Nostalgia teaches new financial institutions

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British band Pink Floyd’s stylized 1978 rock opera The Wall was a searing commentary on alienation, disjointed families, cruel societies and war, including its dual evocation of nostalgia for World War II: “Does anyone here remember Vera Lynn?” the legislative route also induces a nostalgia which, we hope, will not neglect the lessons drawn from the mistakes of the past.

On March 23, the Lok Sabha passed the National Infrastructure and Development Finance Bank (NBFID) Bill of 2021, aimed at establishing a Development Finance Institution (DFI) to finance infrastructure. It was Finance Minister Nirmala Sitharaman who fulfilled her budget promise. The government will initially own 100% of the proposed NBFID ??Share capital of 20,000 crore, which will later be reduced to 26% by selling shares to banks, multilateral institutions, sovereign wealth funds, pension funds and insurers.

The government will also help NBFID to raise cheap and long-term finance. In addition to the initial registered capital, the government will also provide a ??grant of 5,000 crore at the end of its first fiscal year, presumably to cover initial costs; it also undertook to guarantee, at a negligible cost, the loans and bond issues of the FNBID on the national and foreign markets. In addition, the government will bear the costs of currency hedging for FNBID.

These are comfort factors for any infrastructure finance agency based in India. Pre-reform-era DFIs were converted into commercial banks (or languished) after their access to cheap finance dried up. FDI bonds were previously eligible for investment by banks to meet their statutory liquidity ratio (SLR) mandatory requirements, so the paper had loan takers. Once the SLR tag was removed, DFIs could only raise short and medium term financing at market rates. It demolished their basic business model. The future of NBFID seems somewhat secure on this point.

But there are other concerns. It might be instructive to study the fate of two infrastructure finance institutions created in the public sector with direct and indirect government participation: IL&FS Ltd and IDFC Ltd. .

The problems of IL&FS, established in 1990 as a non-bank finance company, are now well documented after its collapse in 2018. IL&FS had borrowed short-term loans to finance long-term infrastructure assets and was kicked out of the bank. this unstable carousel when the economic downturn and political interference forced infrastructure borrowers to stop repaying their loans. In addition, it had become unwieldy, mismanaged, and eluded scrutiny for too long by handing out plum displays to select bureaucrats.

P. Chidambaram’s July 1996 budget speech announced the establishment of the IDFC to address the lack of long-term infrastructure funding, with contributions from the government and the Reserve Bank of India (RBI) ??500 crore each as start-up capital. In 2004, interference from Delhi-based bureaucrats sparked an internal rebellion; seven senior executives resigned, including then-chief executive Nasser Munjee and chief political adviser Urjit Patel (appointed RBI governor in 2016). Sounds familiar? Delhi mandarins were unhappy with the slow growth in infrastructure lending; executives said the book was developing cautiously due to the lack of bankable projects. Cut to 2021. IDFC, originally created to finance infrastructure projects, has since liquidated its project finance portfolio. It transferred its lending activities to IDFC First Bank, which cut its infrastructure portfolio by more than half from ??26 832 crore in March 2018 at ??11,602 crore by December 2020. The statement by Vinod Rai, former bureaucrat and current president of IDFC Ltd in his 2019-2020 annual report, is revealing: “… We have now completely exited our non-commercial activities. Ironically, as a government candidate for the IDFC board in 2004, Rai was part of an effort to convert IDFC Ltd into a subsidiary of the State Bank of India because it was not disbursing funds quickly enough. infrastructure loans. .

Sitharaman’s 2021-22 budget speech also mentioned the creation of another institution that will acquire the stressed assets of the banking sector, manage them and eventually dispose of them. Listen to Pink Floyd’s song again: “Does anyone here remember the Industrial Investment Bank of India?” Launched in 1971 as Industrial Reconstruction Corporation of India, then renamed Industrial Reconstruction Bank of India and eventually renamed Industrial Investment Bank of India, the institution was eventually closed in 2012. Mandated with sick and weak nursing companies , he collapsed under this onerous burden, betrayed by a campaign finance system that favored hijacking entrepreneurs over a robust resolution process.

The short lesson is this: correct the distortion of demand before increasing supply. Any number of institutions can be started, but they cannot be expected to work wonders in a broken system. Bankers at Mint’s Annual Banking Conclave in February 2020 had a recurring collective concern: Banks can assess business, operational, or market risk, but have no control over political risk, which has hampered many plans for infrastructure in India. No funding institution can solve this problem.

Rajrishi Singhal is a political consultant, journalist and author. His Twitter handle is @rajrishisinghal.

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