Economy: Vision IAS March 2021 Current Affairs Notes | EduRev

UPSC Mains: International Relations, Social Issues & others

UPSC : Economy: Vision IAS March 2021 Current Affairs Notes | EduRev

 Page 1


	
	
3.	ECONOMY	
3.1.	 NATIONAL	 BANK	 FOR	 FINANCING	 INFRASTRUCTURE	 AND	
DEVELOPMENT	(NABFID)	
Why in news? 
Recently, the Parliament passed 
National Bank for Financing 
Infrastructure and Development 
(NaBFID) Bill, 2021. 
About NaBFID Bill, 2021 
• Bill seeks to set up NaBFID, a 
Development Financial 
Institution (DFI) to support the 
development of long-term non-recourse infrastructure financing. 
• Shareholding of NaBFID: NaBFID will be set up as a corporate body with authorised share capital of 1 lakh 
crore rupees held by central government, multilateral institutions, sovereign wealth funds, pension funds, 
insurers, financial institutions, etc.   
o Initially, central government will own 
100% shares of the institution which may 
subsequently be reduced up to 26% once 
the institution has achieved stability and 
scale.	 
• Source of funds: NBFID may raise money in the 
form of loans or otherwise both in Indian 
rupees and foreign currencies, or the issue 
and sale of various financial instruments 
including bonds and debentures.   
o NBFID may borrow money from central 
government, RBI, scheduled commercial 
banks, mutual funds, and multilateral 
institutions such as World Bank and Asian 
Development Bank. 
• Management: NBFID will be governed by a 
Board of Directors and the Chairperson 
appointed by the central government in 
consultation with RBI. 
o A body constituted by the central government will recommend candidates for the post of the Managing 
Director and Deputy Managing Directors.   
o The Board will appoint independent directors based on the recommendation of an internal committee. 
• Government Support: The central government will provide grants worth Rs 5,000 crore to NBFID by the end 
of the first financial year.   
o 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.   
o Costs towards insulation from fluctuations in foreign may be reimbursed by the government in part or 
full.   
o Upon request by NBFID, the government may guarantee the bonds, debentures, and loans issued by 
NBFID. 
• Investigation and prosecution: Courts will also require prior sanction for taking cognisance of offences in 
matters involving employees of NBFID. No investigation can be initiated against employees of NBFID without 
the prior sanction of 
o the central government in case of the chairperson or other directors  
o the managing director in case of other employees.   
Page 2


	
	
3.	ECONOMY	
3.1.	 NATIONAL	 BANK	 FOR	 FINANCING	 INFRASTRUCTURE	 AND	
DEVELOPMENT	(NABFID)	
Why in news? 
Recently, the Parliament passed 
National Bank for Financing 
Infrastructure and Development 
(NaBFID) Bill, 2021. 
About NaBFID Bill, 2021 
• Bill seeks to set up NaBFID, a 
Development Financial 
Institution (DFI) to support the 
development of long-term non-recourse infrastructure financing. 
• Shareholding of NaBFID: NaBFID will be set up as a corporate body with authorised share capital of 1 lakh 
crore rupees held by central government, multilateral institutions, sovereign wealth funds, pension funds, 
insurers, financial institutions, etc.   
o Initially, central government will own 
100% shares of the institution which may 
subsequently be reduced up to 26% once 
the institution has achieved stability and 
scale.	 
• Source of funds: NBFID may raise money in the 
form of loans or otherwise both in Indian 
rupees and foreign currencies, or the issue 
and sale of various financial instruments 
including bonds and debentures.   
o NBFID may borrow money from central 
government, RBI, scheduled commercial 
banks, mutual funds, and multilateral 
institutions such as World Bank and Asian 
Development Bank. 
• Management: NBFID will be governed by a 
Board of Directors and the Chairperson 
appointed by the central government in 
consultation with RBI. 
o A body constituted by the central government will recommend candidates for the post of the Managing 
Director and Deputy Managing Directors.   
o The Board will appoint independent directors based on the recommendation of an internal committee. 
• Government Support: The central government will provide grants worth Rs 5,000 crore to NBFID by the end 
of the first financial year.   
o 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.   
o Costs towards insulation from fluctuations in foreign may be reimbursed by the government in part or 
full.   
o Upon request by NBFID, the government may guarantee the bonds, debentures, and loans issued by 
NBFID. 
• Investigation and prosecution: Courts will also require prior sanction for taking cognisance of offences in 
matters involving employees of NBFID. No investigation can be initiated against employees of NBFID without 
the prior sanction of 
o the central government in case of the chairperson or other directors  
o the managing director in case of other employees.   
	
