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  • Ketan Mukhija & Akanksha Gupta

Exploring the Potential of the NBFID in Foreign Infrastructure Investment


Infrastructure is critical to India’s long-term prosperity. Non-recourse financing is essential for long-term infrastructure investment due to higher borrowing costs, delays, and a larger risk of project failure. Despite banks’ substantial reliance on short-term liabilities, infrastructure financing is used to make long-term investments. As a result, banks’ exposure to long-term infrastructure financing has long led to balance sheet mismatches and other systemic issues.

The slowing in the flow of resources from banks and non-banks to the business sector during the first half of 2019-20 is a clear sign of the weakening growth impulses and low credit off-take that have been taking place. Particularly ineffective are internal control processes and surveillance systems, which limit the organization’s ability to detect and prevent fraud. The surge in forgery and fraud has resulted in companies suffering financial losses as well as a loss of the faith that consumers have in them, which is eroded when these crimes take place.

As resource strapped banks neither had the capacity nor the willingness to invest in long term greenfield projects, the government finally resorted to the creation of a novel entity in the form of a DFI. The National Bank for Financing Infrastructure and Development (NBFID), Act came into force on March 28, 2021 for the purpose of stimulating investing specifically in the infrastructure sector. This article highlights the scope of and barriers before the NBFID domestically and also explores its potential for modelling itself after international Development Financial Institutions (DFIs) like China’s Asian Development Bank (ADB).

Structure and Functions of the NBFID

NBFID would be established as a corporation with a one lakh crore rupee authorized share capital. According to Clause 3 of Section 5[i] NBFID shares may be owned by the following entities:

  1. The central government,

  2. International institutes,

  3. Sovereign wealth funds,

  4. Pension funds,

  5. Insurers,

  6. Financial organizations,

  7. Banks, and

  8. Any other entity that the central government deems appropriate.

When the institution reaches a particular degree of stability and economic sustainability, the state keeps a 26% ownership stake in the organization’s paid-up voting share capital, according to the founding Act.

Moreover, the Act establishes the DFI to offer long-term non-recourse financing to diverse sectors of the economy where commercial investors are afraid to take risks. Riskier projects may be more easily financed with the NBFID since it ensures that resources are always available at a lower cost of capital. The country’s biggest growth and development challenge may be solved by attracting enormous sums of public money.

Lending, investing, and providing financial solutions are all part of the NBFID’s aim to assist infrastructure projects in attracting private capital. A variety of financial instruments may be available to help the economy’s credit engine and assist businesses and projects that would otherwise be considered too risky due to their size, type or location. Two objectives will be met by NBFID: First, it will achieve policy objectives to prevent market failures in projects; and second, it will meet the requirements of sustainable development.

Apprehensions Related to Systemic Transparency of the NBFID Act

In the wake of the IL&FS fiasco, the Reserve Bank of India (RBI) has imposed rigorous requirements for financial institution and bank auditors to follow. As stated in the reports, the Audit Committee of the Board of Directors should be in charge of all aspects of fraud management, including monitoring and investigating cases. As a result, it is clear that the auditing process should be separate from the other pillar of government, particularly the legislature, while yet, being subject to their oversight. The Members of Parliament made the point during the discussion on the NBFID Bill that the proposed DFI lacked parliamentary oversight.

Section 26[ii] of the Act was used to claim that the CAG, the CVC, and the CBI would not have authority over the DFI, and this was supported by the government. While Section 26 only offers limited protection in this regard, it does mandate the filing of an audit report to the legislature. But it is impossible to rule out the likelihood that the report may be modified to meet the needs of the present government. Because of this, the demand that external auditors be engaged by an independent observer body rather than by the NBFID board or on the basis of government nomination, as recommended by the YH Malegam Committee, becomes more important.

The Act’s Section 20[iii], which asks for an external performance review of the DFI based on Section 4[iv] objectives every five years, may need some revisions. To promote transparency, an independent committee chaired by the Comptroller and Auditor General should choose an external agency to replace it, so promoting transparency.

Exploring the Potential of the NBFID in Other Developing Nations

According to the National Infrastructure Pipeline Report, with most of the existing Indian DFIs financing infrastructure primarily in the Power and Railway sectors, there is a lack of DFIs with diversified inter-sectoral investment portfolios. With a few exceptions such as the National Bank for Agriculture and Rural Development (NABARD) and the Housing and Urban Development Corporation Ltd. (HUDCO) – Both of which are now reduced to refinancing agencies – most DFI’s are now sector specific.

