Context

• The National Bank for Financing Infrastructure and Development (NaBFID) has recently declared its intent to introduce takeout financing products, invest in Infrastructure Investment Trusts (InvITs) and refinance loans.
• While many of these plans are welcome, there need to be some cautions.

Takeout Financing, Infrastructure Investment Trusts, and Refinancing Loans

• Takeout Financing
  • A takeout loan is a method of financing whereby a loan that is procured later is used to replace the initial loan.
  • More specifically, a takeout loan, or takeout financing, is long-term financing that the lender promises to provide at a particular date or when particular criteria for completion of a project are met.
• InvITs
  • It is a Collective Investment Scheme similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as return.
  • The InvIT is designed as a tiered structure with sponsor setting up the InvIT which in turn invests into the eligible infrastructure projects either directly or via special purpose vehicles (SPVs).
  • The InvITs are regulated by the SEBI (Infrastructure Investment Trusts) Regulations, 2014.
• Refinancing Loans
  • Refinancing a loan is when a borrower replaces their current debt obligation with one that has more favourable terms.
  • Through this process, a borrower takes out a new loan to pay off their existing debt, and the terms of the original loan are replaced with an updated agreement.

The National Bank for Financing Infrastructure and Development (NaBFID)

• It is a specialised Development Finance Institution(DFI) set up in 2021, by an Act of the Parliament (The National Bank for Financing Infrastructure and Development Act, 2021).
• NaBFID lifts the heavy burden of implementing the National Monetisation Pipeline (NMP) and financing projects in the National Infrastructure Pipeline (NIP).
• To finance India’s infrastructure needs, NaBFID has disbursed60 per cent of the Rs 25,000 crore loans that it has sanctioned.

Problems Associated with Integration of Climate Risk in NIP

• Limited to Building for Acute Physical Risks
  • Integration of climate risk in NIP is largely limited to building for acute physical risks, such as disasters and extreme events.
  • Building resilience against chronic physical risks (like rising temperatures or accelerated loss of biodiversity finds space) in the broad policy recommendations, but not in the sectoral needs identified.
• Less Focus on Green and Blue Infrastructure
  • NIP’s focus seems to be contrary to the global trend where there is more focus on adoption of nature-based solutions and embracing green and blue infrastructure.
  • NIP continues to focus on traditional grey infrastructure.
  • For instance, it champions the improvement of stormwater drainage infrastructure and avoids integrating green infrastructure like green roofs that global cities are adopting for flood mitigation.

Global Efforts for Climate-Based Infrastructure Financing

• Under the task force on climate-related financial disclosures for banks and companies the G7 has supported mandating disclosures.
• These largely remain voluntary, especially in India.

Steps Taken by India to Promote Climate-Based Infrastructure

• Business Responsibility and Sustainability Reporting(BRSR)
  • It was introduced by SEBI in 2021 and is based on the nine principles of National Guidelines for Responsible Business Conduct (NGRBC) introduced by SEBI.
  • With the BRSR reporting, companies require to highlight sustainability-related challenges faced by them and further delve in their ESG (Environmental, Social and Governance) related targets, while also mapping the probable risks and opportunities.
  • Extending BRSR to the top 1,000 listed companies is an encouraging move. However, efforts to mainstream sustainability and climate resiliency remain a matter of rhetoric, and the subject of a few declarations.
• Indian regulators have announced a framework for green/blue bonds, and green deposits.
• They also intend to propose guidelines for climate stress testing.

Challenges in Implementation of Climate-Based Infrastructure Finance Mechanisms

• Time Consuming and Lack of Expertise
  • Operationalising concepts like BRSR and mainstreaming their implementation is a time-consuming effort and the lack of expertise makes the task complicated.
  • Therefore, ensuring the flow of funds to sustainable projects can prove difficult.
• Financial Risks
  • There is a growing consensus that climate change poses financial risks.
  • Insurance companies exiting California in the face of wildfires are telling examples of the risks faced by financial institutions in a world plagued by climate disasters.
  • Central banks globally have initiated stress testing measures to gauge how their portfolios would fare in varying climate scenarios.
• Identifying Relevant Climate Risks
  • Climate Risk identification, correlating them to financial risks and quantifying them is a complex process.
  • The procedure is compounded by the fact that credit risks have also to be accounted for. That is why financial institutions are struggling to accomplish the procedure.

How can NaBFID address these challenges effectively?

• Focus on Structural Measures: Addressing climate-related financial and infrastructure challenges requires NaBFID to focus on structural measures that improve asset provisioning and quality as well as produce returns on investment.
• Consider Recommendations to Enable PPP Projects’ Success
  • Engaging private finance in infrastructure projects through public-private partnerships (PPPs) often leads to cost overruns and delays.India’s experience with PPPs has been a mixed bag.
  • NaBFID is well-placed to consider recommendations on investing in pre-planning and site investigation, adopting a collaborative planning process with departments and downstream contractors involved to enable the success of PPPs. 
• Proper Assessment of Growth and Demand for Credit: NaBFID’s plans to proceed on the takeout financing route need an assessment of how broad-based growth and demand for credit would be.
• Need to Take Advantage of Innovative Financial Products
  • In a bid to mainstream climate adaptation and mitigation NaBFID needs to take advantage of innovative financial products.
  • Green bonds, sustainability-linked bonds, and transition bonds all seek to divert global financial flows towards projects aimed at climate mitigation and resilience.
  • General purpose and use-of-proceeds bonds can be powerful instruments to generate funds.
  • On the back of the success of India’s sovereign green bond, issuances by NaBFID for private placements could increase green capital flows to infrastructure.
  • This could be in line with its objective of indirect lending and attracting investments from the private sector.
• Employ Entity-Level and Project-Level Safeguard
  • Employing entity-level and project-level safeguards to direct funds to appropriate projects, through innovative financing structures, would attract a diverse investor base and enable scaling of finance.
  • Most transition bond frameworks, for instance, recommend an entity-level transition plan.
• Employ Disclosure on the line of G7 Framework: Standards like those framed by global agencies such as the Task Force on Climate Related Financial Disclosures by G7 would be useful to enhance transparency, credibility and avoid potential hazards of greenwashing.

 Conclusion

• Considering the impacts on biodiversity and existing natural infrastructure, applying new emerging standards for infrastructure projects could go a long way in building climate resilience and integrating nature into its decision-making.
• Moreover, this will help mobilise the funds needed and reinforce government policy to meet our net zero commitments.