Reforms & Developments in the Banking Sector
Infrastructure financing challenges, NaBFID (India’s new DFI for infrastructure), NARCL — the Bad Bank (Rs 2 lakh crore NPA resolution), and EASE Reforms 1.0 through 5.0 — the transformation roadmap for India’s Public Sector Banks.
Banky hears about “Bad Bank” on the news! 📰
Banky’s senior said: “The government is setting up a Bad Bank to take over bad loans from us.” Banky thought: how can a bank be “bad”? And what is EASE? Chapter 28 explains the three biggest reforms in PSB space today.
Infrastructure Financing — The Challenge and Solution
Why infrastructure needs special financing + channels + characteristics
Infrastructure is the backbone of any economy. It requires heavy investment, has long gestation periods, creates externalities, enjoys economies of scale, and often has characteristics of natural monopoly. Commercial banks (with short-term deposits) cannot easily lend for 10-40 year infrastructure projects. This gap needs to be filled by Development Financial Institutions (DFIs) and NaBFID.
What is NOT Infrastructure? (Q1 PYQ)
Infrastructure includes: Construction, Electricity (generation/transmission/distribution), Gas distribution through pipes, Water works and supply, Non-conventional energy, Railway tracks/signalling/stations, Roads and bridges/runways, Telephones/telecom networks, Pipelines (water/crude oil/slurry), Waterways, Port facilities, Canal networks, Sanitation and sewerage. NOT included: Textile Mills (Q1 PYQ: answer = Textile Mills).
Characteristics of Infrastructure Financing (Q2 PYQ: All of the above)
4 Key Characteristics
- Longer Maturity: 5 to 40 years (construction period + asset life)
- Larger Amounts: A km of road = USD 1 million; meaningful infra project = USD 200–250 million (Rs 1,595–1,995 crores at 1 USD = Rs 79.75)
- Higher Risk: Demand uncertainty, environmental surprises, tech obsolescence, political/policy risks
- Fixed and Low (but positive) Real Returns: Revenue streams often function of inflation rate; important because cascading effect of higher pricing on economy
Channels for Financing Infrastructure
- Government
- Development Financial Institutions (DFIs)
- Commercial Banks
- Non-Banking Financial Companies (NBFCs)
- Insurance Companies & Pension Funds
- External Commercial Borrowings (ECB)
- Foreign Direct Investment (FDI) from abroad
NaBFID — National Bank for Financing Infrastructure and Development
India’s new DFI | Set up 2021 | Authorised capital Rs 1 lakh crore (Q3 PYQ)
🏦 NaBFID — Key Facts
NaBFID Act introduced in Lok Sabha on March 22, 2021. Approved by the President on 28 March 2021. Principal development financial institution (DFI) for infrastructure financing. Preamble: “An Act to establish NaBFID to support the development of long-term non-recourse infrastructure financing in India including development of the bonds and derivatives markets necessary for infrastructure financing.” Unlike banks, DFIs do not accept deposits from public — source funds from market, government and multilateral institutions. First Chairperson: Shri K V Kamath (banking veteran, designated October 2021).
