses on NaBFID’s balance sheet. The rot will set in quicker than we can say ‘NPA’ (non-performing assets). Therefore, NaBFID should strictly earn a profitable/viable return on every investment it makes — if some ‘social good/benefit’ has to be triggered, let the government provide an explicit/transparent subsidy rather than ‘offshore the loss to NaBFID’ (remember FCI, how the government had brazenly ‘off-balance-sheeted’ its muck?)
- While it’s delightful that the government’s 100 percent ownership will be whittled down to 26 percent ‘eventually’, that could take several years. So unfortunately, NaBFID will acquire all the trappings of a sarkari (government-owned) venture in its critical, culture-defining years. Phone calls from Delhi, crony financing, gold-plating, ever-greening… alas, all of this could happen!
- Since NaBFID will have to set up physical infrastructure and intellectual skillsets from scratch, there will be an utterly wasteful duplication. Several pedigreed private/public entities in the financial sector have acquired copious capabilities in evaluating project risks/potential. They have created sophisticated models of hedging risks. They have the buildings, computers, surveyors, quant-modelers, legal eagles, financial whiz-kids, you name it and they have it. So, why create one more institution that will reinvent/recreate an expensive architecture? Worse, most of the gold-plating, cost-fudging, over-invoicing, that is, all the instruments of corruption, occur across these ‘project assessment’ operations — so, why tempt fate one more time?
Thinking Out-of-the-Box: A New Architecture for NaBFID
So, here’s the Fifty-Billion Dollar (over Rs 3.25 lakh cr) Question:
Is there an alternate architecture for NaBFID, that is neither wasteful nor so vulnerable to financial skullduggery?
Yes, there is, as a modern, asset-light, super-specialist market-maker to provide two-way quotes, depth, and liquidity to an ultra-long-term bond exchange. It shall be a win-win-win-win structure (as below):
- With an initial capital base of Rs 3.25 lakh cr, using nanosecond algorithmic trading models to swiftly arbitrage between price quotes of listed bonds, our new-fangled DFI should be able to catalyse hundreds of lakhs of crores of two-way liquidity every day
- It would not be required to get its hands dirty, quite literally, in the difficult and potentially messy business of actual lending, collateralising, monitoring, and recoveries. That would be left to experts in private entities
- Its risk assessment mandate would be limited to individual instruments that are listed and traded on the exchange. It won’t need to negotiate the blind alleys and pitfalls of thousands of multi-billion-dollar greenfield projects in a mind-boggling variety of industries, each requiring highly specialised expertise. That job would be left to vertically qualified investment shops
- It won’t need sprawling skyscrapers in many metros, acres of computer farms, or an army of people… just a guerrilla garrison of savvy bond traders!
Oh, how I wish our policy-makers could top-up their ambition with out-of-the-box ideas, instead of falling back on discredited structures from the 1960s!
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