Development finance institutions (DFIs) are taking centre stage in India’s infrastructure financing landscape. With non-performing assets (NPAs) at historically low levels and new financing instruments gaining traction, institutions such as India Infrastructure Finance Company Limited (IIFCL) and the National Bank for Financing Infrastructure and Development (NaBFID) are revising their strategies to support infrastructure development. At a recent India Infrastructure conference, senior executives from DFIs and industry advisors discussed sector trends, the current regulatory environment, financing gaps, and the key risks and challenges, particularly those arising from an increasingly aggressive bidding activity. Edited excerpts…
Salil Garg
IIFCL is a 20-year-old institution established by the government. Its cumulative sanctions have reached about Rs 3.5 trillion while cumulative disbursements stand at around Rs 1.7 trillion. The current asset book is close to Rs 770 billion in the form of loans and advances. IIFCL recorded double-digit growth in 2024-25, with the top line expanding by about 15 per cent. Growth in the bottom line was even stronger. The institution expects to maintain this growth trajectory in 2025-26. With respect to NPAs, IIFCL’s experience has been similar to that of the broader infrastructure financing sector. NPAs were elevated in around 2020; however, since then, gross NPAs have declined to about 1 per cent while net NPAs are close to 0.3 per cent, broadly in line with other infrastructure-focused NBFCs.
The institution is now exploring fundraising through the external commercial borrowings (ECB) route with the support of a guarantee from Multilateral Investment Guarantee Agency (MIGA). Instead of relying on a sovereign guarantee from the government, the use of MIGA-backed guarantee would help lower the cost of funds, expand the investor base and access international markets with higher rating, as MIGA-guaranteed issuances typically carry stronger ratings than the Government of India-guaranteed instruments.
Regarding sectoral trends, there has been a noticeable shift over the past 12 months. Greenfield financing has moderated across sectors and there has been a higher volume of refinancing transactions and increased funding towards infrastructure investment trusts (InvITs), both of which relate to existing operational projects.. Even so, financial institutions and NBFCs continue to perform better than banks in terms of growth in infrastructure lending. Over the next 12 months, a moderate revival in greenfield activity is expected, particularly in select emerging areas such as the maritime sector, supported by recent government announcements. Much of this anticipated revival is expected in shipbuilding, which has recently been added to the harmonised list of infrastructure sectors. In addition, a few other sectors are beginning to gain traction, indicating a gradual diversification beyond the traditional predominance of the road sector. Increased activity is also expected in renewable energy and electric vehicle (EV) infrastructure.
Expanding on the broader issue of urban infrastructure, significant work remains at the urban local body (ULB) level. Only about 95 of over 4,000 ULBs are currently rated, and rating is only one aspect of the challenge. Comprehensive capacity building is required across the project lifecycle, from project conceptualisation to standardised master concession agreements and structured bidding processes. A strong case exists for establishing a central nodal agency that can build capacity across ULBs in a uniform, scalable manner. Expecting all 29 states to independently develop such capabilities would be time consuming; thus, a central institution could accelerate preparedness and help bring the next wave of urban projects to market.
On the advisory side, IIFCL projects works closely with ULBs and state governments on developmental initiatives. One example is the engagement with the state of Meghalaya, where the organisation is supporting tourism-related projects and other infrastructure development efforts. Looking ahead, a major area of focus will be deeper engagement with states and ULBs. The aim is to build their capacity and bring a larger number of projects to market. With the National Highways Authority of India (NHAI) having already awarded around 75 per cent of the Bharatmala Pariyojana projects, the next wave of infrastructure opportunities is expected to originate from state-level agencies and urban bodies, and IIFCL intends to play a major role in supporting this pipeline.
IIFCL was established nearly two decades ago and the government adopted a highly cautious approach as infrastructure financing under PPP was in the initial stages. As a result, several restrictions were imposed, the most significant being the cap on IIFCL’s exposure to infrastructure projects at 20 per cent of the total project cost. This has remained the single biggest regulatory constraint for almost 20 years.
Since then, the infrastructure sector and its financing ecosystem have changed considerably, particularly the involvement of NBFCs and DFIs. Balance sheets are in far better shape, NPAs are at historic lows and there is now healthy competition among institutions, including banks, in sectors such as power and roads. Any remaining stressed assets are expected to be resolved over time. However, the regulatory limits introduced two decades ago continue to apply on IIFCL. The exposure cap remains at 20 per cent for project loans, 30 per cent for take-out financing and 50 per cent for bond investments. These constraints no longer reflect current market realities and limit IIFCL’s ability to play a larger role in infrastructure financing. Recent bidding trends in certain projects have raised concerns around commercial viability. Given its responsibility as a public institution entrusted with managing public funds, IIFCL places paramount importance on safeguarding its balance sheet and profitability, and has therefore consciously refrained from participating in transactions where project viability appears uncertain.
