Financing Rural Development: How NABARD Raises Funds

India’s rural economy runs on credit – credit for seeds, irrigation, roads, storage, and livelihoods. At the centre of channelling this credit is NABARD, the National Bank for Agriculture and Rural Development. But before NABARD can lend even a single rupee to a cooperative bank or fund a rural road, it must first raise the money itself. NABARD is not a commercial bank – it doesn’t take deposits from the public. So where does its enormous financial firepower come from? The answer lies in a carefully structured mix of government capital, market borrowings, institutional deposits, and international funding lines that together form the backbone of India’s rural finance system.

NABARD’s funding architecture: an overview 🔗

NABARD operates as India’s apex development financial institution for agriculture and rural development. Unlike commercial banks that rely on public deposits, NABARD’s Finance Department mobilises resources through a diverse mix of instruments – from bonds and commercial papers to government-mandated deposits and foreign currency loans. Each source of funding serves a specific purpose and caters to a different set of lenders or investors. Together, they ensure that NABARD can consistently meet the massive credit demands of rural India.

In FY2024, NABARD’s total mobilised corpus stood at ₹3.5 lakh crore, with total outstanding borrowings of ₹4.9 lakh crore. Commercial papers, term loans, and non-convertible debentures together formed 94% of its total borrowing portfolio. These numbers reflect both the scale of NABARD’s operations and its growing dependence on market-based instruments to fund rural development.

Own funds: the foundation of NABARD’s capital base 🔗

Every institution begins with its own capital, and NABARD is no different. Its own funds comprise paid-up share capital and accumulated reserves. These form the permanent equity base that supports all subsequent borrowings and operations.

Share capital and government ownership 🔗

NABARD was set up with an initial capital of ₹100 crore, with paid-up capital standing at ₹14,080 crore as of 31 March 2020. Following a revision in the composition of share capital between the Government of India and the RBI, NABARD is today fully owned by the Government of India. The authorised share capital has since been raised to ₹30,000 crore following the NABARD Amendment Act of 2018, which transferred RBI’s residual equity stake to the central government.

The significance of this government ownership goes beyond mere numbers. A fully government-owned institution carries an implicit sovereign guarantee, which dramatically lowers its cost of borrowing in the market. Rating agencies consistently assign NABARD the highest domestic credit rating (AAA), partly because of this government backing, allowing it to raise funds at competitive rates.

Reserves and surplus 🔗

Over the decades, NABARD has built up substantial reserves from retained profits and statutory allocations. These reserves serve as a buffer against risk and also reduce dependence on external borrowings for operational purposes. A strong reserve position also enhances NABARD’s credibility with investors and international lenders.

Market borrowings: the engine of growth 🔗

As NABARD’s mandate has expanded to cover rural infrastructure, climate finance, and social sector lending, its own capital base alone has proved insufficient. Market borrowings have therefore become the dominant funding source, accounting for the lion’s share of its resource mobilisation.

Bonds issued to retail investors 🔗

NABARD mobilises resources through a mix of instruments of various types and tenures. In the bonds category, four types of bonds have been issued to retail investors: Capital Gains Bonds, NABARD Rural Bonds, Bhavishya Nirman Bonds, and Tax-Free Bonds.

Capital Gains Bonds are issued under Section 54EC of the Income Tax Act, 1961. Investors who have earned long-term capital gains can invest in these bonds within six months of the sale transaction to claim a tax exemption. This feature makes them particularly popular with individuals selling property or other long-term capital assets.

NABARD Rural Bonds are plain vanilla bonds that offer fixed returns over a specified tenure. They appeal to risk-averse investors – particularly retirees and conservative savers – seeking steady income with the security of a AAA-rated institution.

Bhavishya Nirman Bonds are deep discount bonds, meaning investors purchase them at a price significantly below face value and receive the full face value on maturity. This zero-coupon structure eliminates reinvestment risk, since no periodic interest is paid.

Tax-Free Bonds offer interest income that is fully exempt from income tax. In March 2016, NABARD issued Tax-Free Bonds worth ₹5,000 crore, and these bonds are proposed to be listed on the Bombay Stock Exchange, giving bondholders the option to trade in the secondary market. The tax-free feature makes these bonds especially attractive to investors in the higher income tax bracket.

Corporate bonds and debentures for institutional investors 🔗

Apart from retail instruments, NABARD also issues corporate bonds and non-convertible debentures (NCDs) targeted at institutional investors such as insurance companies, mutual funds, and provident funds. Corporate bonds issued to institutional investors are listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), with Axis Trustee Services Ltd. acting as the Debenture Trustee.

The outstanding bonds and debentures stood at ₹2.86 trillion in March 2024, up from ₹2.46 trillion a year earlier, reflecting net borrowings through debentures and bonds of ₹39,473 crore in FY2024. NABARD’s AAA rating, assigned by agencies like CRISIL and reflecting the Government of India’s backing, allows it to price these instruments attractively for both the issuer and investors.

Commercial papers and term loans 🔗

For short-term funding needs, NABARD issues Commercial Papers (CPs) in the money markets. During FY2024, NABARD issued commercial papers to raise ₹1.3 lakh crore, and term loans worth ₹82,450 crore were borrowed from commercial banks through the financial year. These instruments provide liquidity and operational flexibility, allowing NABARD to manage short-term cash flows while longer-term bonds and deposits anchor its balance sheet.

Government-mandated deposits: RIDF and special funds 🔗

One of the most distinctive funding mechanisms available to NABARD is the system of mandatory deposits from commercial banks and financial institutions. These arise directly from the Reserve Bank of India’s priority sector lending framework.