• Licences:  The RBI in consultation with 
the government issue licences and 
specify conditions for setting up of 
private sector DFIs and also RBI prescribe 
regulations for these DFIs. 
About Development Financial institution 
(DFI) 
• DFI known as a development bank or a 
development finance company are 
institutions that provides long term 
development finance to various sectors 
like industry, agriculture, housing and infrastructure.  
• DFIs play a pivotal role in extending credit and boosting economies, especially in developing countries. 
• DFIs can be either wholly or partially owned by the government and few have majority private ownership, 
determined by the nature of the activities being financed, and their associated risk-returns profile. 
• There is no specific use of the term ‘DFI’ in either the RBI Act, 1934 or the Companies Act, 1956 or various 
statutes establishing DFIs, while some financial institutions under RBI Act and Companies Act perform the role 
of DFIs in the broadest sense. 
How DFIs are different from banks? 
Parameter Commercial Bank Development financial institutions 
Definition Banks that provide services to individuals and 
industries. 
Banks that function as multi-purpose financial 
institutes, with a broad development agenda. 
Set up Set up under the Companies Act, as Banking 
Companies. 
Set up under specialized act E.g. Industrial Finance 
Corporation Act 
Funds Funds are raised through investments and 
deposits made by Depositors 
Funds are borrowed and acquired by grants, selling 
securities 
Loan provided Short and Medium-term loans Medium and Long-term loans 
Purpose To make a profit by lending money at a high rate 
of interest. 
To make a profit by lending money at a high rate of 
interest. 
Clients Individuals, and Business Entities Government and Corporates 
Need and benefits of DFIs	
• Long term finance: DFIs emphasizes the long-term financing of a project rather than collateral based financing 
and support for activities to the sectors of the economy where the risks may be higher and may not be feasible 
for commercial banks to finance.  
• Gap filler: DFIs act as a gap-filler which was made due to incapability of commercial banks to finance big 
infrastructure projects for long term to attain growth and financial steadiness. 
• To improve capital Market: Tax benefits and tweaks to the Indian Stamp Act as mentioned under bill will have 
positive impact on the bond market 
• Reduces incidences of risk:  DFIs carry out feasibility study to evaluate viability of projects. When project costs 
were high and could not be financed by one DFI, rather they form loan consortia with commercial banks, 
thereby reducing the incidence of risks. 
• Technical support and expertise: DFIs provide skills, technical and managerial expertise to projects, which 
makes projects to be more successful. 
Challenges that DFIs may face 
• Actionable strategy: DFIs are expected to operate at the forefront of societal and economic change and need 
a strategy to guide them towards meeting their objectives. This may be made more difficult due to nature of 
their governance, often complex and prone to political interference. 
• Credit decisions: Avoiding a high level of Non-Performing Loans is as important for DFIs as it is for commercial 
banks. Moreover, making good credit decisions has other dimensions and face specific challenges like 
underwriting weak loans for the sake of volume targets and corruption. 
• Counter-productive competition: There can be cases where too much money chases too few good projects, 
resulting in poor resource allocation and counter-productive competition. 
Evolution of DFIs in India 
• After Independence, government has set up the Industrial 
Finance Corporation (IFCI) under The Industrial Finance 
Corporation of India Act, 1948 and State Financial Corporations 
(SFCs) were formed under State Financial corporations (SFCS) 
Act 1951 to embark on long term term-financing for industries.  
• Later in 1955, the Industrial Credit and Investment Corporation 
of India (ICICI), the first development finance institution in the 
private sector set up with backing and funding of the World Bank.  
• Later Refinance Corporation for Industry (1958), Agriculture 
Refinance Corporation (1963), Rural Electrification Corporation 
Ltd and HUDCO were established.  
Page 3


	
	
3.	ECONOMY	
3.1.	 NATIONAL	 BANK	 FOR	 FINANCING	 INFRASTRUCTURE	 AND	
DEVELOPMENT	(NABFID)	
Why in news? 
Recently, the Parliament passed 
National Bank for Financing 
Infrastructure and Development 
(NaBFID) Bill, 2021. 
About NaBFID Bill, 2021 
• Bill seeks to set up NaBFID, a 
Development Financial 
Institution (DFI) to support the 
development of long-term non-recourse infrastructure financing. 
• Shareholding of NaBFID: NaBFID will be set up as a corporate body with authorised share capital of 1 lakh 
crore rupees held by central government, multilateral institutions, sovereign wealth funds, pension funds, 
insurers, financial institutions, etc.   
o Initially, central government will own 
100% shares of the institution which may 
subsequently be reduced up to 26% once 
the institution has achieved stability and 
scale.	 
• Source of funds: NBFID may raise money in the 
form of loans or otherwise both in Indian 
rupees and foreign currencies, or the issue 
and sale of various financial instruments 
including bonds and debentures.   
o NBFID may borrow money from central 
government, RBI, scheduled commercial 
banks, mutual funds, and multilateral 
institutions such as World Bank and Asian 
Development Bank. 
• Management: NBFID will be governed by a 
Board of Directors and the Chairperson 
appointed by the central government in 
consultation with RBI. 
o A body constituted by the central government will recommend candidates for the post of the Managing 
Director and Deputy Managing Directors.   
o The Board will appoint independent directors based on the recommendation of an internal committee. 
• Government Support: The central government will provide grants worth Rs 5,000 crore to NBFID by the end 
of the first financial year.   
o 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.   
o Costs towards insulation from fluctuations in foreign may be reimbursed by the government in part or 
full.   
o Upon request by NBFID, the government may guarantee the bonds, debentures, and loans issued by 
NBFID. 
• Investigation and prosecution: Courts will also require prior sanction for taking cognisance of offences in 
matters involving employees of NBFID. No investigation can be initiated against employees of NBFID without 
the prior sanction of 
o the central government in case of the chairperson or other directors  
o the managing director in case of other employees.   
	
