The National Bank for Financing Infrastructure and Development (NBFID) Bill, 2021 has been recently cleared by the Rajya Sabha, a significant event that is currently making news. This Bill aims to establish the NBFID as the key Development Financial Institution (DFI) for financing infrastructure. It was first announced in the 2021 Budget.
Development Financial Institutions (DFIs)
DFIs are organisations established to offer long-term financial assistance to economic sectors which carry risks exceeding the acceptable limit for commercial banks and other conventional financial institutions. Unique to banks, DFIs do not accept deposits from the public. Instead, they gather funds from the market, government, and multilateral institutions and often receive support through government guarantees.
About the National Bank for Financing Infrastructure and Development (NBFID)
The NBFID will be constituted as a corporate body with an authorised share capital of one lakh crore rupees. Its financial objective includes direct or indirect lending, investment, or attracting investments for infrastructure projects, whether completely or partially located in India. Its developmental objective includes facilitating the development of the market for infrastructure financing bonds, loans, and derivatives.
Functions of NBFID
The NBFID’s functions encompass loan extension and advancement for infrastructure projects, taking over or refinancing existing loans, attracting investments from private sector investors and institutional investors, facilitating foreign participation in infrastructure projects and negotiations with various government authorities for dispute resolution in infrastructure financing. It also provides consultancy services in this field.
Funding Sources for NBFID
The NBFID may raise finances in the form of loans or otherwise, both in Indian currency and foreign currencies. It could secure finances by issuing and selling different financial instruments, including bonds and debentures. It can also borrow money from the central government, Reserve Bank of India (RBI), scheduled commercial banks, mutual funds, and multilateral institutions like the World Bank and Asian Development Bank. Initially, the central government will fully own the institution’s shares, which can be reduced to 26% subsequently.
NBFID Management
A Board of Directors will govern the NBFID. The central government will appoint the Chairperson in collaboration with RBI. A body constituted by the central government will recommend candidates for the Managing Director and the Deputy Managing Directors’ positions. The Board will also appoint independent directors based on an internal committee’s recommendation.
Central Government Support
The central government will grant NBFID Rs. 5,000 crore by the end of the first financial year and provide a concessional guarantee up to 0.1% for borrowing from multilateral institutions, sovereign wealth funds, and other foreign resources. To insulate NBFID from foreign currency fluctuations, the government may reimburse expenses, either partially or completely. Upon request by NBFID, the government may also guarantee the bonds, debentures, and loans issued.
Prior Sanction for Investigation and Prosecution
Investigations against NBFID employees cannot start without prior sanction from the central government or the managing director for other employees. Courts also require prior sanction to address offences involving NBFID employees.
Other Development Financial Institutions
The Bill also includes provisions for any individual to set up a DFI by application to RBI. RBI may grant a DFI licence in conjunction with the central government and prescribe regulations for these DFIs.