Infrastructure development of any nation plays crucial role in attracting foreign investments and boosts the economic development of the country. Improvement in Infrastructure financing facilitates rapid economic growth. Prime Minister Narendra Modi in his 2019 Independence Day speech laid the foundation of National Infrastructure Pipeline (NIP) for financial year 2019 to financial year 2025 with the purpose of injecting almost Rs100 lakh crore into the social and economic infrastructure projects of the country such as roads, rail, ports, energy, housing, water etc.Presently, around 7,400 projects have been included so far under NIP within more than 30 sub-sectors out of which over 1800 projects have already been sanctioned and are now under the developmental phase.
Infrastructure projects involve high capital investments, high risks and long gestation periods. Owing to large capital investments in these projects, the major focus of lenders is on revenue generation. Before financing such projects the lenders analyse the potential of such projects considering commercial, environmental, regulatory, engineering and financial aspects that would govern the implementation of such projects. With the aim of providing the facility of Infrastructure Financing, the government of India has established a new Development Financial Institution which will go by the name of The National Bank for Financing Infrastructure and Development (hereinafter referred to as NaBFID).
INCEPTION OF DFI
The inception of Development Financial Institution (DFI) can be traced back to the time of India’s independence. In the year 1948, India’s first DFI, Industrial Finance Corporation of India (ICFI) was set up. Industrial Credit and Investment Corporation of India Limited (ICICI) — nation’s first DFI in the private sector, was established in 1955. An initiative of the World Bank, ICICI Bank Limited was initially established prior to ICFI in 1944 and it was only in 2000; that both ICICI Limited and ICICI Bank Limited agglutinated into the first Universal bank of India. Industrial Development Bank of India (IDBI) was set up in 1964 under RBI and converted to a universal bank in 2003. All these primary financial institutions were responsible for assisting long-term financing in the industrial sector of the economy of the country.
Some sector- specific Development Banks such as EXIM Bank, National Housing Bank and Housing and Urban Development Corporations followed by State- specific DFIs came up in the 70s and 80s with the objective of providing concessional lending to small and medium enterprises. Yet, in early 1990, the financial reforms drastically compressed and condensed the role of DFIs in financing the industrial sector by drawing out concessional funding through Long Term Operation (LTO) funds from RBI thereby making it impractical and non- sustainable. As a result, ICICI and IDBI were transmuted into Commercial banks and IIBI was shut down.
The idea of DFI was again resuscitated in 2017 by RBI in an attempt to cater long-term financing needs of the economy. Finance Minister Nirmala Sithraman while presenting the Union Budget 2021-22 stated that, India’s Infrastructure needs long term debt financing. A professionally managed Development Financial Institution is necessary to act as a provider, enabler and catalyst for infrastructure financing. Therefore, India will set up a new DFI called the National Bank for Financing Infrastructure and Development.
The National Bank for Financing Infrastructure and Development (hereinafter referred to as NaBFID) bill was introduced in Lok Sabha on 22nd March, 2021 and was passed on 23rd March, 2021. The bill was subsequently passed in Rajya Sabha on 25th March, 2021. This bill states that the institution established by it will be the principal DFI for infrastructure financing. The institution is set up as a corporate body with authorised share capital of one lakh crore rupees. Its shares will be held by:
1. Central Government
2. Multilateral Institutions
4. Sovereign Wealth Fun
5. Pension Funds
6. Financial Institutions
8. Any other institution as the central government prescribes.
The central government will own 100% shares initially but they can in the future be reduced to at least 26%. The Bill establishes NBFID as a company with share capital amounting to one lakh crore rupees. NBFID has been set up with the primary motive of lending, investing or to attract investments for infrastructure projects located wholly or partially in India. This institution will also facilitate the market for bonds and derivatives for development financing.
The Institution will discharge two types of functions: (i) Financial Objective, (ii) Developmental Objective. Financial Objectives include directly or indirectly lending, investing or attracting investments for projects entirely or partly within Indian territory whereas developmental objective facilitates the development of market for bonds, loans and derivatives for infrastructure financing.