• Licences:  The RBI in consultation with 
the government issue licences and 
specify conditions for setting up of 
private sector DFIs and also RBI prescribe 
regulations for these DFIs. 
About Development Financial institution 
(DFI) 
• DFI known as a development bank or a 
development finance company are 
institutions that provides long term 
development finance to various sectors 
like industry, agriculture, housing and infrastructure.  
• DFIs play a pivotal role in extending credit and boosting economies, especially in developing countries. 
• DFIs can be either wholly or partially owned by the government and few have majority private ownership, 
determined by the nature of the activities being financed, and their associated risk-returns profile. 
• There is no specific use of the term ‘DFI’ in either the RBI Act, 1934 or the Companies Act, 1956 or various 
statutes establishing DFIs, while some financial institutions under RBI Act and Companies Act perform the role 
of DFIs in the broadest sense. 
How DFIs are different from banks? 
Parameter Commercial Bank Development financial institutions 
Definition Banks that provide services to individuals and 
industries. 
Banks that function as multi-purpose financial 
institutes, with a broad development agenda. 
Set up Set up under the Companies Act, as Banking 
Companies. 
Set up under specialized act E.g. Industrial Finance 
Corporation Act 
Funds Funds are raised through investments and 
deposits made by Depositors 
Funds are borrowed and acquired by grants, selling 
securities 
Loan provided Short and Medium-term loans Medium and Long-term loans 
Purpose To make a profit by lending money at a high rate 
of interest. 
To make a profit by lending money at a high rate of 
interest. 
Clients Individuals, and Business Entities Government and Corporates 
Need and benefits of DFIs	
• Long term finance: DFIs emphasizes the long-term financing of a project rather than collateral based financing 
and support for activities to the sectors of the economy where the risks may be higher and may not be feasible 
for commercial banks to finance.  
• Gap filler: DFIs act as a gap-filler which was made due to incapability of commercial banks to finance big 
infrastructure projects for long term to attain growth and financial steadiness. 
• To improve capital Market: Tax benefits and tweaks to the Indian Stamp Act as mentioned under bill will have 
positive impact on the bond market 
• Reduces incidences of risk:  DFIs carry out feasibility study to evaluate viability of projects. When project costs 
were high and could not be financed by one DFI, rather they form loan consortia with commercial banks, 
thereby reducing the incidence of risks. 
• Technical support and expertise: DFIs provide skills, technical and managerial expertise to projects, which 
makes projects to be more successful. 
Challenges that DFIs may face 
• Actionable strategy: DFIs are expected to operate at the forefront of societal and economic change and need 
a strategy to guide them towards meeting their objectives. This may be made more difficult due to nature of 
their governance, often complex and prone to political interference. 
• Credit decisions: Avoiding a high level of Non-Performing Loans is as important for DFIs as it is for commercial 
banks. Moreover, making good credit decisions has other dimensions and face specific challenges like 
underwriting weak loans for the sake of volume targets and corruption. 
• Counter-productive competition: There can be cases where too much money chases too few good projects, 
resulting in poor resource allocation and counter-productive competition. 
Evolution of DFIs in India 
• After Independence, government has set up the Industrial 
Finance Corporation (IFCI) under The Industrial Finance 
Corporation of India Act, 1948 and State Financial Corporations 
(SFCs) were formed under State Financial corporations (SFCS) 
Act 1951 to embark on long term term-financing for industries.  
• Later in 1955, the Industrial Credit and Investment Corporation 
of India (ICICI), the first development finance institution in the 
private sector set up with backing and funding of the World Bank.  
• Later Refinance Corporation for Industry (1958), Agriculture 
Refinance Corporation (1963), Rural Electrification Corporation 
Ltd and HUDCO were established.  
	
