Pariksha SaathiLesson 8 of 10 · Banking and Financial Awareness
Development Banks, NBFCs and Financial Regulators (NABARD, SIDBI, SEBI, IRDAI, PFRDA)
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Why development banks
Commercial banks take short-term deposits and so prefer short-term lending, but industry, farming, housing and exports need long-term finance and specialised knowledge. After Independence India created development financial institutions (DFIs) for this: IFCI (1948) was the first, followed by state financial corporations under an Act of 1951, ICICI (1955) and IDBI (1964), set up as an RBI subsidiary to be the apex body for industrial finance. Sector-specific apex banks for agriculture, small industry, exports and housing came later. ICICI and IDBI have since become commercial banks.
NABARD
The National Bank for Agriculture and Rural Development was set up on 12 July 1982 under the NABARD Act 1981, on the recommendation of the CRAFICARD committee headed by B. Sivaraman. It took over the agricultural credit functions of the RBI and the refinance work of the Agricultural Refinance and Development Corporation. With headquarters in Mumbai, it is the apex body for rural credit: it refinances banks that lend to farmers and rural enterprises, supervises regional rural banks and state and district co-operative banks, manages the Rural Infrastructure Development Fund and promotes self-help groups through the SHG-bank linkage programme begun in 1992.
SIDBI, EXIM Bank and NHB
The Small Industries Development Bank of India was set up on 2 April 1990 under the SIDBI Act 1989, first as a subsidiary of IDBI; with headquarters in Lucknow, it is the principal institution for financing and developing micro, small and medium enterprises, and MUDRA is its subsidiary. The Export-Import Bank of India, created under an Act of 1981 and set up in 1982 with headquarters in Mumbai, finances and promotes India's foreign trade and gives lines of credit to foreign governments and banks to buy Indian goods. The National Housing Bank, set up on 9 July 1988 under the NHB Act 1987 with headquarters in New Delhi, is the apex institution for housing finance and refinances housing finance companies and banks. In 2019 the regulation of housing finance companies moved from NHB to the RBI, which treats them as a category of NBFC; the 2019 change left their supervision with NHB.
NBFCs and how they differ from banks
A non-banking financial company is a company registered under the Companies Act whose principal business is financial, such as loans, asset finance, hire purchase or investment in securities; the RBI treats financial business as principal when financial assets are more than half of total assets and financial income more than half of gross income. NBFCs under the RBI must register with it under section 45-IA of the RBI Act. They differ from banks in key ways: they cannot accept demand deposits, they cannot issue cheques drawn on themselves, they are not part of the payment and settlement system as banks are, their depositors get no DICGC insurance and they keep no CRR. Types include investment and credit companies, infrastructure finance companies, microfinance institutions, core investment companies, factors, account aggregators and peer-to-peer lending platforms. Not all finance companies come under the RBI: merchant bankers and stock brokers are under SEBI, insurers under IRDAI, chit funds under state governments and Nidhi companies under the Ministry of Corporate Affairs.
SEBI
The Securities and Exchange Board of India was set up on 12 April 1988 by a government resolution and became a statutory body on 30 January 1992 under the SEBI Act 1992. With headquarters in Mumbai, it protects investors and regulates and develops the securities market: stock exchanges, brokers, depositories, mutual funds, merchant bankers, credit rating agencies and the disclosures of listed companies. The Forward Markets Commission (1953), which regulated commodity futures, was merged into SEBI in September 2015.
IRDAI and PFRDA
The Insurance Regulatory and Development Authority of India was created under the IRDA Act 1999, on the recommendation of the Malhotra Committee (1994), and set up in 2000, and has its headquarters in Hyderabad; it regulates life, general and health insurance, a sector reopened to private companies from 2000. Life insurance had been nationalised in 1956 with the creation of LIC, and general insurance in 1972. The Pension Fund Regulatory and Development Authority was set up by a government resolution in 2003 and became statutory under the PFRDA Act 2013; with headquarters in New Delhi, it regulates the National Pension System, introduced for new central government employees from 1 January 2004, and the Atal Pension Yojana.
Other regulators and coordination
The Insolvency and Bankruptcy Board of India (2016) regulates insolvency professionals and processes. The International Financial Services Centres Authority (IFSCA), set up in 2020 under the IFSCA Act 2019 with headquarters at GIFT City, Gandhinagar, is the single regulator for financial services in international financial services centres. The Financial Stability and Development Council, set up by the government in December 2010 and chaired by the Union Finance Minister, brings the regulators together on financial stability. Exams test the matching: banks with the RBI, securities with SEBI, insurance with IRDAI and pensions with PFRDA.
Key facts
- IFCI (1948) was India's first development financial institution; ICICI followed in 1955 and IDBI in 1964.
- NABARD: 12 July 1982, NABARD Act 1981, on the CRAFICARD (B. Sivaraman) recommendation; HQ Mumbai; supervises RRBs and co-operative banks.
- SIDBI: 2 April 1990, SIDBI Act 1989, HQ Lucknow; apex institution for MSMEs; MUDRA is its subsidiary.
- EXIM Bank: EXIM Bank Act 1981, set up 1982, HQ Mumbai; NHB: 9 July 1988, NHB Act 1987, HQ New Delhi.
- NBFCs register with the RBI under section 45-IA of the RBI Act; they cannot take demand deposits or issue cheques, and their deposits are not insured by DICGC.
- SEBI: set up 12 April 1988, statutory from 30 January 1992, HQ Mumbai; the Forward Markets Commission was merged into it in 2015.
- IRDAI: IRDA Act 1999 (Malhotra Committee), HQ Hyderabad; PFRDA: 2003 resolution, PFRDA Act 2013, HQ New Delhi, regulates NPS and APY.
- IFSCA (2020, HQ GIFT City, Gandhinagar) regulates international financial services centres; FSDC (December 2010) is chaired by the Union Finance Minister.
- Chit funds are regulated by state governments and Nidhi companies by the Ministry of Corporate Affairs, not by the RBI.
Quick revision
IFCI 1948 first DFI, ICICI 1955, IDBI 1964; NABARD 12 July 1982 (Act 1981, CRAFICARD, Mumbai); SIDBI 2 April 1990 (Lucknow); EXIM Bank 1982 (Act 1981, Mumbai); NHB 9 July 1988 (New Delhi), HFC regulation to RBI 2019; NBFCs register under section 45-IA, no demand deposits, no cheques, no DICGC cover; SEBI 1988, statutory 1992, FMC merged 2015; IRDAI Act 1999, Hyderabad; PFRDA 2003, Act 2013; IFSCA 2020 Gandhinagar; FSDC 2010.