National Bank for Financing Infrastructure and Development Bill, 2021 "EMPOWER IAS"

In news:

• Finance Minister has introduced the National Bank for Financing Infrastructure and Development (NaBFID) Bill 2021 in the Lok Sabha to pave way for setting up a government-owned DFI to fund infra projects.

 

The National Bank for Financing Infrastructure and Development (NaBFID) Bill, 2021

Objective

• Sets up a new Development Financial Institution (DFI) as a provider, enabler, and catalyst for infrastructure financing and as the principal financial institution and development bank for building and sustaining a supportive ecosystem for infrastructure projects.

 

What Is A Development Finance Institution? 

• A development finance institution is an agency that finances infrastructure projects that are of national importance but may or may not conform to commercial return standards. 
• Since few commercial lenders are willing to take on infrastructure risk, particularly after the experience of the last lending cycle, a development finance institution has become necessary.

• DFIs provide long-term credit for capital-intensive investments spread over a long period and yielding low rates of return, such as urban infrastructure, mining and heavy industry, and irrigation systems.
• DFIs often lend at low and stable rates of interest to promote long-term investments with considerable social benefits.
• DFIs are also known as Development banks. They are different from commercial banks which mobilise short- to medium-term deposits and lend for similar maturities to avoid a maturity mismatch-a potential cause for a bank’s liquidity and solvency.

 

DFIs in India

• After independence, the institutional framework for development banking began- IFCI (1948), IDBI (1964), IIBI (1972), NABARD and EXIM Bank (1982), SIDBI (1990), etc.
• In the past few years, DFIs such as ICICI, IDBI and IDFC have transformed into universal banks as they did not have the advantage of low-cost funding for long term projects.
• DFIs are sector-specific, such as Rural Electrification Corp. Ltd (REC) for the power sector, National Bank for Agriculture and Rural Development (NABARD) for the agriculture sector, and Indian Railway Finance Corp. to fund rail infrastructure among others.

 

Key provisions of the Bill

NBFID:

• NBFID will be set up as a corporate body with an 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%.

 

Functions of NBFID:

• NBFID will have both financial as well as developmental objectives.
• Financial objectives will be to directly or indirectly lend, invest, or attract investments for infrastructure projects located entirely or partly in India.
• The central government will prescribe the sectors to be covered under the infrastructure domain.
• Developmental objectives include facilitating the development of the market for bonds, loans, and derivatives for infrastructure financing.

 

Functions of NBFID include:

• 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, and
• 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.

 

Management of NBFID:

• 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.

 

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.