• Balance between private and public sectors: A DFI with a private sector character will require the government 
to believe and trust the private sector and still extend such benefits to the institution as it would normally to 
a state-owned DFI. 
• Attracting and retaining the best staff: DFIs are in competition with the private sector to attract talent, they 
are often at a disadvantage when it comes to absolute levels of remuneration. This may erode efficiency, 
motivation and competence.  
Way forward 
• Standardised regulation: There is need for establishment of standardized and streamlined regulatory 
frameworks where, despite government participation, decision-making and where executive responsibilities 
are not hampered. 
• Performance analysis: Advocate performance-based remuneration to retain staff and vocational training to 
keep the technical competences and maintain efficiency of DFI. 
• Consultation and coordination: Consultation among DFIs during the elaboration of the strategy, exchange 
information, find concrete synergies and cooperate on specific operations through co-financing to make sure 
that overlaps are avoided and conversely eventual markets gaps are covered.  
• Strong culture of innovation: Cultivating strong culture of innovation helps to increase value-addition and 
catalyse private investment in entrepreneurship especially in uncharted sectors. 
3.2.	NEW	UMBRELLA	ENTITY	
Why in News? 
Recently, Reserve Bank of India (RBI) extended the deadline to apply for NUE (New Umbrella Entity) to March 31. 
More on News 
• In August last year, RBI had released a 
framework for authorization of an 
umbrella entity for retail payments and 
had invited applications from desirous 
entities by February 26, 2021. 
• According to reports, several companies 
have partnered with banks and major 
tech players to apply for NUEs. 
About NUE 
• Objective is to set up new pan-India 
umbrella entity / entities focusing on 
retail payment systems. 
• NUE will be authorised under the 
Payment and Settlement Systems Act, 
2007 and shall be a company incorporated under the Companies Act, 2013. 
 
Page 4


	
	
3.	ECONOMY	
3.1.	 NATIONAL	 BANK	 FOR	 FINANCING	 INFRASTRUCTURE	 AND	
DEVELOPMENT	(NABFID)	
Why in news? 
Recently, the Parliament passed 
National Bank for Financing 
Infrastructure and Development 
(NaBFID) Bill, 2021. 
About NaBFID Bill, 2021 
• Bill seeks to set up NaBFID, a 
Development Financial 
Institution (DFI) to support the 
development of long-term non-recourse infrastructure financing. 
• Shareholding of NaBFID: NaBFID will be set up as a corporate body with authorised share capital of 1 lakh 
crore rupees held by central government, multilateral institutions, sovereign wealth funds, pension funds, 
insurers, financial institutions, etc.   
o Initially, central government will own 
100% shares of the institution which may 
subsequently be reduced up to 26% once 
the institution has achieved stability and 
scale.	 
• Source of funds: NBFID may raise money in the 
form of loans or otherwise both in Indian 
rupees and foreign currencies, or the issue 
and sale of various financial instruments 
including bonds and debentures.   
o NBFID may borrow money from central 
government, RBI, scheduled commercial 
banks, mutual funds, and multilateral 
institutions such as World Bank and Asian 
Development Bank. 
• Management: NBFID will be governed by a 
Board of Directors and the Chairperson 
appointed by the central government in 
consultation with RBI. 
o A body constituted by the central government will recommend candidates for the post of the Managing 
Director and Deputy Managing Directors.   
o The Board will appoint independent directors based on the recommendation of an internal committee. 
• Government Support: The central government will provide grants worth Rs 5,000 crore to NBFID by the end 
of the first financial year.   
o 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.   
o Costs towards insulation from fluctuations in foreign may be reimbursed by the government in part or 
full.   
o Upon request by NBFID, the government may guarantee the bonds, debentures, and loans issued by 
NBFID. 
• Investigation and prosecution: Courts will also require prior sanction for taking cognisance of offences in 
matters involving employees of NBFID. No investigation can be initiated against employees of NBFID without 
the prior sanction of 
o the central government in case of the chairperson or other directors  
o the managing director in case of other employees.   
	