NaBFID — Key Numbers and Features
| Feature | Detail |
|---|---|
| Authorised Share Capital | Rs 1 lakh crore (Rs 100,000 crores) — divided into 10,000 crore shares of Rs 10 each (Q3 PYQ: answer = Rs 1,00,000 crores) |
| Government Ownership | Central Government initially owns 100% shares; may be reduced to a minimum of 26% |
| Government Grant | Central Govt to provide grants worth Rs 5,000 crores by end of first financial year |
| Govt Guarantee on Borrowings | Concessional rate of up to 0.1% for borrowing from multilateral institutions, sovereign wealth funds and other foreign funds |
| Board Composition | Chairperson (appointed by Central Govt in consultation with RBI) + MD + up to 3 Deputy MDs + 2 Central Govt nominees + up to 3 elected by shareholders + independent directors |
| Shareholders Eligible | Central Govt + Multilateral institutions + Sovereign wealth funds + Pension funds + Insurers + FIs + Banks + Other institutions prescribed by Central Govt |
| Functions | Extend loans/advances for infra projects; take over/refinance existing loans; attract private/institutional investment; organise foreign participation; facilitate negotiations with govt; provide consultancy |
| Fund Sources | Loans in INR and foreign currencies; bonds and debentures; borrow from Central Govt, RBI, scheduled commercial banks, mutual funds, multilateral institutions (World Bank, ADB) |
NARCL — National Asset Reconstruction Company Ltd (“Bad Bank”)
India’s “Bad Bank” | Incorporated July 7, 2021 | To resolve Rs 2 lakh crore NPAs
Indian banks had over Rs 8.3 lakh crore worth of gross NPAs as on March 2021 — expected to reach Rs 10-11 lakh crores by March 2022 due to COVID-19. RBI’s Financial Stability Report: gross NPA ratio may increase to 13.59% by September 2021. The Indian Banks’ Association (IBA) proposed setting up a Bad Bank. Objective: transfer NPAs from banks to NARCL so banks can focus on business development and raising capital — cleans up bank balance sheets.
💀 NARCL — Structure and Key Features
NARCL + IDRCL dual structure: NARCL (National Asset Reconstruction Company Ltd) — incorporated 7th July 2021 — aggregates and consolidates stressed assets for resolution. IDRCL (India Debt Resolution Company Ltd) — service company/operational entity that manages assets, engages market professionals and turnaround experts.
Ownership: NARCL: PSBs hold 51% (public sector banks majority). IDRCL: PSBs and Public FIs hold 49% (private sector lenders hold majority).
NPA transfer plan: Total assets to be transferred: Rs 2 lakh crores (1.8% of total banking sector loans). Phase 1: Rs 90,000 crores (fully provided/written-off loans). Phase 2: Rs 1,10,000 crores (loans with lower provisioning).
Minimum cut-off for transfer to NARCL: Rs 500 crores per loan. Settlement structure: 15% cash + 85% Security Receipts (SRs). Central Govt guarantees SRs up to Rs 30,600 crores — valid for 5 years (to incentivise NARCL to speed up resolution).
NARCL makes offer to lead bank → if accepted → IDRCL engaged for management and value addition.
NARCL — Key Numbers Summary
| Particulars | Amount (Rs crores) | % of Banking Sector Loans |
|---|---|---|
| Total assets to be transferred | 2,00,000 | 1.8% |
| Phase 1 (written-off loans) | 90,000 | 0.8% |
| Phase 2 assets | 1,10,000 | 1.0% |
| Central Guarantee (valid 5 years) | 30,600 | 0.3% |
| Guarantee % of loans transferred | 15% | — |
| PSB ownership in NARCL | 51% | — |
| PSB and Public FIs stake in IDRCL | 49% | — |
EASE Reforms — Enhanced Access and Service Excellence for PSBs
EASE 1.0 to 5.0 — PSB transformation roadmap
Government recapitalised PSBs with Rs 2.1 lakh crores approved in 2017. The PSB Reform Agenda — EASE (Enhanced Access and Service Excellence) — based on recommendations by Whole Time Directors, senior management of PSBs and Government at “PSB Manthan” in November 2017. Goal: institutionalise CLEAN and SMART banking. Reforms Index measures each PSB on 120+ objective metrics. Sequential version: EASE 1.0 (2018-19) → EASE 2.0 (2019-20) → EASE 3.0 (2020-21) → EASE 4.0 (2021-22) → EASE 5.0 (2022+).