The NBFID, therefore is an emerging ray of hope not only for long-term infrastructure projects in the country but also for the domestic Bonds Market, as it is expected to play a major role as both bond seller and market-maker during its initial years of operations. As the Growth of Chinese DFIs can partially be credited to their dominating presence in young and resource rich African Economies, Indian DFIs must also expand beyond domestic boundaries if they wish to compete with international behemoths such as the ADB.

While South East Asia and the Arab world have experienced massive growth spurts in terms of development infrastructure since the beginning of this century, Central Asian economies have somewhat lagged behind due to underutilization and ineffective application of its abundant resources. National resources such as gold, crude oil, natural gas, and other metals exist across Central Asia. Kazakhstan and Turkmenistan have crude oil and natural gas deposits, whereas Armenia, the Kyrgyz Republic, Tajikistan, and Uzbekistan have gold reserves, and Kazakhstan has major uranium reserves.

Furthermore, Infrastructure Financing in this region has seen a steady decline since 2015 with actual investment being a fraction of what it ought to be for sustained growth. Both traditional and non-traditional sources can be used to solve the obstacles of infrastructure development in these economies. India and China are seen as the two major players in Central Asian economies with the region being termed as the “Global Chessboard”.[v] China although has a clear upper hand in the region with its Belt and Road Initiative, however, in recent times has experienced some pushback and distrust owing to its aggressive and non-transparent activities.


India may benefit from NBFID’s assistance in making the transition to a sustainable economy, while also proving its commitment to infrastructural investment. It has the authority to lend to or invest in infrastructure projects located entirely within India or partially within India and outside the country for the purpose of reducing systemic risk, improving credit quality, extending the maturity date of acceptable debt, and deferring the maturity of subordinated debt for the duration of the project’s life cycle.

India’s ambitious Goal of becoming a $5 trillion economy by 2025–for which both the national monetization as well as the national infrastructure pipelines are strategies–cannot be achieved through domestic infrastructure investment alone, acquiring long term assets outside domestic boundaries especially in resource rich regions can positively influence national wealth generation.

With prevalence of large deposits of natural resources which are underutilized, an investment deficit in development infrastructure, geographic proximity, and the existence of amenable governmental relations, Central Asian economies could be to India what Africa has been to China. International investment in developmental projects would not only benefit these nations but also allow India to establish its dominance in the region as a driving force of development.

However, India’s fiscal health, especially since the pandemic has to be taken into consideration. Infrastructure Investment internationally might seem frivolous considering the level and quality of domestic infrastructure. Therefore, unlike it’s Chinese counterparts, a DFI like NBFID operating at a transnational scale cannot source its investments at the expense of the Indian taxpayer.

Chinese practices in foreign nations–especially Africa–have time and again been viewed by the international community as unethical and with little regard to human rights. This opens doors for India to seek funding through other nations concerned with China’s unchecked economic growth.  With the potential of attracting foreign funding from countries threatened by or in an economic tussle with China, the NBFID could be the instrument of development from India in contrast to the Chinese monopoly in the region.

India therefore through international investment would have the opportunity of engaging and deploying strategies that are mutually beneficial to the host as well as the investing nations. With the potential of attracting foreign funding from countries threatened by or in an economic tussle with China, the NBFID could be the instrument of development from India in contrast to large China dominated DFIs.


[i] Section 5, The National Bank for Financing Infrastructure and Development Act, 2021, No. 17 of 2021, Acts of Parliament.

[ii] The National Bank for Financing Infrastructure and Development Act, 2021, § 26, No. 17, Acts of Parliament, 2021 (India).

[iii] The National Bank for Financing Infrastructure and Development Act, 2021, § 20, No. 17, Acts of Parliament, 2021 (India).

[iv] The National Bank for Financing Infrastructure and Development Act, 2021, § 4, No. 17, Acts of Parliament, 2021 (India).

[v] Kuanysh-Beck Sazanov (2008), The Grand Chatrang Game, Author house UK.

This article has been authored by Ketan Mukhija, Partner and Akanksha Gupta, Associate at Link Legal. They were assisted by Mr. Ishaan Sood, a student at RGNUL, Punjab. This blog is a part of RSRR’s Excerpts from Experts Blog Series, initiated to bring forth discussion by experts on contemporary legal issues.


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