• Licences:  The RBI in consultation with 
the government issue licences and 
specify conditions for setting up of 
private sector DFIs and also RBI prescribe 
regulations for these DFIs. 
About Development Financial institution 
(DFI) 
• DFI known as a development bank or a 
development finance company are 
institutions that provides long term 
development finance to various sectors 
like industry, agriculture, housing and infrastructure.  
• DFIs play a pivotal role in extending credit and boosting economies, especially in developing countries. 
• DFIs can be either wholly or partially owned by the government and few have majority private ownership, 
determined by the nature of the activities being financed, and their associated risk-returns profile. 
• There is no specific use of the term ‘DFI’ in either the RBI Act, 1934 or the Companies Act, 1956 or various 
statutes establishing DFIs, while some financial institutions under RBI Act and Companies Act perform the role 
of DFIs in the broadest sense. 
How DFIs are different from banks? 
Parameter Commercial Bank Development financial institutions 
Definition Banks that provide services to individuals and 
industries. 
Banks that function as multi-purpose financial 
institutes, with a broad development agenda. 
Set up Set up under the Companies Act, as Banking 
Companies. 
Set up under specialized act E.g. Industrial Finance 
Corporation Act 
Funds Funds are raised through investments and 
deposits made by Depositors 
Funds are borrowed and acquired by grants, selling 
securities 
Loan provided Short and Medium-term loans Medium and Long-term loans 
Purpose To make a profit by lending money at a high rate 
of interest. 
To make a profit by lending money at a high rate of 
interest. 
Clients Individuals, and Business Entities Government and Corporates 
Need and benefits of DFIs	
• Long term finance: DFIs emphasizes the long-term financing of a project rather than collateral based financing 
and support for activities to the sectors of the economy where the risks may be higher and may not be feasible 
for commercial banks to finance.  
• Gap filler: DFIs act as a gap-filler which was made due to incapability of commercial banks to finance big 
infrastructure projects for long term to attain growth and financial steadiness. 
• To improve capital Market: Tax benefits and tweaks to the Indian Stamp Act as mentioned under bill will have 
positive impact on the bond market 
• Reduces incidences of risk:  DFIs carry out feasibility study to evaluate viability of projects. When project costs 
were high and could not be financed by one DFI, rather they form loan consortia with commercial banks, 
thereby reducing the incidence of risks. 
• Technical support and expertise: DFIs provide skills, technical and managerial expertise to projects, which 
makes projects to be more successful. 
Challenges that DFIs may face 
• Actionable strategy: DFIs are expected to operate at the forefront of societal and economic change and need 
a strategy to guide them towards meeting their objectives. This may be made more difficult due to nature of 
their governance, often complex and prone to political interference. 
• Credit decisions: Avoiding a high level of Non-Performing Loans is as important for DFIs as it is for commercial 
banks. Moreover, making good credit decisions has other dimensions and face specific challenges like 
underwriting weak loans for the sake of volume targets and corruption. 
• Counter-productive competition: There can be cases where too much money chases too few good projects, 
resulting in poor resource allocation and counter-productive competition. 
Evolution of DFIs in India 
• After Independence, government has set up the Industrial 
Finance Corporation (IFCI) under The Industrial Finance 
Corporation of India Act, 1948 and State Financial Corporations 
(SFCs) were formed under State Financial corporations (SFCS) 
Act 1951 to embark on long term term-financing for industries.  
• Later in 1955, the Industrial Credit and Investment Corporation 
of India (ICICI), the first development finance institution in the 
private sector set up with backing and funding of the World Bank.  
• Later Refinance Corporation for Industry (1958), Agriculture 
Refinance Corporation (1963), Rural Electrification Corporation 
Ltd and HUDCO were established.  
	
• Balance between private and public sectors: A DFI with a private sector character will require the government 
to believe and trust the private sector and still extend such benefits to the institution as it would normally to 
a state-owned DFI. 
• Attracting and retaining the best staff: DFIs are in competition with the private sector to attract talent, they 
are often at a disadvantage when it comes to absolute levels of remuneration. This may erode efficiency, 
motivation and competence.  
Way forward 
• Standardised regulation: There is need for establishment of standardized and streamlined regulatory 
frameworks where, despite government participation, decision-making and where executive responsibilities 
are not hampered. 
• Performance analysis: Advocate performance-based remuneration to retain staff and vocational training to 
keep the technical competences and maintain efficiency of DFI. 
• Consultation and coordination: Consultation among DFIs during the elaboration of the strategy, exchange 
information, find concrete synergies and cooperate on specific operations through co-financing to make sure 
that overlaps are avoided and conversely eventual markets gaps are covered.  
• Strong culture of innovation: Cultivating strong culture of innovation helps to increase value-addition and 
catalyse private investment in entrepreneurship especially in uncharted sectors. 
3.2.	NEW	UMBRELLA	ENTITY	
Why in News? 
Recently, Reserve Bank of India (RBI) extended the deadline to apply for NUE (New Umbrella Entity) to March 31. 
More on News 
• In August last year, RBI had released a 
framework for authorization of an 
umbrella entity for retail payments and 
had invited applications from desirous 
entities by February 26, 2021. 
• According to reports, several companies 
have partnered with banks and major 
tech players to apply for NUEs. 
About NUE 
• Objective is to set up new pan-India 
umbrella entity / entities focusing on 
retail payment systems. 
• NUE will be authorised under the 
Payment and Settlement Systems Act, 
2007 and shall be a company incorporated under the Companies Act, 2013. 
 