EASE 1.0 (2018-19)
- Customer responsiveness — ease for customer comfort
- Responsible Banking — financial stability, improved governance, clean and prudent business
- Credit offtake — proactive delivery of credit
- PSBs as Udyamimitras for MSMEs
- Deepening financial inclusion and digitalisation
- Ensuring outcomes — HR: developing branch banking personnel
EASE 2.0 (2019-20)
- Built on EASE 1.0 foundation — made reforms irreversible
- Comprehensive Loan Management Systems (LMS) for faster processing
- Early Warning Signals (EWS) systems for stress detection
- Specialised monitoring for time-bound stress action
- Outcome-centric HR systems
- Max improvement in: Responsible Banking (50% increase) and PSBs as Udyamimitra for MSMEs
EASE 3.0 (2020-21) — “Smart Lending” (Q5 PYQ)
- Smart Lending for Aspiring India (Q5 PYQ: answer = EASE 3.0)
- Hard-wiring sound banking through IT systems
- Tech-enabled ease of banking
- Governance and outcome-centric HR
- Alternate-data-based lending; analytics-based credit offers; AI/ML driven risk management
- Cloud-based banking solutions; AL compliance monitoring
EASE 4.0 (2021-22)
- New Age 24×7 banking with resilient technology — uninterrupted 24×7 banking channels
- Collaborative banking for synergistic outcomes — collaboration between PSBs and NBFCs for co-originated loans
- Doorstep banking services at scale
- Digital payments in semi-urban/rural areas
- With amalgamation of 13 PSBs into 5 PSBs (completed March 2021), EASE 4.0 set agenda to transform PSBs into digital-attacker banks
EASE 5.0 (EASENext Programme) — Launched June 2022 by Finance Minister Nirmala Sitharaman
Latest version: EASE 5.0 “Common reforms agenda” — part of EASENext programme. Two major initiatives: (1) EASE 5.0 (common PSB reforms agenda) and (2) Bank-specific strategic 3-year roadmap (based on individual bank’s business priorities). Focus: digital customer experience and integrated & inclusive banking, with emphasis on supporting small businesses and agriculture. New APs include: comprehensive digital banking for MSMEs, banking solutions for agri value chain, digital-only products and services, specialised analytics, AI for compliance, co-lending with NBFCs, employee-centricity, gender diversity, digital and analytics-driven collections, early detection and prevention of frauds, deepening financial inclusion in rural and semi-urban areas.
Exam Angle Points and PYQs
All 5 PYQ answers + critical reform facts
✅ Must-Know Reform Facts
- NOT a sector of infrastructure: Textile Mills (Q1 PYQ: answer = a) — infrastructure does NOT include textile mills
- Characteristics of infrastructure financing: Larger amounts + Longer maturities + Fixed and low real returns = All of the above (Q2 PYQ: answer = d)
- Authorised capital of NaBFID: Rs 1,00,000 crores = Rs 1 lakh crore (Q3 PYQ: answer = d)
- Cash settlement % by NARCL: 15% cash + 85% SRs (Q4 PYQ: answer = c) | Govt guarantees SRs up to Rs 30,600 crores valid for 5 years
- “Smart Lending for Aspiring India” is a theme in: EASE 3.0 (Q5 PYQ: answer = c) — FY 2020-21
- NaBFID Act: Introduced in Lok Sabha March 22, 2021 | Approved by President March 28, 2021 | First Chairperson: K V Kamath (October 2021)
- NaBFID authorised share capital: Rs 1 lakh crore | 10,000 crore shares at Rs 10 each | Govt initially 100% → can reduce to min 26%
- NaBFID Govt grant: Rs 5,000 crores by end of first financial year | Guarantee at 0.1% on multilateral/sovereign wealth fund borrowings
- NaBFID does NOT accept deposits — unlike banks | Sources: market, government, multilateral institutions