Despite these long-standing regulatory constraints, IIFCL has demonstrated strong resilience and sustained growth over the years. The institution has expanded its operations prudently while maintaining robust asset quality, resulting in record-breaking profitability in the past few years. This underscores IIFCL’s ability to adapt to evolving market conditions, and be at the forefront of financing the nation’s infrastructure development.
Monika Kalia
The National Bank for Financing Infrastructure and Development (NaBFID) is among the newest institutions in the infrastructure financing ecosystem. Established through an Act of Parliament in 2021, NaBFID began operations in December 2022, with its first disbursement. Over three years of operations, NaBFID has scaled rapidly, with a balance sheet now exceeding Rs 900 billion and disbursements over Rs 1 trillion, while total sanctions have reached around Rs 2.7 trillion. Further, the outstanding book is expected to surpass the Rs 1 trillion mark in 2025-26.
NaBFID has also emerged as the largest loan syndicator. In terms of sectoral distribution, NaBFID’s portfolio largely reflects the government’s current focus areas. Logistics, roads and power sector have gained strong traction, accounting for about 70-75 per cent of the overall book. Beyond these core areas, NaBFID has extended exposure across 16 sectors. Key emerging segments gaining momentum are ports, data centres, water and sanitation, hospitals and schools.
The mandate given to NaBFID at the time of its formation was twofold. The first mandate focused on developing the broader ecosystem to crowd in greater investment, including deepening the bond and derivatives markets. The second mandate related to providing long-term lending support to the infrastructure sector. While commercial banks and NBFCs were already active lenders, a clear gap existed due to asset-liability mismatches within the banking system. NaBFID was created to address this gap and has been able to offer financing with tenures of 20 years or more, with fixed-rate interest options.
The Union Budget 2025-26 appointed NaBFID to launch a partial credit enhancement product, which was formally introduced in September 2025. The first transactions under this product are expected in 2025-26. Other initiatives include plans to enter the securitisation space and the creation of a national data repository for the infrastructure sector. This platform aims to improve data symmetry among industry participants while providing a better ecosystem. NaBFID is also contributing to the expansion of the harmonised list of infrastructure sectors.
Over the years, NaBFID has demonstrated its ability to raise long-term resources. Around Rs 600 billion has been mobilised from the bond market, with a maturity of 5-20 years. This structure enables a strong match between long-term liabilities and long-term infrastructure assets, supported by patient capital from pension and insurance funds.
Turning to the urban sector, including water, waste and municipal projects, the challenges are more structural. Out of more than 4,000 ULBs, only about 95 are currently rated, which indicates limited credit absorption capacity. To address this, NaBFID is providing transaction advisory services to ULBs and state governments to help them improve their financial and operational capacity, enhance their ratings and become creditworthy.
For sustained progress, capacity building at the institutional level is essential. One potential solution is the creation of state-level nodal agencies to play a role similar to that of NHAI in transforming national highway development. A nodal entity could streamline approvals, standardise processes, and provide a credible counterpart for lenders and developers. This would reduce the need to engage with multiple authorities and strengthen lender confidence. Some examples of advisory initiatives undertaken by NaBFID include its close engagement with the Amaravati city development initiative, where it is supporting the creation of infrastructure for the new city. Sanctions have also been extended under the Jal Jeevan Mission in Amaravati. In addition, NaBFID has participated in several municipal bond issuances across different municipal corporations.
Although NPAs in the infrastructure sector are currently among the lowest, there is a conscious effort to manage emerging risks and avoid conditions that could create a sectoral bubble. The first risk relates to the ecosystem itself, including the regulatory environment, evolving regulations and their implementation. The second challenge is the sheer scale of capital required. Over the next 20 years, the infrastructure sector is expected to require nearly Rs 700 trillion. Meeting this requirement will demand far more than ECBs or international borrowings. India’s corporate bond market is at around 18 per cent of GDP, significantly smaller than that of peer countries, where it typically ranges between 26 per cent and 30 per cent. This is where products such as partial credit enhancement become important. The intention is to channel completed, de-risked projects with stable cash flows into the bond market, where insurance and pension funds can participate. With a first-loss guarantee from a credible institution like NaBFID, these long-term investors can enter the sector with confidence. The third challenge arises from the rapid pace of infrastructure expansion. As the country grows, certain assets may face temporary stress. India lacks an asset management company that can hold such assets for a short period, preserve their value and return them to the market once conditions stabilise. Past NPA cycles have shown that recoveries could have been far higher had stressed assets been professionally managed during periods of difficulty.