	
Need for NUEs 
 
Benefit of the move 
• More such entities will encourage competition and will offer more retail payment solutions to customers. 
• NUE will offer innovative payment systems to include hitherto excluded cross-sections of the society and will 
also enhance access, customer convenience and safety. 
o Just like NPCI runs UPI, IMPS and other payment modes, the NUEs will create similar mechanisms which 
will then be used by banks and fintech companies. 
• Entities planning to establish these NUEs aim to get an even bigger share in the digital payments sector. 
o As per recent reports, one third of Indian households are using digital payments in some form or the other. 
About National Payments Corporation of India (NPCI) 
• NPCI is an umbrella organisation for 
operating retail payments and settlement 
systems in India. 
• It is an initiative of RBI and Indian Banks’ 
Association (IBA) under the provisions of the 
Payment and Settlement Systems Act, 2007.  
o 10 core promoter banks are State Bank 
of India, Punjab National Bank, Canara 
Bank, Bank of Baroda, Union Bank of 
India, Bank of India, ICICI Bank, HDFC 
Bank, Citibank and HSBC 
• It has been incorporated as a “Not for Profit” Company under Companies Act 1956 with an intention to provide 
infrastructure to the entire Banking system in India for physical as well as electronic payment and settlement 
systems.  
Issues with NPCI 
• As it is owned by banks, it may not have an incentive for promoting competition in the payments and money 
transmission sector because the latter reduces the stability of deposits they may otherwise lend out. 
• Its not-for-profit character and the unity of operational control and underlying infrastructure is at odds with the 
objective of building innovative payments systems. 
• People from rural areas & senior citizens are still in doubt with NPCI products mainly because of lack of financial 
illiteracy and lack of operational knowledge. 
• Being a single operator for payments system, it could also result in systemic and operational risk, lack of innovation 
and upgradation and inefficiencies. 
• NPCI’s role as an infrastructure provider needs to be separated from its role as instrument operator to avoid conflict 
of interest. 
Way forward 
• Government must follow the Watal Committee recommendation to classify NPCI as a Critical Payment Infrastructure 
Company to improve governance and to bring transparency in its functioning. 
• Main focus of NPCI should be to create awareness of its digital products to rural areas so that the dream of Cashless 
India will be a reality. 
• RBI shall consider other options, like NUE, to minimise concentration risk and promote innovation and competition. 
• To avoid conflict of interest, NPCI can place its payment instruments related functions in a separate profit-making 
entity. 
Page 5


	
	
3.	ECONOMY	
3.1.	 NATIONAL	 BANK	 FOR	 FINANCING	 INFRASTRUCTURE	 AND	
DEVELOPMENT	(NABFID)	
Why in news? 
Recently, the Parliament passed 
National Bank for Financing 
Infrastructure and Development 
(NaBFID) Bill, 2021. 
About NaBFID Bill, 2021 
• Bill seeks to set up NaBFID, a 
Development Financial 
Institution (DFI) to support the 
development of long-term non-recourse infrastructure financing. 
• Shareholding of NaBFID: NaBFID will be set up as a corporate body with authorised share capital of 1 lakh 
crore rupees held by central government, multilateral institutions, sovereign wealth funds, pension funds, 
insurers, financial institutions, etc.   
o Initially, central government will own 
100% shares of the institution which may 
subsequently be reduced up to 26% once 
the institution has achieved stability and 
scale.	 
• Source of funds: NBFID may raise money in the 
form of loans or otherwise both in Indian 
rupees and foreign currencies, or the issue 
and sale of various financial instruments 
including bonds and debentures.   
o NBFID may borrow money from central 
government, RBI, scheduled commercial 
banks, mutual funds, and multilateral 
institutions such as World Bank and Asian 
Development Bank. 
• Management: NBFID will be governed by a 
Board of Directors and the Chairperson 
appointed by the central government in 
consultation with RBI. 
o A body constituted by the central government will recommend candidates for the post of the Managing 
Director and Deputy Managing Directors.   
o The Board will appoint independent directors based on the recommendation of an internal committee. 
• Government Support: The central government will provide grants worth Rs 5,000 crore to NBFID by the end 
of the first financial year.   
o 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.   
o Costs towards insulation from fluctuations in foreign may be reimbursed by the government in part or 
full.   
o Upon request by NBFID, the government may guarantee the bonds, debentures, and loans issued by 
NBFID. 
• Investigation and prosecution: Courts will also require prior sanction for taking cognisance of offences in 
matters involving employees of NBFID. No investigation can be initiated against employees of NBFID without 
the prior sanction of 
o the central government in case of the chairperson or other directors  
o the managing director in case of other employees.   
	
