Deja vu - all over again

No credible signs yet of the viability of long-term infrastructure lending in India

The yesteryear baseball player Yogi Berra’s unwitting one-liners are profoundly amusing. Berra’s quip that it was "deja vu all over again" came to mind when the central government announced in February 2021 that it is setting up yet another development finance institution (DFI) to fund long-term infrastructure projects.

Several DFIs such as the Industrial Credit and Investment Corporation of India and the Industrial Development Bank of India were established to provide long-term loans. These and other DFIs have since converted themselves into commercial banks. It is amply evident that project financing is fraught with multiple difficulties, making short-term lending to the best credits the easier option. It is near impossible to get the pricing of long-term loans even approximately correct when dispute resolution over defaults gets dragged out over decades in interminable court cases.

It was expected that with the enactment of the 2016 Insolvency and Bankruptcy Code (IBC), lenders would feel emboldened to provide longer-term funding. The reality has proved to be otherwise as cases of default have dragged on in National Company Law Tribunals, Appellate Tribunals, High Courts and finally the Supreme Court. In addition to having the IBC approved by parliament, the government should have focussed on why several DFIs have converted themselves into banks. This could have been done easily given all the evidence of wrongdoing associated with long-term lending. Information on the machinations of the many concerned in the acquisition of Essar Steel by Arcelormittal and the on-going saga of the non-banking finance company, Infrastructure Leasing and Financial Services (IL&FS), would be readily available with government. Government should reflect on the fact that even the National Highways Authority of India (NHAI) is involved in protracted litigation as it withholds repayments and challenges High Court judgments in favour of DFIs by petitioning the Supreme Court. 

The central government has been setting up dedicated new DFIs for some time, including the Indian Infrastructure Finance Company Limited (IIFCL), which was established in 2006. IIFCL is fully owned by the central government and is clearly undercapitalised with authorised capital of Rs 10,000 crore. Inexplicably, IIFCL has sponsored a mutual fund, while IIFCL projects was set up in 2012 six years after this DFI was founded. It is not immediately clear from IIFCL’s website how much it has disbursed till now and what were the maturities of its loans.

Another initiative that was announced in the February 2015 Budget was the establishment of the National Investment and Infrastructure Fund (NIIF). NIIF was created to support investment in "commercially viable greenfield, brownfield and stalled infrastructure projects". Press reports indicate that the government was to provide Rs 20,000 crore per annum and NIIF would seek additional long-term capital from domestic and foreign sources. NIIF’s website is slickly designed but it is frugal with information on how many long-term projects it has funded and at what cost. There is a reference to two road projects in Karnataka and Telangana, 22 and 60 kilometres long, respectively without information about the loan amounts that were disbursed and their maturities. It is unclear from NIIF’s website to what extent it would provide funding support, for example, to NHAI in building highways over the next 10 years. There are no loan specific details on NIIF’s website about its claim that it supports the generation of renewable energy. NIIF is registered as a Category II Investment Fund with the Securities and Exchange Board of India, but it is unclear how that has helped NIIF to provide long-term funding for sizeable infrastructure projects.  

In the latest February 2021 Budget, the government announced the setting up of a new DFI. The finance minister mentioned that although "investment funds" were set up in the past "we ended up with no bank which could take up long-term risk and fund development." Parliament has since approved the setting up of a National Bank for Financing Infrastructure and Development (NaBFID) to finance infrastructure projects. The government is to provide Rs 20,000 crore in FY2021-22 to capitalise NaBFID. NaBFID will have tax advantages, perhaps no withholding tax on interest paid on its bonds as was permitted for the now extinct DFIs.

Illustration by Binay Sinha

It is too early to assess whether NaBFID would become a significant provider of long-term funds. In this context, I recall a truism that is usually attributed to Einstein. Namely, that "insanity is doing the same thing over and over and expecting different results". The Indian government keeps setting up institutions to fund long-term projects and is reluctant to publicly recognise the causal reasons why sponsors of longer-term projects are often unable to service their debt obligations. A drumbeat has now started for IBC to be amended and to be presumably rendered toothless like the defunct Board for Industrial and Financial Reconstruction (BIFR). The core problem is that some borrowers are used to siphoning away large amounts from projects and then defaulting on repayments to lenders with little by way of adverse consequences. Part of the current strategy of large-scale debtors/police is to hound insolvency resolution professionals (IRPs). This seems to be the case in the arbitrary arrest of Anuj Jain who is the IRP in the Japypee Infratech Ltd case. Jain was released consequent to a Supreme Court intervention on March 2, 2021.

To sum up, it is obvious there are several problems with project lending and consequently private banks tend to shy away from participating in disbursing long-term loans. The government should first fully air out and disclose these issues and work to resolve them instead of periodically establishing new term-lending institutions. One way to assess whether the setting up of NaBFID has been successful would be to measure its ability to crowd-in long-term lending by private banks and insurance companies. If in time such crowding-in of private capital funding for sizeable projects is not evident, NaBFID is unlikely to have any significant impact on increasing development financing.

j.bhagwati@gmail.com. The writer is a former Indian ambassador and World Bank Treasury professional