Rural Infrastructure Development Fund (RIDF) 🔗

The Rural Infrastructure Development Fund, established in 1995-96, is perhaps NABARD’s most impactful funding channel. Commercial banks that fall short of their priority sector lending targets are required to deposit funds with NABARD, and RIDF deposits held close to a 23.7% share in NABARD’s total borrowings at the end of March 2024.

The Government of India allocated ₹40,475 crore for RIDF in FY2024, through which NABARD mobilised ₹49,730 crore during the year. These funds are then lent to state governments at concessional rates for rural infrastructure projects – roads, bridges, irrigation networks, school buildings, rural health centres, and drinking water facilities. Cumulative allocations to RIDF had grown to over ₹40,000 crore by 2023-24, with total sanctions exceeding ₹4.5 lakh crore, financing over 7.9 lakh projects across India.

Other special-purpose funds 🔗

Beyond RIDF, NABARD administers several other government-supported funds that serve as dedicated sources of capital for targeted sectors. These include the Short-Term Cooperative Rural Credit (STCRC) Fund, Short-Term Regional Rural Bank (STRRB) Fund, Long-Term Rural Credit Fund (LTRCF), Warehouse Infrastructure Fund (WIF), and Food Processing Fund (FPF), among others. Each of these funds pools resources from commercial banks or government allocations to address specific gaps in rural credit and infrastructure.

The Long-Term Irrigation Fund (LTIF), Micro Irrigation Fund (MIF), and NABARD Infrastructure Development Assistance (NIDA) are additional conduits through which government budgetary allocations reach NABARD, to be deployed for specific scheme-linked infrastructure lending.

Foreign currency borrowings: accessing global capital 🔗

To supplement domestic resources and bring in concessional international capital – often bundled with technical expertise – NABARD actively borrows from bilateral and multilateral agencies abroad.

Multilateral and bilateral sources 🔗

NABARD has long-standing relationships with institutions such as the World Bank, the Asian Development Bank (ADB), and the International Fund for Agricultural Development (IFAD). These multilateral loans typically carry lower interest rates than commercial borrowings and often come with technical assistance components, adding knowledge value alongside capital.

On the bilateral side, several initiatives are underway between NABARD and Germany’s KfW, including the KfW-NABARD Adivasi Development Programme, the Indo-German Watershed Development Programme, the Indo-German Umbrella Programme for Natural Resource Management, and the NABARD-SDC Rural Innovations Programme. Japan (through JICA) and France (through AFD) are other bilateral partners whose credit lines support specific thematic priorities such as climate resilience and watershed management.

Social bonds and ESG instruments 🔗

NABARD made history with the maiden issuance of India’s first rupee-denominated social bond, with the listing ceremony conducted at the Bombay Stock Exchange on 29 September 2023. The ₹1,000 crore bond issue attracted bids worth ₹8,560 crore. This AAA-rated bond was externally certified by KPMG under the social bond guidelines of the International Capital Markets Association, with funds earmarked to refinance drinking water projects under the Government of India’s Jal Jeevan Mission.

This foray into Environmental, Social, and Governance (ESG) instruments marks a significant evolution in NABARD’s fundraising strategy, allowing it to tap into the growing global pool of impact-focused institutional capital.

Deposits from institutions and RBI 🔗

In addition to the government-mandated RIDF deposits, NABARD also receives deposits and borrowings from commercial banks, state cooperative banks, commodity boards, and marketing organisations. These institutional deposits form another layer of stable, medium-term funding.

Historically, the Reserve Bank of India also provided financial support to NABARD through term loans and allocations from the National Rural Credit (Long-Term Operations) Fund and the National Rural Credit (Stabilisation) Fund. While RBI’s direct equity stake in NABARD was fully transferred to the central government following the 2018 amendment, the RBI continues to maintain an oversight and regulatory relationship with the institution.

Why the diversity of funding sources matters 🔗

NABARD’s multi-pronged funding strategy is not accidental – it is a deliberate design to ensure financial resilience and mission alignment. Relying too heavily on any single source would expose NABARD to concentration risk. If market conditions tighten, bond issuances become costlier; if the government’s fiscal position weakens, budgetary allocations may shrink. By spreading its resource base across retail bonds, institutional borrowings, government-mandated deposits, and international lines of credit, NABARD insulates itself from shocks in any one market.

The money raised through the market – covering bonds and money market instruments – had about a 51.5% share in total borrowings by NABARD at the end of March 2024. This steady shift toward market-based funding also signals NABARD’s growing financial sophistication and its ability to operate efficiently in competitive capital markets while retaining its developmental character.

Furthermore, the Government of India’s continuous enhancement of NABARD’s authorised capital – from ₹100 crore at inception to ₹30,000 crore today – reflects the state’s commitment to keeping NABARD well-capitalised as its mandate grows. A stronger capital base not only supports higher lending volumes but also improves NABARD’s debt-to-equity profile, keeping borrowing costs in check.

What do you think? Given that NABARD increasingly relies on market borrowings – which come with higher interest costs – does this risk shifting the institution’s focus away from concessional lending to rural borrowers? And with climate finance and ESG instruments gaining traction globally, how should NABARD balance its traditional agricultural mandate with newer green and social bond obligations?

References

1. https://www.nabard.org/content.aspx?id=3
2. https://www.nabard.org/content.aspx?id=472
3. https://prsindia.org/billtrack/the-national-bank-for-agriculture-and-rural-development-amendment-bill-2017
4. https://financialservices.gov.in/beta/en/nabard-act