Banking System in India – Structure and

Developments, Financial Institutions – SIDBI,

EXIM Bank,
NABARD, NHB, NaBFID etc.
BR Act 5(b) - banking” means
the accepting, for the
purpose of lending or
investment, of deposits of
money from the public,
repayable on demand or
otherwise, and withdrawable
by cheque, draft, order or
otherwise.
Structure of NBFIs under RBI Regulation
 All India Financial Institutions
• AIFIs constitute institutional mechanisms entrusted with providing
sector-specific long-term financing. They are also called Specialized
Financial Institutions. These FIs are apex level institutions that play a
salutary role in the financial markets through credit extension and
refinancing operation activities for the agriculture and the rural sector,
foreign trade, small industries, housing finance companies, NBFCs,
Micro Finance Institutions (MFIs) and other specialised segments and
institutions.
 The Need for NaBFID
• Absence of a vibrant bond market. Retail investor participation is low.
• Medium / long term projects (1-5, >5) – ALM mismatches for Banks and NBFCs.
• The challenge of long-term funding for one of the riskiest activities worldwide
(infrastructure)
• The government conceives massive scale-up in infrastructure investment—Rs 111
lakh crore spread out to FY26. Which scheme is this?
• If competitive pricing, i.e. cheaper funds, are to be raised, government guarantee is
necessary; else, the risk is too high.
• Currently barring pockets in renewable energy, there is extremely narrow if at all any
non-recourse bank financing available in India for green-field projects
• Economic Survey 2017-18: Around US$ 4.5 trillion worth of investments are required
by India till 2040 to develop infrastructure to improve economic growth and
community wellbeing. The current trend shows that India can meet around US$ 3.9
trillion infrastructure investment out of US$ 4.5 trillion. The cumulative figure for
India’s infrastructure investment gap would be around US$ 526 Billion by 2040.
 NaBFID

• Set up as a DFI – Development Financial Institution- to support the

development of long-term infrastructure financing in India.
• 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
• Regulated and Supervised as AIFI by the Reserve Bank under Sections
45L and 45N of the Reserve Bank of India Act, 1934.
• Instituted under National Bank for Financing Infrastructure and
Development (NaBFID) Act, 2021, come into force on April 19, 2021.
 Structure

• 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%.
• Head office?
 Two Objectives
• The developmental objective of the Institution shall be to co-ordinate
with the Central and State Governments, regulators, financial
institutions, institutional investors and such other relevant
stakeholders, in India or outside India, to facilitate building and
improving the relevant institutions to support the development of
long term non-recourse infrastructure financing in India including the
domestic bonds and derivatives markets
• The financial objective of the Institution shall be to lend or invest,
directly or indirectly, and seek to attract investment from private
sector investors and institutional investors, in infrastructure projects
located in India, or partly in India and partly outside India, with a view
to foster sustainable economic development in India.
 Functions
• Functions of NBFID include:
• (i) extending loans and advances for infrastructure projects,
• (ii) taking over or refinancing such existing loans,
• (iii) attracting investment from private sector investors and
institutional investors for infrastructure projects,
• (iv) organising and facilitating foreign participation in infrastructure
projects,
• (v) facilitating negotiations with various government authorities for
dispute resolution in the field of infrastructure financing, and
• (vi) providing consultancy services in infrastructure financing.
 Sources of Funds
• Unlike banks, DFIs do not accept deposits from people
• 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.
• central government.
• Reserve Bank of India (RBI)
• scheduled commercial banks
• mutual funds, and
• multilateral institutions such as World Bank and Asian Development Bank.
• Budget 2020-21 – Initial Capital of Rs. 20, 000 crore which would be leveraged Rs.
300, 000 crore over 5 years.
 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.
 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,
• (iv) two directors nominated by the central government,
• (v) up to three directors elected by shareholders, and
• (vi) a few independent directors (as specified).
• 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.
 Setting up other DFIs

• 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. These
new DFIs will be licensed under NaBFID Act, 2021, section 29.
• Any institution to which licence is granted shall be subject to the
provisions of the Reserve Bank of India Act, 1934 or the Banking
Regulation Act, 1949, as the case may be.
• The RBI Act 1934, and the BR Act 1949 also stand amended.
Further Reading – PDFs and Videos
• History of Banking - 1770 to 2021
• Cooperative banks in India
• Regional Rural Banks (RRBs)
• Priority Sector Lending
• Banking Outlets guidelines.
• Small Finance Banks and Payments Bank
• Lead Bank Scheme.
• NABARD and NHB
• SIDBI and MUDRA Bank
• Exim Bank and other FIs.
Happy Learning!!!