• Licences:  The RBI in consultation with 
the government issue licences and 
specify conditions for setting up of 
private sector DFIs and also RBI prescribe 
regulations for these DFIs. 
About Development Financial institution 
(DFI) 
• DFI known as a development bank or a 
development finance company are 
institutions that provides long term 
development finance to various sectors 
like industry, agriculture, housing and infrastructure.  
• DFIs play a pivotal role in extending credit and boosting economies, especially in developing countries. 
• DFIs can be either wholly or partially owned by the government and few have majority private ownership, 
determined by the nature of the activities being financed, and their associated risk-returns profile. 
• There is no specific use of the term ‘DFI’ in either the RBI Act, 1934 or the Companies Act, 1956 or various 
statutes establishing DFIs, while some financial institutions under RBI Act and Companies Act perform the role 
of DFIs in the broadest sense. 
How DFIs are different from banks? 
Parameter Commercial Bank Development financial institutions 
Definition Banks that provide services to individuals and 
industries. 
Banks that function as multi-purpose financial 
institutes, with a broad development agenda. 
Set up Set up under the Companies Act, as Banking 
Companies. 
Set up under specialized act E.g. Industrial Finance 
Corporation Act 
Funds Funds are raised through investments and 
deposits made by Depositors 
Funds are borrowed and acquired by grants, selling 
securities 
Loan provided Short and Medium-term loans Medium and Long-term loans 
Purpose To make a profit by lending money at a high rate 
of interest. 
To make a profit by lending money at a high rate of 
interest. 
Clients Individuals, and Business Entities Government and Corporates 
Need and benefits of DFIs	
• Long term finance: DFIs emphasizes the long-term financing of a project rather than collateral based financing 
and support for activities to the sectors of the economy where the risks may be higher and may not be feasible 
for commercial banks to finance.  
• Gap filler: DFIs act as a gap-filler which was made due to incapability of commercial banks to finance big 
infrastructure projects for long term to attain growth and financial steadiness. 
• To improve capital Market: Tax benefits and tweaks to the Indian Stamp Act as mentioned under bill will have 
positive impact on the bond market 
• Reduces incidences of risk:  DFIs carry out feasibility study to evaluate viability of projects. When project costs 
were high and could not be financed by one DFI, rather they form loan consortia with commercial banks, 
thereby reducing the incidence of risks. 
• Technical support and expertise: DFIs provide skills, technical and managerial expertise to projects, which 
makes projects to be more successful. 
Challenges that DFIs may face 
• Actionable strategy: DFIs are expected to operate at the forefront of societal and economic change and need 
a strategy to guide them towards meeting their objectives. This may be made more difficult due to nature of 
their governance, often complex and prone to political interference. 
• Credit decisions: Avoiding a high level of Non-Performing Loans is as important for DFIs as it is for commercial 
banks. Moreover, making good credit decisions has other dimensions and face specific challenges like 
underwriting weak loans for the sake of volume targets and corruption. 
• Counter-productive competition: There can be cases where too much money chases too few good projects, 
resulting in poor resource allocation and counter-productive competition. 
Evolution of DFIs in India 
• After Independence, government has set up the Industrial 
Finance Corporation (IFCI) under The Industrial Finance 
Corporation of India Act, 1948 and State Financial Corporations 
(SFCs) were formed under State Financial corporations (SFCS) 
Act 1951 to embark on long term term-financing for industries.  
• Later in 1955, the Industrial Credit and Investment Corporation 
of India (ICICI), the first development finance institution in the 
private sector set up with backing and funding of the World Bank.  
• Later Refinance Corporation for Industry (1958), Agriculture 
Refinance Corporation (1963), Rural Electrification Corporation 
Ltd and HUDCO were established.  
	
• Balance between private and public sectors: A DFI with a private sector character will require the government 
to believe and trust the private sector and still extend such benefits to the institution as it would normally to 
a state-owned DFI. 
• Attracting and retaining the best staff: DFIs are in competition with the private sector to attract talent, they 
are often at a disadvantage when it comes to absolute levels of remuneration. This may erode efficiency, 
motivation and competence.  
Way forward 
• Standardised regulation: There is need for establishment of standardized and streamlined regulatory 
frameworks where, despite government participation, decision-making and where executive responsibilities 
are not hampered. 
• Performance analysis: Advocate performance-based remuneration to retain staff and vocational training to 
keep the technical competences and maintain efficiency of DFI. 
• Consultation and coordination: Consultation among DFIs during the elaboration of the strategy, exchange 
information, find concrete synergies and cooperate on specific operations through co-financing to make sure 
that overlaps are avoided and conversely eventual markets gaps are covered.  
• Strong culture of innovation: Cultivating strong culture of innovation helps to increase value-addition and 
catalyse private investment in entrepreneurship especially in uncharted sectors. 
3.2.	NEW	UMBRELLA	ENTITY	
Why in News? 
Recently, Reserve Bank of India (RBI) extended the deadline to apply for NUE (New Umbrella Entity) to March 31. 
More on News 
• In August last year, RBI had released a 
framework for authorization of an 
umbrella entity for retail payments and 
had invited applications from desirous 
entities by February 26, 2021. 
• According to reports, several companies 
have partnered with banks and major 
tech players to apply for NUEs. 
About NUE 
• Objective is to set up new pan-India 
umbrella entity / entities focusing on 
retail payment systems. 
• NUE will be authorised under the 
Payment and Settlement Systems Act, 
2007 and shall be a company incorporated under the Companies Act, 2013. 
 
