National Bank for Financing Infrastructure and Development (NabFID)

March 21, 2022
Posted by: OptimizeIAS Team
Category: DPN Topics

National Bank for Financing Infrastructure and Development (NabFID)

Subject: Economy

Section: Monetary Policy and banking

Concept:

NBFID was announced in the Budget 2021.

The National Bank for Financing Infrastructure and Development Bill, 2021 was introduced in Lok Sabha on March 22, 2021. The Bill seeks to establish the National Bank for Financing Infrastructure and Development (NBFID) as the principal development financial institution (DFIs) for infrastructure financing.

NBFID will be set up as a corporate body with authorised share capital of one lakh crore rupees. Shares of NBFID may be held by:

(i) central government,

(ii) multilateral institutions,

(iii) sovereign wealth funds,

(iv) pension funds,

(v) insurers,

(vi) financial institutions,

(vii) banks, and

(viii) any other institution prescribed by the central government.

Initially, the central government will own 100% shares of the institution which may subsequently be reduced up to 26%.

Objective:

To directly or indirectly lend, invest, or attract investments for infrastructure projects located entirely or partly in India.
Development objectives include facilitating the development of the market for bonds, loans, and derivatives for infrastructure financing.

Functions of NBFID:

Extending loans and advances for infrastructure projects.
Taking over or refinancing such existing loans.
Attracting investment from private sector investors and institutional investors for infrastructure projects.
Organising and facilitating foreign participation in infrastructure projects.
Facilitating negotiations with various government authorities for dispute resolution in the field of infrastructure financing.
Providing consultancy services in infrastructure financing.

Source of funds:

NBFID may raise money in the form of loans or otherwise both in Indian rupees and foreign currencies, or secure money by the issue and sale of various financial instruments including bonds and debentures.
NBFID may borrow money from:

(i) central government,

(ii) Reserve Bank of India (RBI),

(iii) scheduled commercial banks,

(iii) mutual funds, and

(iv) multilateral institutions such as World Bank and Asian Development Bank.

Structure and management:

NBFID will be governed by a Board of Directors.
The members of the Board include:

(i) the Chairperson appointed by the central government in consultation with RBI,

(ii) a Managing Director,

(iii) up to three Deputy Managing Directors among others.

A body constituted by the central government will recommend candidates for the post of the Managing Director and Deputy Managing Directors.
The Board will appoint independent directors based on the recommendation of an internal committee.

No investigation can be initiated against employees of NBFID without the prior sanction of (i) the central government in case of the chairperson or other directors, and (ii) the managing director in case of other employees.

Courts will also require prior sanction for taking cognisance of offences in matters involving employees of NBFID.

Support from the Central Government:

The central government will provide grants worth Rs. 5,000 crore to NBFID by the end of the first financial year.
The government will also provide guarantee at a concessional rate of up to 0.1% for borrowing from multilateral institutions, sovereign wealth funds, and other foreign funds.
Costs towards insulation from fluctuations in foreign exchange (in connection with borrowing in foreign currency) may be reimbursed by the government in part or full.
Upon request by NBFID, the government may guarantee the bonds, debentures, and loans issued by NBFID.

Other provisions

The Bill also provides for any person to set up a DFI by applying to RBI.
RBI may grant a licence for DFI in consultation with the central government.
RBI will also prescribe regulations for these DFIs.

Development Financial Institution

DFIs are set up for providing long-term finance for such segments of the economy where the risks involved are beyond the acceptable limits of commercial banks and other ordinary financial institutions.

Unlike banks, DFIs do not accept deposits from people.

They source funds from the market, government, as well as multilateral institutions, and are often supported through government guarantees.

The development finance institutions or development finance companies are organizations owned by the government or charitable institution to provide funds for low-capital projects or where their borrowers are unable to get it from commercial lenders.

Development finance institutions (DFIs) occupy an intermediary space between public aid and private investment, facilitating international capital flows.

Categories of DFIs:

National Development Banks such as IDBI, SIDBI, ICICI, IFCI, IRBI, and IDFC.
Sector-specific financial institutions such as TFCI, EXIM Bank, NABARD, HDFC, and NHB.
Investment Institutions such as LIC, GIC and UTI.
State-level institutions such as State Finance Corporations and SIDCs.

Types of Finances:

Medium (1-5 years)
Long term (>5 years)

List of important Development Finance Institutions (DFIs)

IFCI: Industrial Finance Corporation of India was established in 1948. It is India’s first Development Finance Institution.
ICICI: Industrial Credit and Investment Corporation of India Limited was established in the year 1955 by an initiative of the World Bank and was the first DFI in the private sector. ICICI Limited established its subsidiary company ICICI Bank Limited in 1944 and in 2002, ICICI Limited was merged into ICICI Bank Limited, making it the first universal bank of India.
IDBI: Industrial Development Bank of India was set up in 1964 under RBI and was granted autonomy in 1976. The bank is responsible for ensuring adequate flow of credit to various sectors and was converted into a universal bank in 2003.
IRCI: Industrial Reconstruction Corporation of India was set up in 1971 to revive weak units and provide financial & technical assistance.
SIDBI: Small Industries Development Bank of India was established in 1989 as a subsidiary of IDBI and was granted autonomy in 1998.
EXIM Bank: Export-Import Bank was established in January 1982 to provide technical assistance and loan to exports.

NABARD: National Bank for Agriculture and Rural Development was established in July 1982 on the recommendation of the Shivraman Committee and functions as a refinancing institution.
NHB: National Housing Bank was established in 1988 to finance housing projects.

After two important DFIs, namely, ICICI and IDBI were merged with their banking units, many functions of DFIs are now performed by commercial banks and these are actively performed by commercial banks that finance projects like DFIs. Thus, Commercial banks are called universal banks which provide all kinds of financial services under one roof.