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State-owned construction giant NBCC is considering establishing its own non-banking finance company (NBFC) to lower borrowing costs for critical infrastructure projects, a move unprecedented for an Indian public sector entity. Currently relying on external NBFCs with interest rates between 12% and 14%, NBCC anticipates potential savings of 1-2 percentage points with an in-house NBFC, translating to substantial savings. This initiative could save NBCC over USD 108 million in interest costs over two years. While awaiting approval from the new Indian administration and a license from the Reserve Bank of India (RBI), NBCC's proposed NBFC aims to streamline financing for its projects and potentially support redevelopment projects for other public sector entities. However, challenges such as expertise acquisition and regulatory compliance remain significant hurdles to overcome.
State-owned construction giant NBCC is exploring setting up its own non-banking finance company (NBFC) to reduce borrowing costs for critical infrastructure projects. This move, if approved, would be a first for an Indian public sector company. Advertisement
NBCC currently relies on external NBFCs for financing, incurring interest rates between 12% and 14%. The company estimates that an in-house NBFC could potentially lower these rates by 1-2 percentage points, translating to significant savings over time.
A source familiar with the discussions stated that this could save NBCC over USD 108 million in interest costs over the next two years.
While the Indian government has existing infrastructure financing institutions like the National Bank for Infrastructure and Development (NBFIDC), NBCC's proposed NBFC would offer a more streamlined solution for its projects. The company's board reportedly discussed the proposal in March, with final details expected to be ironed out by June.
Approval for the NBFC would need to come from the new Indian administration elected in June and a license from the Reserve Bank of India (RBI). NBCC has not yet submitted a formal application to the RBI.
The potential benefits of the NBFC extend beyond just NBCC's projects. The company believes it could also use this platform to provide "seed money" for redevelopment and monetization projects undertaken by other public sector entities. NBCC has recently secured redevelopment projects from the Steel Authority of India Ltd and the Indian Railways. These projects often require upfront capital to begin planning and development before generating returns. An NBFC could provide a source of funding for these initial stages.
While the potential cost savings are attractive, NBCC faces several hurdles. Setting up and running an NBFC requires specialised finance and regulatory compliance expertise. The company would need to build a new team or partner with existing financial institutions to ensure the NBFC operates smoothly. Additionally, receiving approval from the RBI can be a complex process.
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