	
Need for NUEs 
 
Benefit of the move 
• More such entities will encourage competition and will offer more retail payment solutions to customers. 
• NUE will offer innovative payment systems to include hitherto excluded cross-sections of the society and will 
also enhance access, customer convenience and safety. 
o Just like NPCI runs UPI, IMPS and other payment modes, the NUEs will create similar mechanisms which 
will then be used by banks and fintech companies. 
• Entities planning to establish these NUEs aim to get an even bigger share in the digital payments sector. 
o As per recent reports, one third of Indian households are using digital payments in some form or the other. 
About National Payments Corporation of India (NPCI) 
• NPCI is an umbrella organisation for 
operating retail payments and settlement 
systems in India. 
• It is an initiative of RBI and Indian Banks’ 
Association (IBA) under the provisions of the 
Payment and Settlement Systems Act, 2007.  
o 10 core promoter banks are State Bank 
of India, Punjab National Bank, Canara 
Bank, Bank of Baroda, Union Bank of 
India, Bank of India, ICICI Bank, HDFC 
Bank, Citibank and HSBC 
• It has been incorporated as a “Not for Profit” Company under Companies Act 1956 with an intention to provide 
infrastructure to the entire Banking system in India for physical as well as electronic payment and settlement 
systems.  
Issues with NPCI 
• As it is owned by banks, it may not have an incentive for promoting competition in the payments and money 
transmission sector because the latter reduces the stability of deposits they may otherwise lend out. 
• Its not-for-profit character and the unity of operational control and underlying infrastructure is at odds with the 
objective of building innovative payments systems. 
• People from rural areas & senior citizens are still in doubt with NPCI products mainly because of lack of financial 
illiteracy and lack of operational knowledge. 
• Being a single operator for payments system, it could also result in systemic and operational risk, lack of innovation 
and upgradation and inefficiencies. 
• NPCI’s role as an infrastructure provider needs to be separated from its role as instrument operator to avoid conflict 
of interest. 
Way forward 
• Government must follow the Watal Committee recommendation to classify NPCI as a Critical Payment Infrastructure 
Company to improve governance and to bring transparency in its functioning. 
• Main focus of NPCI should be to create awareness of its digital products to rural areas so that the dream of Cashless 
India will be a reality. 
• RBI shall consider other options, like NUE, to minimise concentration risk and promote innovation and competition. 
• To avoid conflict of interest, NPCI can place its payment instruments related functions in a separate profit-making 
entity. 
	
3.3.	DIGITAL	CURRENCY		
Why in News? 
Recently, China has floated its own Central Bank backed digital 
currency, namely eCNY in selected cities on a trial basis.  
What is a Digital currency?   
In the broadest sense, a digital currency is a form of currency 
that is available only in digital or electronic form, and not in 
physical form. It is also called digital money, electronic money, 
electronic currency, or cyber cash. 	
What are potential benefits of using a Central Bank Digital 
currency?  
• Transactions are low cost: As payments in digital 
currencies are made directly between the transacting 
parties without the need of any intermediaries, the transactions are usually instantaneous and low-cost.  
• Increased safety of the financial system: Allowing individuals, private sector companies, and non-bank 
financial institutions to settle directly in central bank money (rather than bank deposits) significantly reduces 
the concentration of liquidity and credit risk in payment systems.  
• Encourage competition and innovation in the payment systems: Digital currency would create a level playing 
field in the payments sector, which could encourage multiple start-ups and development of new products in 
the sector.  
• Improve financial inclusion: Digital Cash Account Providers are likely to reach the segments which are 
currently excluded from conventional banking services. 
• Possibility of a better directed monetary or fiscal policy: Digital currency provide an opportunity to 
authorities to issue currency with additional conditions. For instance, these currencies can enable direct 
handouts of money that expire if not used by a particular date and can make it easier for governments to track 
financial transactions to stamp out tax evasion and crackdown on dissidents. 
What are the challenges that may arise in adoption of digital currencies?  
• Privacy issue: Central banks would have 
increased control over money issuance and 
greater insight into how people spend their 
money, this data can potentially affect the 
privacy of the users. 
• Cybersecurity threats: Transactions in digital 
currencies removes Banks as intermediaries 
which makes users all the more vulnerable to 
cyber frauds and increases the fragility of the 
overall system.  
• Need for large-scale digital infrastructure: 
Floating a digital currency requires pre-
requisites such as large-scale internet 
penetration, reliable network infrastructure 
and handling capacity for large scale data 
such as data centres among others.   
How has Indian dispensation responded to developments regarding digital currency?  
In India, despite government threats of a ban, cryptocurrency transaction volumes have been rising and about 8 
million investors now hold 100 billion rupees ($1.4 billion) in crypto investments. User registrations and money 
inflows at local crypto exchanges such as ZebPay, Unocoin etc. have been soaring especially in the last 2-3 years.  
In this context of large demand for digital currencies, following steps have been seen-  
• The Reserve Bank of India voiced its concern against cryptocurrencies. At the same time, moving forward for 
developing its own digital currency.  
China’s Digital Currency  
Countries from Sweden to Bahamas are experimenting with 
digital currency on some level, yet no major power is as far along 
as China. The development can be seen on following lines-  
• While the Chinese government has not officially introduced 
the currency, namely, eCNY nationwide, trial has been 
started on a large scale.  
• If the eCNY is successful, it will give the central bank new 
powers, including novel types of monetary policy to help 
the economy grow.  
• Some economists have stated that China’s digital currency 
would also make it easier for the renminbi to compete with 
the U.S. dollar as a global currency because it can move 
internationally with fewer barriers.  
• In this context, the right to issue and control digital 
currencies could become a ‘new battlefield’ of competition 
between sovereign states. 
Read More
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