Need for Development Finance Institutions and Overview of the National Bank for Financing and Infras
Author: Naga Om Siva Shirdik
Introduction:
Development Finance Institutions are known as Specialized Development Banks, which are owned by the national government. It provides medium and long-term loans to various organizations, businesses, firms and traditional financial agencies like commercial banks. The main advantage of DFI is that they also provide various financial, managerial and technical advice and consultancy to a business firm.
History of DFIs in Indian Economy:
Post-Independence to provide funding and to achieve the long-term financing needs of agriculture and industry specialized development financial institutions (DFIs), such as, Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), National Housing Board (NHB) National Bank for Agriculture and Rural Development (NABARD), and Small Industry Development Bank of India (SIDBI), has been established under the ownership of the RBI were set in motion.
There have been three stages of phases in the advancement of Development Financial Institutions (DFI’s) in India. The first stageis the period from Independence to 1964, in this period the Industrial Development Bank of India was started up for the development of industries. The DFI’s grew their importance in the period from 1964 to 1990 this is the second phase in the advancement of DFI’s, the funding has been disbursed by them from 10.3 percent of Gross Capital Formation to 15.2 percent of Gross Capital Formation. In the third stage that is the phase between 1993 to 1994 the graph of development banking drastically declined.
Difference between Commercial Bank and DFI’s:
Commercial Bank
1. Provides services to individuals and industries.
2. Set up under Companies Act.
3. Profit-oriented.
4. Funds obtained to depositors or investment profits.
5. Interest-oriented.
6. Clients are individuals, businessmen and industries
DFI’s
1. Provides multipurpose finances with developmental agencies.
2. Set up under Special Act.
3. Development oriented
4. Funds are obtained by borrowing or selling securities.
5. Welfare approach
6. Provide financial aid to governments and corporates
Overview of the National Bank for Financing and Infrastructure and Development Bill, 2021:
Cabinet recently approved the setting up of DFI with a capital infusion of rupees 20,000 crores. In the Union Budget 2021-2022 the finance minister had stated that a new DFI called the National bank for Financing Infrastructure and Development will be established in India. DFI will start with 100 percent government ownership and will gradually be brought down to 26 percent. A professional board will be formed with 50 percent of non-official directors in DFI. Initial capital infusions of 20000 crores will help in raising up3 lakh crore in the next few years. For investment in new projects the DFI would seek to raise funds from global pension and insurance sectors. An amount of one lakh crore rupees will be authorised to NBFID to set up as a corporate body.
Objectives of the Bill:
1. The Financial Objective of the Bill is to directly or indirectly lend, invest and attract investments for infrastructure projects located entirely or partly in India.
2. The Developmental Objective of the Bill includes facilitating the development of the market for bonds, loans, and derivatives for infrastructure financing.
The main purpose of the National Bank for Financing and Infrastructure and Development Bill, 2021 are given below:
1. Attracting investment from private sector investors and institutional investors for infrastructure projects.
2. Taking over or refinancing such existing loans.
3. Facilitating negotiations with various government authorities for dispute resolution in the field of infrastructure financing.
4. Organising and facilitating foreign participation in infrastructure projects.
5. Extending loans and advances for infrastructure projects.
6. Providing consultancy services in infrastructure financing.
Management of NBFID:
1. The Governing body of NBFID will be the Board of Directors. The Central Government with the consultation of RBI will appoint a Chairperson to the NBFID.
2. The candidates for the post of Managing Director and Deputy Managing Directors will be recommended by the body constituted by the central government.
3. The Board will appoint independent directors based on the recommendation of an internal committee.
Source of Funds:
1. It 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[i] and debentures[ii].
2. Initially, the central government will start with 100% ownership of shares which gradually will be reduced to 26% ownership.
3. It may borrow money from the scheduled commercial banks, Reserve Bank of India (RBI)[iii],mutual funds, central government, and multilateral institutions such as the World Bank[iv] and Asian Development Bank[v].
Support from the Central Government:
1. The government may guarantee the debentures, bonds, and loans issued by NBFID. This can be done by the request of NBFID
2. 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.
3. The government will also provide a guarantee at a concessional rate of up to 0.1% for borrowing from multilateral institutions, sovereign wealth funds, and other foreign funds.
4. The central government will provide grants worth Rupees 5,000 crores to NBFID by the end of the first financial year.
Other Development Financial Institutions:
o The Bill also provides for any person to set up a DFI by applying to RBI.
o RBI may grant a licence for DFI in consultation with the central government.
o RBI will also prescribe regulations for these DFIs.
Need of Developmental Finance Institutions:
1. To reduce dependence on foreign funds.
2. India is going through an economic slowdown, so to increase the capital flows and increase the capital market India needs DFI’s
3. Since India is still a developing country, specialised banks could help for long-term financing needs of the growing economy and possibly fill the gap in long-form financing.
4. For shaping developmental work and raise Indian standards at the global level DFI’s are the boosting banks allowing to attracting investors and borrowers in a run.
5. At present India is going through an economic slowdown due to a pandemic so the DFI’s need is very much necessary
Conclusion:
To conclude the economic survey 2020-2021 which also laid emphasis on infrastructure development. According to NITI-Aayog country need 4.5 trillion USD for investments by 2030 and that cannot be provided by commercial banks. So, DFI’s are the best possible solution to fund such projects. DFI would help the sector in many ways in expert advice, financing, attracting FDI, etc. Also, the Ajay Chakraborty committee has recommended DFI for the speedy execution of the national infrastructure project.
I also laid emphasis on infrastructure development. According to NITI-Aayog country need 4.5 trillion USD for investments by 2030 and that cannot be provided by commercial banks. So, DFI’s are the best possible solution to fund such projects. DFI would help the sector in many ways li expert advice, financing, attracting FDI, etc. Also, the Ajay Chakraborty committee has recommended DFI for the speedy execution of the national infrastructure project
REFERENCES:
[i]https://www.drishtiias.com/daily-updates/daily-news-analysis/special-zero-coupon-recapitalisation-bonds [ii]https://www.drishtiias.com/daily-updates/daily-news-analysis/debenture-redemption-reserve [iii]https://www.drishtiias.com/daily-updates/daily-news-analysis/debenture-redemption-reserve [iv]https://www.drishtiias.com/important-institutions/drishti-specials-important-institutions-international-institution/world-bank-group [v]https://www.drishtiias.com/daily-updates/daily-news-analysis/4-contraction-in-growth-adb 1. https://www.jagranjosh.com/general-knowledge/development-finance-institution-dfi-1613568002-1 2. https://www.businessmanagementideas.com/financial-management/financial-institutions/development-financial-institutions-dfis-in-india/18699