Development Financial Institutions: NABARD, SIDBI, EXIM Bank, NHB and NaBFID for RBI Grade B Finance

Last updated: 2026-11-13 · MockMentor

The Finance syllabus names five institutions directly: "Financial Institutions: SIDBI, EXIM Bank, NABARD, NHB, NaBFID etc." They are asked about almost every year in the objective paper, through questions on their year of set-up, headquarters, ownership, functions and flagship schemes. In the descriptive paper, the return of development finance through NaBFID and the funding gap in infrastructure are common themes. This chapter explains what development financial institutions (DFIs) are, how India's DFIs evolved, and the role of each of the five named institutions.

In one line: India's DFIs give long-term and sector-specific finance that commercial banks find hard to provide: NABARD for agriculture and rural areas, SIDBI for small industry, EXIM Bank for trade, NHB for housing and NaBFID for infrastructure.

Basic concepts

• Development Financial Institution (DFI): a specialised institution that provides long-term finance for projects with high social or economic value but long gestation periods, low initial returns or high risk, which commercial lenders avoid.
• All India Financial Institutions (AIFIs): the DFIs regulated and supervised by RBI as a separate category. These are NABARD, SIDBI, EXIM Bank, NHB and NaBFID.
• Refinance: a loan from a DFI to a bank or other lender against loans that lender has already given, which increases the lender's ability to lend.
• Asset-liability mismatch: funding long-term loans with short-term borrowings, which creates the risk that the lender cannot roll over its borrowing.
• Gestation period: the time between investment in a project and the start of returns from it.

Why in News?

1. NaBFID, India's newest DFI, set up in 2021 under its own Act, has expanded its loan sanctions for infrastructure and has been raising funds through long-term bonds.
2. Under the "One State, One RRB" policy, 26 regional rural banks were merged with effect from 1 May 2025, leaving 28 RRBs, in which NABARD plays a supervisory and development role.
3. SIDBI runs the Fund of Funds for Startups (FFS) and many credit guarantee and refinance schemes for micro, small and medium enterprises (MSMEs), including through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which it manages with the Ministry of MSME.
4. The Union Budget 2026-27 kept a strong focus on infrastructure, with capital expenditure of ₹12.2 lakh crore, which raises the demand for long-term finance.

Why DFIs were needed

At independence, India had little industry, few capital markets and banks that lent only short term for trade. Large projects in steel, power, fertilisers and transport needed loans for 10 to 20 years. The government therefore created DFIs that raised money through government-guaranteed bonds, lines of credit from abroad and RBI's National Industrial Credit (Long Term Operations) Fund, and lent at concessional rates.

Evolution of DFIs in India

Decline after 1991

After the reforms, DFIs lost access to cheap funds: SLR bonds were phased out, government guarantees became rare, and RBI's long-term funds were wound down. They had to borrow at market rates while competing with banks. Several ran into heavy losses. The Narasimham Committee (1998) and the S. H. Khan Working Group (1998) suggested that DFIs should become banks or NBFCs. ICICI merged with ICICI Bank in 2002, and IDBI became IDBI Bank in 2004. IFCI shrank and is now a small NBFC. By the 2010s, banks had become the main source of infrastructure loans, which led to the asset-liability mismatch and bad loans discussed in the banking reforms chapter.

Revival of development finance

The Union Budget 2021-22 announced a new DFI for infrastructure. The National Bank for Financing Infrastructure and Development Act, 2021 created NaBFID, and the same Act allowed private DFIs to be licensed by RBI.

NABARD

Background

The National Bank for Agriculture and Rural Development (NABARD) was set up on 12 July 1982 under the NABARD Act, 1981, on the recommendation of the CRAFICARD Committee (Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development), chaired by B. Sivaraman. It took over the agricultural credit functions of RBI and the refinance work of the Agricultural Refinance and Development Corporation. Its headquarters are in Mumbai. It is wholly owned by the Government of India since RBI transferred its stake.

Functions

Important funds and schemes

• Rural Infrastructure Development Fund (RIDF): set up in 1995-96. Banks that fall short of priority sector targets deposit the shortfall with NABARD, which lends it to state governments for rural roads, bridges, irrigation and other projects.
• Long Term Irrigation Fund (LTIF): for completing pending irrigation projects under the Pradhan Mantri Krishi Sinchayee Yojana.
• Self Help Group-Bank Linkage Programme: started as a pilot in 1992, now the largest microfinance programme in the world.
• Kisan Credit Card (KCC): introduced in 1998 on the basis of a model prepared by NABARD.
• Agriculture Infrastructure Fund and Food Processing Fund: support for post-harvest infrastructure.
• Watershed Development Fund and Tribal Development Fund.
• Climate finance: NABARD is the National Implementing Entity for the Adaptation Fund and an accredited entity of the Green Climate Fund.

