NaBFID To Be Regulated As AIFI Under RBI Act

NaBFID to be regulated as AIFI under RBI act

What is the news :

• The National Bank for Financing Infrastructure and Development (NaBFID) Act, 2021 received the assent of the President on March 28, 2021 and has come into force w.e.f. April 19, 2021.
• Accordingly, NaBFID has been set up as a Development Financial Institution (DFI) to support the development of long-term infrastructure financing in India.
• NaBFID shall be regulated and supervised as an All India Financial Institution (AIFI) by the Reserve Bank under Sections 45L and 45N of the Reserve Bank of India Act, 1934.
• It shall be the fifth AIFI after EXIM Bank, NABARD, NHB and SIDBI.

About  The National Bank for Financing Infrastructure and Development (NaBFID):

• 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.  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 multi-lateral institutions, and are often supported through government guarantees.

NBFID: 

• NBFID is 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%.

Functions of NBFID: 

• NBFID 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.
• 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
• 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:
• central government,
• Reserve Bank of India (RBI),
• scheduled commercial banks, mutual funds,
• multilateral institutions such as World Bank and Asian Development Bank.

Management of NBFID:  

• NBFID is 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.

Support from the central government: 

• The central government 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.