- Financial institutions that provide medium term and long-term credit at low interest rates. Aimed at promoting long-term investments with social benefits such as infrastructure, irrigation, mining, heavy industry, agriculture etc.
- Examples- Industrial Finance Corporation of India (first development Bank); NABARD; NHB, SIDBI and MUDRA, EXIM etc.
- (Even ICICI and IDBI were initially set up as Development banks and later converted into Universal banks)
Difference between Commercial banks and Development banks
- Source of Funds: Commercial banks- Deposits; Development Banks- Govt’s funding
- Nature of Loans: Commercial banks- Short-term; Development Banks- Long-term.
- Nature of Assistance: Commercial banks- Extend Loans; Development Banks- Loans + Managerial Assistance + Credit Guarantee Enhancement.
National Bank for Financing Infrastructure and Development (NaBFID)
Proposed in the Union Budget 2021-22 and set up through “The National Bank for Financing Infrastructure and Development Act, 2021”.
- Ownership: NBFID will be set up as a corporate body with authorised share capital of one lakh crore rupees. Shares of NBFID may be held by:
- central government
- multilateral institutions
- sovereign wealth funds
- pension funds
- insurers
- financial institutions
- banks
- 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%.
- Source of funds: Raise money in form of loans in Indian Rupees and Foreign currencies. 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.
- Support from the Central government: The central government will 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.
- Other DFIs: The act 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.
National Bank for Agriculture & Rural Development (NABARD)
- NABARD is an apex development bank which provides help for agricultural and rural development.
- Functions
- Centre of the rural credit system
- Provider of supplemental funding to rural credit institutions
- Provides refinance facilities to SLDBs, SCBs, RRBs and commercial banks for developmental purposes
- Arranges investment credit to small industries, village and cottage industries, handicrafts, and other rural crafts, artisans, and farmers.
RBI has divested its share in NABARD in two phases, one in 2010 and one recently in April 2019. With this the central government now holds 100% stake in NABARD.
National Housing Bank
- Established under National Housing Policy, 1987. Previously, it was a wholly owned subsidiary of RBI. In 2019, RBI divested its stake in NHB, and thus currently central government holds 100% stake in NHB.
- It aims at extending financial assistance to housing sector by way of both refinance and direct finance.
- Note: The NBH publishes the RESIDEX to track the movement in the housing Prices.
Micro Units Development & Refinance Agency (MUDRA)
- Set up as a refinance agency for developing and refinancing all micro-enterprises engaged in manufacturing, trading and service activities.
- Aims to provide financial support to those banks and micro finance institutions which are engaged in lending to the micro-enterprises. Hence, MUDRA is a refinancing Institution. MUDRA does not lend directly to the micro entrepreneurs / individuals.
- It has been set up as a subsidiary of SIDBI.
- Gives loans up to Rs 10 lakh while loans of higher amount are given by SIDBI.
- Mudra Loans are available for non-agricultural activities up to Rs. 10 lakh and activities allied to agriculture such as Dairy, Poultry, Bee Keeping etc., are also covered.
- Mudra issues a Mudra Card which permits access to Working Capital through ATMs and Card Machines.
- There are three types of loans under PM Mudra Yojana:
- Shishu (up to Rs.50,000)
- Kishore (from Rs.50,001 to Rs.5 lakh)
- Tarun (from Rs.500,001 to Rs.10,00,000)