SIDBI

Background

The Small Industries Development Bank of India (SIDBI) was set up on 2 April 1990 under the SIDBI Act, 1989, as a subsidiary of IDBI, and was delinked from IDBI in 2000. Its headquarters are in Lucknow. Its shareholders include the Government of India, SBI, LIC and other public sector banks and institutions.

Functions

1. Refinance to banks, NBFCs and small finance banks for loans to MSMEs.
2. Direct lending to MSMEs, especially for new technology, energy efficiency and services.
3. Promotion and development: entrepreneurship programmes, cluster development and the Udyam Mitra portal.
4. Coordination of institutions working for MSMEs.

Important roles and schemes

EXIM Bank

Background

The Export-Import Bank of India (EXIM Bank) was set up on 1 January 1982 under the EXIM Bank Act, 1981, to finance, facilitate and promote India's foreign trade. It is wholly owned by the Government of India and has its headquarters in Mumbai. It took over the international finance functions of IDBI.

Functions

EXIM Bank also runs schemes such as the Buyer's Credit under the National Export Insurance Account (BC-NEIA) for project exports and the Ubharte Sitaare programme for promising export-oriented firms. It works closely with the Export Credit Guarantee Corporation of India (ECGC), which provides export credit insurance.

National Housing Bank

Background

The National Housing Bank (NHB) was set up on 9 July 1988 under the NHB Act, 1987, as a wholly owned subsidiary of RBI, on the recommendation of the High Level Group chaired by C. Rangarajan. RBI transferred its entire stake to the Government of India in 2019. Its headquarters are in New Delhi.

Functions

• Refinance to housing finance companies, banks, RRBs and cooperative banks for housing loans.
• Supervision of housing finance companies. Since August 2019, their regulation has moved to RBI, while NHB continues to supervise them.
• Development of the housing finance market, including mortgage-backed securities.
• Administration of government funds such as the Urban Infrastructure Development Fund (UIDF).

Indices and schemes

• RESIDEX: an index of residential property prices in Indian cities, launched by NHB in 2007.
• Credit Linked Subsidy Scheme: NHB and HUDCO were the central nodal agencies for the interest subsidy under the Pradhan Mantri Awas Yojana (Urban).
• Urban Infrastructure Development Fund: created from priority sector shortfalls to fund urban infrastructure in tier 2 and tier 3 cities.

NaBFID

Background

The National Bank for Financing Infrastructure and Development (NaBFID) was set up under the NaBFID Act, 2021, as a DFI for long-term infrastructure finance. Its headquarters are in Mumbai.

Objectives

1. Financial objective: lend directly or indirectly to infrastructure projects, including refinance and credit enhancement.
2. Developmental objective: develop the market for bonds and derivatives for infrastructure finance, and build skills for project preparation.

The same Act allows private persons to apply to RBI for a licence to set up a DFI.

Comparison of the five institutions

Regulation of AIFIs by RBI

RBI applies prudential rules to AIFIs on capital adequacy (Basel-based), asset classification, exposure limits, liquidity and resource raising. They can raise funds through bonds, term deposits, certificates of deposit, commercial paper and term money borrowing within an umbrella limit linked to their net owned funds.

Challenges

• Funding cost: DFIs need cheap long-term funds, but without government guarantees they must borrow at market rates.
• Asset-liability mismatch: long loans funded by shorter borrowings.
• Concentration risk: infrastructure loans are large and exposed to delays, regulatory change and demand risk.
• Overlap: many schemes and institutions serve the same sectors, which leads to duplication.
• Governance: the earlier collapse of DFIs shows the risk of politically driven lending.
• Thin bond market: without a deep corporate bond market, DFIs cannot easily sell down loans.

Way forward

• Give NaBFID and other DFIs access to long-term funds from insurance companies, pension funds and foreign investors.
• Develop credit enhancement and a market for infrastructure bonds, so that DFIs can recycle capital.
• Professionalise boards and keep DFIs at arm's length from political pressure.
• Rationalise refinance schemes and focus on gaps that commercial lenders cannot fill.
• Develop green and climate finance through DFIs, using their experience with multilateral funds.

Possible exam and interview questions

1. Why did India's development financial institutions decline after 1991, and why has the government revived the idea through NaBFID? (620 words)
2. Explain the role of NABARD in rural credit. How does the Rural Infrastructure Development Fund work? (420 words)
3. Compare the roles of SIDBI and MUDRA in financing MSMEs.
4. What are Lines of Credit given by EXIM Bank, and how do they help India's foreign policy?
5. Interview: Should private companies be allowed to set up development financial institutions?

Related reading: Indian financial system, financial inclusion, and Indian agriculture.

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