Explained: All you need to know about NaBFID Bill

The parliament has recently enacted a law for setting up the National Bank for Financing Infrastructure and Development (NaBFID). NaBFID is envisaged as a statutory Development Finance Institution (DFI), which would support development of long-term non-recourse infrastructure financing in India. In this piece, we contextualize NaBFID within the broader policy scheme and explain how the NaBFID Act makes use of legislative innovation to avoid drawbacks experienced in earlier DFIs.

Infrastructure usually generates predictable and stable returns in the long run. As a result, it primarily relies on low-cost debt financing. Debt financing has two main sources – banks and bond markets. Banks have access to cheaper short-term liabilities. They can therefore offer lower lending rates. But infrastructure assets are usually long-term. This creates a mismatch between the assets (long-term) and liabilities (short-term) on the banks’ books. Consequently, bank financing of infrastructure is inherently risky and may raise financial stability concerns.

In contrast, a deep and liquid bond market could attract a variety of investors. Investors (like pension funds and insurance companies) with long-dated liabilities are a natural fit for long-dated bonds. Strong demand from such investors could lower the yield on longer tenor infrastructure bonds, making infrastructure financing through bond markets cheaper and safer.