Board of Directors will form the governing body of NBFID and the Chairperson will be appointed by the central government in consultation with the Reserve Bank of India. Central Government will constitute a body that will recommend candidates suitable for the post of Managing Directors and Deputy Managing Directors. Independent Directors will be appointed based on the recommendations of the internal committee.
The weakening of growth impulses and subdued credit off-take are playing out, with sporadic credit default events and incidents of frauds exacerbating the reluctance to lend which is starkly evident in the slowdown of flow of resources, both from banks and non-banks to the commercial sector in the first half of 2019-20. Frauds can occur on account of overlooking regulatory guidelines and/ or on lapses in internal risk governance, compliance, and audit functions. In particular, lack of prudent internal control mechanisms and surveillance systems is limiting their ability to prevent frauds. The increased Incidents of forgery and fraud not only result in financial loss to the institutions but additionally disturb the fiduciary relationship which exists between the customer and the institution.
Considering the business shambles like IL&FS, RBI has come up with stringent set of rules for the auditors of financial institutions and banks respectively. As per the reports, the primary function of fraud management, monitoring and investigation must be assigned to the Audit Committee of the Board. Thus, it is clearly evident that auditing process should be free from the other pillar of the government namely the legislature yet under their perusal. The bone of contention of lack of parliamentary oversight of a DFI was raised by members of Parliament while debating on the National Bank for Financing Infrastructure and Development (NaBFID) Bill, 2021.
While referring to Section 26 of the bill, it was contended that DFI would remain outside the purview of Comptroller and Auditor General (CAG), Central Vigilance Commission (CVC) and Central Bureau of Investigation (CBI). Since these development institutions will be expending huge amount of government funds, the inspection by these 3Cs becomes imperative. Opposing these contentions, Finance Minister Nirmala Sitharaman said, “Every year audited accounts (of this bank) will come to each House of Parliament….so Parliament oversight (of the institution) is in-built in the bill.” Section 26 of the Act provides, “The Institution shall furnish to the Central Government and the Reserve Bank within four months from the date on which its accounts are closed and balanced, a copy of its balance-sheet and accounts together with a copy of the auditor’s report and a report of the working of the Institution during the relevant year, and the Central Government shall, as soon as may be after they are received by it, cause the same to be laid before each House of Parliament.”
Section 6 of the Act states the procedure for appointment of board of directors. According to the section, the members of the board will be appointed by the Central Government which means there are chances of political biasness for infrastructure financing. The political party in power may then appoint its own people to the board and may then favour its own people by financing their projects thereby making it politically biased.
Secondly, Section 35 states that before initiating any investigation against the employees of the institution prior sanction of the Central Government is necessary. Prior sanction is mandatory for Courts as well before taking cognizance of the offences under any law against the employees of NBFID. Now, this provision makes the employees of the institution immune from legal proceedings and as has been mentioned under section 6, the government will appoint these employees and prior sanction from the government will lead to defiance of the principles of accountability as then they will not be answerable for their actions. This Section will help such employees evade their responsibilities and consequently there will be no transparency thereby going against public welfare.
Sine qua non, the banks and other financial institutions must comply with statutory norms and requirements framed by the supervisory authorities. It is imperative to hire external auditors to scrutinize the working of the institution and book members if they indulge in financial malpractices or breach regulatory and statutory code of conduct. Thus, there is a need for an independent and efficacious audit system to ensure sound health of these institutions as per the recommendations of the Expert Committee set up by the Reserve Bank (Chairman: Shri Y H Malegam).
India is striving towards becoming a major economic power and in that direction government is taking every possible step to strengthen up the economy. By establishing this DFI the government is trying to improve the infrastructure of the country as any country’s infrastructure development is a litmus test of knowing whether the country is financially sound or not. But the government should also have considered that by only establishing the new institution this objective cannot be achieved as what’s more important is the implementation and the mechanism of the new institution and therefore, on reading of section 6 and section 35 of the Act we can see that there will arise issues on the governance of the institution. The governance of DFIs matters a lot since these are public financial institutions dealing with public money. Therefore, it is of utmost importance that these DFIs should be transparent in their operations and accountable to the public.