- NARCL incorporated: July 7, 2021 | Indian Banks’ Association (IBA) proposed it | Total NPAs to transfer: Rs 2 lakh crores
- NARCL Phase 1: Rs 90,000 crores (fully provided loans) | Phase 2: Rs 1,10,000 crores
- NARCL minimum cutoff per loan: Rs 500 crores | Settlement: 15% cash + 85% SRs
- PSBs hold 51% in NARCL | PSBs + Public FIs hold 49% in IDRCL (private sector lenders hold majority of IDRCL)
- Govt guarantee on SRs: Rs 30,600 crores | Valid 5 years | 15% of total NPAs transferred
- EASE PSB Manthan: November 2017 | Government recapitalised PSBs with Rs 2.1 lakh crores (2017)
- EASE Reforms Index: 120+ objective metrics for each PSB
- EASE 1.0: 6 themes, 30 action points (2018-19) | First edition
- EASE 2.0: 2019-20 | Made reforms irreversible | LMS + EWS | Max improvement: Responsible Banking (+50%)
- EASE 3.0: 2020-21 | Smart Lending for Aspiring India (Q5 PYQ) | Digital + AI transformation
- EASE 4.0: 2021-22 | 2 new themes: 24×7 banking + Collaborative banking | Amalgamation of 13 PSBs into 5 completed March 2021
- EASE 5.0: EASENext programme | Launched June 2022 by Finance Minister Nirmala Sitharaman | Bank-specific 3-year roadmap added
📝 All 5 PYQ Answers from PDF
Memory Tricks
Trick 1 — Infrastructure NOT Textiles (Q1 PYQ)
Trick 2 — NaBFID Capital (Q3 PYQ)
Trick 3 — NARCL 15% Cash (Q4 PYQ)
Trick 4 — EASE 3.0 Smart Lending (Q5 PYQ)
Flash Cards and Summary
⚡ Chapter 28 Complete — Reforms and Developments in Banking Sector
- Infrastructure = backbone of economy | Long gestation, large investment, externalities, economies of scale, natural monopoly characteristics
- NOT infrastructure: Textile Mills (Q1 PYQ) | Infrastructure channels: Govt, DFIs, Banks, NBFCs, Insurance/Pension, ECB, FDI
- Infrastructure financing: longer maturity (5-40 yrs) + larger amounts (USD 200-250 mn) + lower real returns + higher risk = All of above (Q2 PYQ)
- NaBFID: introduced Lok Sabha March 22, 2021 | President’s assent March 28, 2021 | Principal DFI for infrastructure | Does NOT accept deposits
- NaBFID: authorised capital Rs 1 lakh crore (Q3 PYQ) | Govt initially 100%, min 26% | Govt grant Rs 5,000 crores | First Chair: K V Kamath
- NaBFID functions: lend to infra projects, refinance existing loans, attract private investment, organise foreign participation, consultancy
- NARCL: incorporated July 7, 2021 | Aggregate stressed assets from banks | Total NPAs Rs 2 lakh crore (1.8% of banking sector loans)
- NARCL: Phase 1 Rs 90,000 cr + Phase 2 Rs 1,10,000 cr | Min cutoff Rs 500 crores | Settlement: 15% cash (Q4 PYQ) + 85% SRs
- Govt guarantee on SRs: Rs 30,600 crores | Valid 5 years | PSBs: 51% of NARCL | PSBs + Public FIs: 49% of IDRCL
- EASE: PSB Manthan November 2017 | Govt recapitalised PSBs Rs 2.1 lakh crore | 120+ metrics | 5 editions: EASE 1.0 to 5.0
- EASE 3.0 (FY21): Smart Lending for Aspiring India (Q5 PYQ) + Hard-wiring IT + Tech banking + Governance HR
- EASE 4.0 (FY22): 24×7 banking + Collaborative banking with NBFCs | 13 PSBs → 5 PSBs merger completed March 2021
- EASE 5.0 (EASENext, June 2022): Common PSB reforms + Bank-specific 3-year strategic roadmap
MODULE C COMPLETE — All 28 Chapters of IE & IFS Done! 🎉
Banky has covered the entire Indian Financial Architecture — from the history of the financial system to the latest banking reforms. JAIIB preparation is now comprehensive and exam-ready! 💪Banky says: “Now I understand NaBFID, the Bad Bank AND the EASE reforms — and I’m part of this transformation!” 🔧🎉
All 5 PYQs answered | NaBFID + NARCL + EASE 1.0 to 5.0 mastered | Module C IE & IFS COMPLETE! 💪