Recent bidding patterns in sectors such as roads and battery storage have shown instances of aggressive pricing, prompting a deeper review during project assessment. Viability and stress scenarios are evaluated with particular care. As a DFI, there is a strong emphasis on ensuring that no new bubble emerges in the sector. One key parameter assessed is the spread between L1, L2 and L3 bids. Where this spread points to irrational pricing, the institution refrains from participating in the transaction. This stance also sends a clear signal to the market, as many banks participate alongside NaBFID in consortium structures, and a project’s exclusion from NaBFID’s portfolio often prompts other lenders to reassess the underlying risks.
Praveen Sethia
The role of DFIs is extremely important. When India embraced an open economy in 1992, a key policy misstep was the decision to withdraw support from the then-existing development finance institutions amid a highly volatile environment. This coincided with the emergence of the universal banking model. As a result, the role of DFIs in financing projects contracted sharply. The re-entry of dedicated DFIs, first through IIFCL and more recently through NaBFID, marks a positive course correction. It reflects a renewed realisation that DFIs play a crucial role distinct from that of commercial banks.
However, undertaking development-oriented interventions requires different capabilities. The ecosystem now clearly differentiates between investments in operational assets in avenues like InvITs and new projects carried out by developers. The absence of DFIs for an extended period created a vacuum and their return, supported by a strong institutional backing, is a welcome development.
Given the short time since NaBFID’s establishment, it is early to fully assess its long-term role. However, the progress made so far has been encouraging. Expectations from IIFCL have historically been higher. Over time, the institution has not always demonstrated the flexibility that market participants expect. There is significant scope for strengthening processes, especially to simplify transaction navigation.
From a transaction advisory standpoint, Infrastructure Advisors Private Limited’s primary objective is to help clients achieve financial closure within required timelines. Two factors are especially important. The first is the interest rate. Given the competitive nature of bidding for infrastructure projects, financing must fall within a defined cost range. At present, commercial banks are often able to deliver more competitive pricing, although DFIs also play a meaningful role.
In practice, the approach is to secure an underwriting from a bank or institution that can respond quickly. Once this anchor commitment is in place, the transaction is down-sold if the exposure needs to be diversified. The process is not linear, advisory teams approach a group of institutions simultaneously, including DFIs, depending on the sector and the geography of the project.
The second consideration is alignment with long-term project requirements. In many public-private partnership projects, assets typically change ownership post-completion. It is therefore critical that lenders clearly recognise this eventual transition and incorporate features such as rights of first refusal when the asset is transferred to a new entity. Another important aspect is the dilution of sponsor support after the project achieves a stable credit profile, typically in the AA to AA+ range, so that the sponsor’s balance sheet is not perpetually burdened by contingent liabilities.
With experience, there is now a clear understanding of which institutions are best suited to meet these requirements. While institutional constraints are acknowledged, working in parallel with multiple lenders enables a timely and efficient financing outcome.
In several recent transactions, bidding has become extremely competitive, and in some cases, clearly unviable. While project authorities may initially view such bids positively because of the aggressive pricing, the eventual outcome is detrimental.
Traditionally, the final gatekeeper in the system is the lender holding capital. DFIs, financial institutions and banks collectively determine whether a project proceeds by deciding whether to finance it. Unless such institutions decline to fund bids that do not demonstrate economic viability, the cycle of irrational and euphoric bidding is likely to persist.
From an advisory standpoint, the view is that ideally all institutions should walk away from unviable projects. Projects awarded at unsustainable prices are unlikely to be completed within the quoted cost, making them fundamentally flawed.
The broader issue lies at the authority level. If a bid does not align with the authority’s own viability assessment, the award should not proceed. Even if execution hurdles can be managed during construction, operational costs over a 15-year concession period cannot be ignored. Adequate provisions for operations and maintenance (O&M) must be built into the project structure in line with concession requirements.
The key principle is every project can be viable if allowed to remain viable. Problems arise when bids are placed at unrealistic levels. Authorities have access to benchmark cost references, including guidance on how to address excessively competitive bids. Measures such as seeking additional bank guarantees only add stress to the financial system and do not solve the underlying problem.
For this reason, strong technical evaluation by DFIs and banks is essential. A clear understanding of the realistic cost of completion and long-term O&M obligations helps prevent unviable projects from moving forward and ensures that only financially sound proposals receive funding.
